dingojoe

Amazon, Wal-Mart Battle Over Books

The Stephen King book is especially interesting, because it's a pretty safe bet that WalMart and Amazon will lose $7-8 per copy they sell. In fact it makes sense for independent book store to buy their copies from Amazon and WalMart, because it's a far lower price than they'll get from the publisher or distributors. Plus, Amazon and Walmart lose money. Wacky World that capitalism.

Pabrai Funds Annual Meeting Notes 2009

I read the checklist story well before I saw Mohnish recommend it, and I've felt for quite some time that SHLD was a bad idea. I guess I'm a guru. Please feel free to bow before me.

Don't Forget Sears' Housing Connection

I don't have any professional knowledge regarding international corporations. I'm under the assumption that the only way SHLD can gets the Canadian cash is via a dividend. Since SHLD owns 77% of Sears Canada they'd get 77% of the dividend. There may actually be tax implications that would reduce that amount too. It would also reduce the value of Sears Canada and could create some nasty press as it could be viewed as a pillaging of a relatively healthy retailer to prop up a failing one. Furthermore, as you may have noticed, for the first time in a Q report, there was a line showing that part of the Canadian cash is actually collateral for SearsCa credit line (the Q report also mentioned that SearsCA and Orchard hardware debt is nonrecourse to the parent company--very odd detail to throw out there) Bottom line is I'm not sure if they'll go after the Canadian cash.

As you noted, the US cash has been drifting down. it will be interesting to see what SHLD does in the 3Q and 4Q. The 3Q is always the weakest for retailers, lowest sales, weakest margins, have to get rid of any summer merchandise, and get your 4Q merch in the building. Last year, domestic operations produced a whopping 33M in EBITDA in the 3Q, meaning that they were essentially cash flow negative for the Q. Will SHLD continue to buy back shares in the 3Q? or will they take a Q off? Domestic operation will certainly generate big cash flow in the 4Q (the best Q for retailers) will SHLD use the cash to rebuild their cash? or pay down debt? or buyback stock?

Really, SHLD given their decline in sales and their declining need for inventory should be able to function within the new revolver unless they do something really stupid and while I don't think much of Eddie as a retailer, I don't think the financing part should trip him up.

It's easy to see why there are so many opinions on SHLD, many issues, an awful lot of opacity.

Are Best Buy's Earnings a Warning?

A 3.9% SSS decline is pretty impressive for any retailer that doesn't sell groceries right now.

Circuit City was down to 2B in sales per quarter last year(BBY did 11B), so much of the business had already been plucked.

Don't Forget Sears' Housing Connection

Just looking at KMart, margins cratered at the beginning of the recession (mid 2007) as SHLD had way too much inventory. They adjusted that somewhat in the latter half of 2008 and things did improve marginally until last quarter. Right now, the inventory looks a little high given sales, so I wouldn't expect anything special to occur.

(Hope this is readable once posted)

Kmart gross margins:

Kmart 1Q Kmart 2Q Kmart 3Q Kmart4Q
2005--23.4 24.0 24.3 24.9
2006--23.8 24.2 23.4 26.3
2007--23.9 24.2 21.7 23.9
2008--23.2 22.9 22.1 24.5
2009--23.9 22.1

Kmart is a discounter and it's a very competitive segment. All of their competitors, WMT, TGT, Dollar General, Big Lots, hold much stronger hands, so it's just not realistic to expect any vast improvement. The other thing that will keep a cap on profits is SGA. Kmart already lives close to the bone, and even little things like the increase in minimum wage midsummer probably impacts them more than most retailers. Also, spreading advertising costs across fewer stores, means the cost for individual stores increases.

Regarding the pre-Christmas store closings, even if the lease expired, many landlords will give you a short term lease thru the holidays, as the landlord 90% of the time doesn't have anyone who can jump into that space immediately. Perhaps they've burned their bridges so much the landlords don't want to work with them. More likely is that they have another group of stores on deck to close after the holidays, and are trying to do this in orderly fashion.

It would be great if Sears was a more open company. Virtually all retailers hold conference calls will analysts after quarterly earnings are announced, but SHLD doesn't so it's kind of like an old fashioned Kremlin watch to figure out whats going on.

Who Benefited from Microsoft's Bing Cashback?

What taxes have been raised on small businesses?

Who Benefited from Microsoft's Bing Cashback?

For retailers it was about sales and promoting their brand, partly on Microsoft's dime. Clearly, if small retailer's were excluded, they have a right to be cranky.

