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:
Mr. Lampert, Fire Thyself - WSJ (I even chuckled at this one)
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:
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%
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%
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