While Street Yells 'Sell!' Lampert Buys Back 4% of Sears 22 comments
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The results for Sears’ (SHLD) second fiscal quarter are now out and, for most people, they are not very pretty. Year over year sales declines, net income down, lowered guidance. These things are, in essence, death to any retailer, or any publicly traded corporation for that matter.
Here are some headlines I read this morning:
Sears Falls Behind US Rivals - FT
Mr. Lampert, Fire Thyself - WSJ (I even chuckled at this one)
No Future in Sight for Sears Holdings - Motley Fool
Sears Holdings’ net profit falls 62%, more than expected - Marketwatch
Sears’ Q2 Profit drops 62% - AP
Needless to say, everyone was pretty pissed at Lampert and Co. A Zack’s analyst reiterated his “Strong Sell” on Sears’ shares. Even Sears had pretty dismal guidance, saying that full year EBITDA will no longer be higher, but merely comparable to last years’ EBITDA. Do you feel the dread?
On the other hand, do you know what I loved about this quarter? Here it is:
During the 13- and 26- week periods ended August 2, 2008, we repurchased 5.6 million and 6.0 million of our common shares at a total cost of $437 million and $477 million, respectively, under our share repurchase program. Our repurchases for the 13- and 26- week periods ended August 2, 2008 were made at average prices of $78.22 and $79.34 per share, respectively. As of August 2, 2008, we had $206 million of remaining authorization under our common share repurchase program.
That number, 5.6mm shares, represents 4.2% of Sears’ previously outstanding shares! In a quarter where the dismal is the norm, Eddie Lampert went out and basically told everyone to go f*&k themselves. How else do you explain the horde of shares he bought?
When the shares were punished down under $80/share, I was prompted to comment:
Sears (SHLD) is now under $74/share, causing yours truly to contemplate selling a kidney to buy more shares.
I guess Eddie agreed. Most companies take a few years to buy back 4% of shares outstanding. Sears Holdings, boys and girls, is not most companies.
But where did the cash come from? If you read the headlines, you’da thunk Sears would be near bankrupt, a fate that has been oft-speculated. But amidst the pain, Sears made another good move this quarter: inventory reductions nearing $500mm.
One of Lampert’s admitted mistakes so far in the Sears journey was the inventory buildup before Christmas last year, a move that ended up hurting as the economic downturn took hold. Viewing this quarter’s move, he seems bent on not committing the same mistake twice, a trait that strikes me as a rather important part of Lampert’s nature.
So the net effect of these two events is that a $500mm inventory reduction, in essence, fueled a share buyback of $400mm+ in the second quarter. This was probably not by intention, but nonetheless is an outcome of the process. Capital was taken right out of the business and used to enhance shareholders’ proportionate interest in their company. Lampert is the prime beneficiary of such a tactic, by the way, so he isn’t doing this just for giggles. Before you say “he was buying shares at $135, too,” I’ll say this, again: I don’t think Eddie makes big mistakes twice, and the massive buyback this quarter is no accident.
What is the most ironic face-slap of today’s action? Enduring the doom and gloom from the financial press, investors bid the stock up almost a dollar and a half. While the absolute move is a small one, the direction is important. Not only did Sears rise, it rose on a day that the market as a whole fell almost 1.5%! Lowe’s was down, Home Depot was down, WMT, TGT, and JCP were down, but somehow Sears was up, on a day that the Wall Street Journal told Lampert to fire himself (see above). Maybe it’s just me, but that’s tremendously interesting.
If you read Todd Sullivan’s Valueplays, and you should, he put up some short selling “math” today, a look at how the shares outstanding are held. Here’s the main takeaway:
Holder Name—Shares—%
ESL Investments, Inc.—65,639,184—51.0%
Fairholme Capital Management LLC—16,110,090—12.5%
Legg Mason Capital Management, Inc.—12,503,168—9.7%
Pershing Square Capital Management—6,746,568—5.2%
ClearBridge Advisors—4,789,523—3.7%
Perry Capital—2,694,95—2.1%
Davis Advisors—2,020,96—1.6%
Dalal Street, Inc.—517,608—0.4%
T2 Partners Management LP—50,625—0.0%
Greenlight Capital, Inc.—11,240—0.0%Total held by above—111,083,919—86.2%
Total Outstanding—128,800,000
Short Interest—33,656,888—26.1%
Share Not held by Above Holders—17,716,081—13.8%
As you can see above, most of the shares are held by Superinvestors. Lampert owns most, obviously, followed by Bruce Berkowitz, Bill Miller, Bill Ackman, Richard Perry, Mohnish Pabrai, Whitney Tilson, David Einhorn…the list goes on and on. These guys, together, hold over 85% of the shares outstanding. Your author owns a somewhat smaller, but no less important stake.
Thus, if 85%+ are held by long term value investors, and we see that 26% of the shares are sold short, a huge amount considering the public float, a short squeeze of massive proportions could be in the workings.