Don't Forget Sears' Housing Connection

SHLD only states that they expect another $5 million in charges for stores they have announced will close in the 2Q. I expect another round of store closings to be announced, for store closings in January. It was kind of surprising that so many stores were announced in the last round of closings, because virtually all stores are cash flow positive in the 4Q, so why close 28 of them just before Christmas? It seems obvious from the stores I'm familiar with and from stories I get from the internet that there are several rounds of closings still to come.

I expect deflation, not inflation, will be the problem the next several years. Sears probably will get a modest bounce, or lessening decline, from the appliance rebate, but that like the housing bump should fade next year. The excesses of the last decade aren't that easy to wash away, and Sears/Kmart are the laggard.

As for margins, I've look thru the annual and quarterly report for sometime now, and I don't see any great trends in margins. The inventory seems a little high now, a 10% drop in sales yoy and only a 5% drop in inventory yoy, so they don't seem particularly well position for any dramatic improvement in margin.

I'm not a share holder, but I do agree it's fun to watch.

Don't Forget Sears' Housing Connection

I did forget to note that KMart actually loses some stores than probably are cash flow positive because the landlord has a better tenant who wants the location, even in these bad times. They lost a Salt Lake City store this way and there's a relatively famous case of a Santa Rosa, CA landlord who's been trying to evict KMart for several years with no success (the lease ends in 2010). These are rare exceptions though, since Kmart generally occupies less desirable locations.

Kmart generated a ton of cash when most of the Real Estate was sold, that enabled the purchase of Sears. Sears also generated a ton of cash when the credit card business was sold. That was great because you couldn't get near that amount for either of those segments now. The FCF generated for actually selling stuff keeps sinking, because they are a bad retailer that basically relies on residual loyalty. It just harder to generate FCF from 42B of sales than the 55B in sales that Sears-Kmart had when they combined. It'll even be harder when they're down to 30-32B in sales three years from now.

I stated in my initial post that i don't think SHLD is a bankruptcy candidate, I just think Eddie is stuck in a bad place, a bad retailer whose assts can't be monetized until the retail recession is a memory and that could be a decade out. In the meantime, Eddie has to keep it going as a retailer until that day arrives. How long that day arrives, how much of SHLD is left and how many shares exist at that point, I know not. I do think it's harder and harder to make the case that SHLD will be some kind of Berkshire-Hathaway vehicle.

I'm sure if Eddie could do it all over, he would get in a time machine, go back to 2007, and sell everything not nailed down. And then get a hammer and sell anything nailed down.

Don't Forget Sears' Housing Connection

Not exactly a ringing endorsement of Kmart quality there. KMart did 19B in sales in 2005, they'll do 15B this year, so people have and will continue to steadily stop going to the stores, and stores will steadily disappear. The store you described is probably on a list to close when the lease ends. It may even be cash flow positive right now since they don't put any capex into it, but the company knows that with capex the number don't work, so bleed some bucks from it until shutdown time. What you described is also a reason why KMart is unpopular with landlord's, who may be willing to give quality tenants rent concessions at this time, but frequently view KMart a drag on the whole development.

As for the 401K, many companies have pulled the match, however, I'm not sure how many of those companies also spend money on stock buybacks. It does not send an impressive signal to employees when management skimps on capex, cuts 401Ks, but has money for stock buybacks. The brighter, more motivated, and more talented ones see the writing on the wall and start jumping ship. Circuit City's demise was probably inevitable, but they hastened it with some boneheaded moves affecting employees. As cash flow keeps getting tighter and sales lower, don't put it past Eddie to start slashing commissions , and if that happens watch out.

Don't Forget Sears' Housing Connection

As for the rest, I doubt we have little common ground. SHLD is nowhere near generating the kind of free cashflow to eliminate the float anytime in the foreseeable future. The inventory is an asset, but SHLD has to decrease inventory as sales decrease or they'll see FCF get real ugly. Eddie did himself swell in getting Kmart's RE for pennies on the dollar (Kmart's shareholders got ripped off in the process, but it was a legal ripoff). Eddie will make sure he makes out OK on SHLD too, doesn't mean other people will too. He's already eliminated the 401K match for his employees so he doesn't want them to share in the wealth, no reason to think he wants you to share in it either.

Don't Forget Sears' Housing Connection

Regarding Kmart--
It clearly is the weakest by EBITDA and in fact may not be profitable when you factor in things like capex, store closing costs, and it's share of the interest.

