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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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  • Sears is mostly a hedge fund, not a retail stock.
    2008 Aug 31 10:04 AM Reply
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  • Author may be on to something.At some price most things are great deals. IF YOU ANT TO GO LONG SHLD DONT BY thestock outright.Sell Puts which are paying you GREAT PREMIUMS
    2008 Aug 31 10:21 AM Reply
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  • Whether ultimately right or wrong of Eddie Lampert to use usd400m+ of hard cash to buy Sear's own stock, you cannot but be impressed by his conviction in his own stock. This is because the average risk averse investor would probably conserve cash rather than use it to buy financial paper like Sear's own stock. However Eddie is not the average risk average investor, he is [until very recently?] a star "master of the universe". These are interesting times to be observing the markets and the battles taking place.
    2008 Aug 31 10:27 AM Reply
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  • Whatever the future may hold, Lampert's results thus far are surely a source of secret satisfaction, schadenfreude even, for the legions of corporate executives who field calls and hear out complaints from us know-it-all finance types as we second guess their operational, engineering, R&D, marketing, and HR-related decisions. The truth of the matter is that it takes all kinds of business school disciplines to run a company and even some occasional scientists and liberal arts types. For its part, Sears is being run into the ground for want of talent and investment on the management, marketing, and operations fronts. Having a finance genius perched atop is alone insufficient.
    2008 Aug 31 11:12 AM Reply
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  • Didn't SHC have close to four billion bucks right after the takeov... er, merger, and hasn't roughly three quarters of that been spent on stock buybacks already while the company... as a retail entity... has continued to drop into the toilet at the rate of from 3-6% per quarter in sales and market share.

    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?
    2008 Aug 31 11:23 AM Reply
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  • Wonder how EHL will deal with the loss of the credit facility from Bank America. I suppose that if he can figure out how to run those stores without inventory, he won't need to finance holding any product on the shelves. Even EHL will not be able to figure out how to sell from an empty wagon. If he could just figure out what to put in the wagon, that would be a great improvement.
    2008 Aug 31 11:50 AM Reply
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  • SHLD is more a cult than a retailer. It is fascinating to watch the debate.
    2008 Aug 31 07:21 PM Reply
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  • If Eddie Lambert was really confident in this company's future he
    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.

    2008 Sep 01 01:23 AM Reply
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  • SHLD is quite simple, it is self liquidating (of course the parrot Whiney Tilson can read this post and then claim for himself any insights this blog might produce for the investing public). Here is a simple example of what SHLD is:
    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.
    2008 Sep 01 08:14 AM Reply
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  • I would just also like to add, you really shouldn't be idolizing people on that list of shh. A few of them are mere plagiarizers. Whiney Tilson may be one of biggest plagiarizers on Wall Street in my view. He parrots but doesnt have the self respect to footnote the work product done by others.
    I would hazard to guess that quite a few people would support this view.
    2008 Sep 01 08:58 AM Reply
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  • Does anyone remember the days when Cramer would tout SHLD @ $160 per share ? Cramer was so enamoured of Lampert's supposed genius, he just couldn't contain himself...Reminded us of Cramer's love for Ed Zanders as he ran Motorola to the ground..(another "genius" favorite of Cramer's)
    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 !


    2008 Sep 01 09:12 AM Reply
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  • I agree with capital pains. I don't know how Cramer made his 100 million but it is very clear he didn't do it by himself. All this talk about how smart these guys are, makes me wonder if they all went to Harvard with the Bear Stearns crowd. The smartest guys in the room?
    2008 Sep 01 10:45 AM Reply
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  • "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."

    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.
    2008 Sep 01 11:03 AM Reply
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  • SHLD will see around 105 in the next couple of weeks. Short the hell out of it.It is going to $45. The guys holding will be selling in to this.

    Sears is an incredibly horible company that has been living on reputation and nothing else since Lampert took over.
    2008 Sep 01 01:43 PM Reply
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  • Sears has cut back on ad spending in many markets, shifting some dollars from newspapers to direct mail packages. Not a good strategy to give up on their core customer base to reach the masses of over taxed and underpaid direct mail readers. In most cases, cutting newspaper ad spend results in lower sales and therefore lower profits.

    Jay Fredrickson

    I-75.mobi
    2008 Sep 01 02:31 PM Reply
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  • Nobody wants buy his business ..nobody wants to shop at his business....business burning cash.. future looks no better. what do you do?
    .. you prop the shares.

    Lucky Eddie started believing his own genius.
    2008 Sep 01 03:52 PM Reply
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  • It's funny to watch these posts. 50% of people look at SHLD and see nothing more than a dying retailer headed for bankruptcy. 50% of people see the liquidation of assets which will end up being worth significantly more than today's (and yesterday's) stock prices. Only question is: Which side is Eddie Lampert on?

    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.
    2008 Sep 02 09:00 AM Reply
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  • As a former executive with Sears Holding I find this interesting. Without sales and the resulting loss of cash flow he will not be able to maintain as a retailer. What he will do is take it private, his goal all along, buy all the stockholders off for a dime, then break it up and make a killing. The worth is in the brands and he will own them and make even more money for ESL, his true concern.
    2008 Sep 02 10:09 AM Reply
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  • While I agree with Clownface on the importance of SHLD's real estate value, I would definitely caution people not to place too much importance on the complete portfolio. Sears and Kmart centers are facing the dilemma of a nationwide decline in shopping malls and inner-suburb shopping center deterioration. You have these and a bunch of Kmarts in isolated rural towns that have been on the decline for decades. These are crumbling retail locations that have seen very little capital investment in recent years. Yes, of course, they hold key city center and coastal assets in their retail and nonretail properties, but enough to power billions in investment value?

    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).
    2008 Sep 02 10:19 AM Reply
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  • Its amazing that so few SHLD shares are left for trading. In fact, it appears that SHLD has a ton of naked shorts. Seriously doubt that ESL would lend out its shares to shorts. The same goes for the other funds. At the pace of purchases this Q, all the outstanding float will be gone. Thats incredible! Eddie might start showing more of his cards once the float is gone and the stock price soars. I'd guess that most of the top funds won't be willing to sell until say $300 so SHLD will end up with a ton of buyers and very few sellers. 30M shorts getting fried learning what happens when you short an asset rich stock.
    2008 Sep 05 05:30 PM Reply
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