I’m not saying this will occur, or even that probability is in our favor. But one thing is clear: there is an extreme polarization of opinion on Sears, between the value investing world and everyone else. Whoever is correct will reap the spoils, and to the defeated go nothing but destroyed hopes for future riches.
Disclosure: Long Sears
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I realize most of you aren't interested in anything but short term results and that a lot of you are making out like bandits as Eddie plays his little game. BUt I'm also curious as to what happens MORE than three months down the road... say when he runs out of company cash to buy back stock, runs out of ways to cut costs and still keep the doors open, and... most importantly, based on the rate he's losing them... runs out of customers on whom to base a pretense that he's running a retail operation.
What's going to happen then?
would be buying more shares on the open market with his own money
rather than burning through company cash to buy back shares in order
to boost the EPS numbers.
Lets say you and your partner (as in business partner) are each 50% owners of a partnership which is the sole owner of a grocery store. Assume further the store generates 1mm per year in operating income. Assume that operating income will decline to 0 in the not too distant future. Assume the grocery store operates out of a building that is wholly owned by the partnership and is appraised at 20mm.
Now, you and your partner each receive your 500K at the end of the year (lets ignore taxes for this example) from the store. Now your partner comes to you and says, "I would love to sell you a larger interest in the partnership because this business stinks and its income is going to zero, so I will sell you a portion of my interest where I value the partnership at 8mm (8 x operating income)." You decide to take your 500K and pay your partner for his pro rata share at that valuation.
So, was that a dumb move on your part? Shouldnt you use the cash to invest in your business? Answers: No, and No.
The building alone is worth 20mm. And the business, although a melting ice cube has some modicum of value, assume the business is worth zero. So your partner valued the enterprise at 8mm when in fact it was worth 20mm. You just bought a dollar for 40c. Far better deal then putting more cash in buying a business that is a melting ice cube. Thats SHLD. ESL buying shares 75 or 140 should tell you about ESL conservative valuations of the buildings.
Also, the share count, if you were to read the balance sheet, is actually 126mm outstanding. The number you cite is the avg shares outstanding which is not the actual shares outstanding.
I would hazard to guess that quite a few people would support this view.
Lampert is an egotist. Whatever moves he might make will be effected by Lampert's panic mode at seeing his media-driven rep wither and die.
If you have been in a K-Mart or Sears the past 2 years, enough said !
2 dogs combined, only produced 1 mega-dog ..Even we mortals suspected that result. Makes no difference what Lampert does; he can't save Sears,he can't save K-Mart, nobody is buying big-box commercial space so the "real estate play" aspect of SHLD is nil as well. Other than that, SHLD is looking real promising !
The real estate is nil?
Here is a little math for you:
Even if one assumes that commercial real estate is leasing at 8$ sq ft and assuming a cap rate at 9% (which is overly conservative), puts comm real estate values at $88/sq ft.
SHLD has about 200mm sq ft of owned commercial real estate. Or almost 18bb in real estate assets.
SHLD could liquidate its inventory, service its remaining debt, have a staff of 5 at corp headquarters and spend its days signing up tenants.
Sears is an incredibly horible company that has been living on reputation and nothing else since Lampert took over.
Jay Fredrickson
I-75.mobi
.. you prop the shares.
Lucky Eddie started believing his own genius.
Something tells me he is working on something even bigger here. He owns 50% of the shares, so for every two shares he buys with SHLD cash, he gains one share for himself. He has full control over how cash is invested, so obviously, if SHLD didn't have the backstop of being worth way more in liquidation, Eddie would be investing money elsewhere.
I think Eddie is going to play this out over the course of years, not months. Possibly over the next decade. People will be amazed at how much cash this dog will generate. Even at zero GAAP profitability, SHLD still generates half a billion in free cash flow annually. Don't forget that when, not if, housing turns around, SHLD will benefit through the increased sales of appliances and tools. Eventually Eddie and a handful of other brilliant investors will own the entire thing. After which, SHLD can go out and acquire AutoNation, AutoZone, etc... by that time ESL will own more than 50% of those too. Synergies and economies of scale will be tremendous, and all the magazines and posters will have nothing but praise, Again.
The beautiful thing is, if the plan fails at any level, there is the backstop of immediate liquidation. The store inventory is worth nearly $80/ share alone. The real estate, even in a recession is worth probably the same. Even in immediate liquidation, the stock is worth nearly double.
They are losing top retailer executives, they coordinate nonstop legal battles with local governments who demand better property upkeep and now they are trying to make money by subletting their shrinking retail space space to smaller retailers. Who in their right mind would locate within the low foot traffic environment of a Sears store?
Lampert is not a retailer and perhaps he doesn't want to be. He will shrink the business, focus on appliances and e-Commerce and then turn the real estate into function similar to a REIT. I'm sure he can't wait to wipe his hands clean and move on.
FYI: Do your research, the Sears cash came from the selling of their credit card biz (No more income from collecting interest during consumer downturns).