It will take some time to close nonperforming KMarts because of leases, many of them long term. In the meantime the remaining stores continue to see SSS decrease and as stores close shared costs (advertising, home office salaries, etc...) are spread across fewer stores. Kmart already has the lowest margins and lowest payroll costs of the segments, so there's not much for sales decline and not much left to cut. By the time they close the current nonperforming stores, there may be a whole new batch of nonperforming stores. It's an ugly spiral and given, as you said, Lampert may be more interested in a runoff than a turnaround there's good reason to believe Kmart is in danger.

Don't Forget Sears' Housing Connection

I think those that still believe in the buybacks are the vestiges of the golden ticket or Cramer's "buy just one share" fantasy. The idea was that SHLD had all these assets, foremost being the CRE, and Eddie Lampert, being so brilliant would maximize that value, and as he shrank the number of shares outstanding, your golden ticket would be worth untold wealth.

Just slap a Willy Wonka hat on Eddie and it all makes sense.


On Sep 11 10:37 PM Dan Braem wrote:

> I still don't get how anyone can defend these buybacks. When companies
> buy their own shares regardless of price, that is a huge warning
> sign that management lacks intelligent capital allocation. Was
> SHLD so well capitalized that it could afford such buybacks? If
> the answer is yes, why not pay the cash (in the form of a dividend)to
> shareholders?
>
> I am still not sure where Eddie Lampert is headed with this company.
> I also believe that the company will avoid bankruptcy, but the long-term
> strategy remains unclear.

Don't Forget Sears' Housing Connection

Sears will still a big box retailer five years from now, because it's hard to envision a scenario that enables them to monetize their assets in that time frame (I guess one long shot would be Walmart deciding they want to enter the appliance market and deciding buying Sears would be the best way to do it--I would think there would be some huge antitrust issues with all that, but I'm not a lawyer).

Retail real estate, especially big box real estate will be glutted for a long, long time. Lands End probably has some value on it's own or since it's not closely tied to Sears, another retailer may be interested. The other brands, Kenmore, Craftsman, and Die Hard, are closely tied to Sears and it's questionable just exactly who would be willing to buy them and as sales go down the value of the brands go down too. Sears Canada seems capable of functioning as retailer on it's own so it has value.

I've never been in the SHLD is going bankrupt camp, but I do think SHLD is a lousy retailer who can't monetize it's assets in the foreseeable future and those assets will continue to deteriorate in value year after year. The Barron's article did make very good points regarding FCF vs EBITDA and Eddie's retort is unconvincing. It's quite the box Eddie is in.

Don't Forget Sears' Housing Connection

Bottom line is that SHLd isn't a very good retailer.

Gary Balter in his preview for SHLD he expected SHLD to benefit from the closing of some competitors, presumably Circuit City, Linens and Things, and Mervyns (Balter then did a 180 and proceded to kick the snot out of SHLD when that didn't materialize) and in fact SHLD may have had a marginal benefit as Kmart did show some increase in Home Elecronic sales. Circuit City, like KMart, had more locations in poorer demographics than Best Buy so KMart could have pickup up some sales just from shear geography. Instead, Sears has to face some healthy competitors trying to fill the voids and take share away from Sears-- Kohl's, Forever 21, hhrgreg, and Lowe's being the most prominent (WalMart is, of course, the 800 lb gorilla in any retail room).

I've barely mentioned Kmart thus far, because it seems that they barely exist. Actually, and amazingly, a couple of articles had popped up in the last quarter touting Kmart because their SSS in the 1Q dropped less than Target. The reasons for that--Kmart closing locations (ultimately about 60 this year) while Target continues to open locations (though TGT is bringing that process to virtual halt in 2010), Kmart had a particularly lousy 1Q in 2008, Kmart has a greater presence in small farming towns which actually felt the recession later than most, and a boring accounting issue involving how shoe sales are counted. Inded for the 1Q TGT overall sales were actually flat while Kmart 's dropped about 4%.

None of that was discussed, and indeed much of that isn't of primary importance. What is of primary importance is that the average Kmart does $11M in sales while the average Target does $38M in sales. Kmart already lives pretty close to the edge of oblivion and any drop in sales puts them that much closer. Many Kmarts have long term leases (which was supposed to be an asset in the go-go days of Real Estate) which means it will take quite some time to close the underperformers. Not sure if what's left will even be viable after the underperformers are weeded out.