|Shares Out. (in M):||21||P/E||10.5x||0.0x|
|Market Cap (in $M):||770||P/FCF||10.0x||0.0x|
|Net Debt (in $M):||100||EBIT||126||0|
|Entry||10/26/2012 06:56 AM|
This is slightly off topic but it is interesting that you cite 'it is a spin off' as the first of your reasons for buying it. I have seen this in a number of places on this site. Why do 'we' think that a spin off is, prima facie, an attractive characteristic? My memory of Greenblatt's excellent book is that a spin off was supposed to deliver excess returns because of the possible presence of ignorant/indifferent institutional selling, lack of information and, quite possibly, attractive incentives for spin off management. I'm not saying that these characteristics might not be attractive but it is the presence of those things that would make a spin off attractive, not the fact that is a spin off.
In this case the stock has gone up since the spin (so no forced/ignorant selling I guess), there is pretty good information (from memory) from the prospectus on float and I can't see anything in your write up to suggest that managment benefited from depressing the price (unless they got lots of rights other than those from holding SHLD shares?).
I wonder whether we are falling into the trap of looking at historic spin off returns (which may well have had these nice characteristics) and assuming it is the name 'spin off' which delivered them, not the characteristics. I think investors (and the parent company management) has got wise to this 'hidden' value. I haven't found a straight spin off attractive in 3 years. Though I am pretty hard core value it has to be said.
I am not attacking Sears Home, just a point of view on spin offs.
|Entry||10/30/2012 03:38 PM|
These shares strike me as fairly valued.
One initial response, is that the exercise pricing derived from the Duff & Phelps valuation is really neither positive or negative to an SHLD holder who exercised his SHOS rights. To the extent the Duff & Phelps valuation was too low, it shortchanged the SHLD investment. So whatever benefit accrued from buying SHOS cheaply, was lost in terms of less cash accruing to SHLD. Lampert may have felt the incremental cash at SHLD wasn't needed or wouldn't earn a good return, but hard to know for sure.
Don't get me wrong, I think the SHOS model is an attractive one that may benefit from a continued shift in KCD distribution from Sears full-line stores to SHOS outlets. However, the upside from current valuation appears muted. I've modeled roughly $119mm of 2012, which implies a multiple around 7.5x based on current market pricing.
This multiple seems fair for a business that relies significantly on KCD products supplied by SHLD. The merchandising agreement between SHOS and SHLD makes clear that SHLD can terminate the KCD supply agreement if Kenmore, Craftsman or DieHard are sold (can only terminate with respect to the brand sold). At the end of the day, Lampert has preserved his options here. Lampert, et al. own roughly 63% of the company, so roughly $500mm. If he can garner an incremental $500mm by selling KCD unencumbered rather than subject to the SHOS merchandising agreement, he'll do it. Furthermore, the non-competition clauses associated with the spin highlight that SHLD retains the ability to (and likely has the intent to) distribute Kenmore via third-party retailers. This likely puts a limit on the ultimate scaleablity of SHOS distribution given Kenmore is a large driver of overall revenue.
All that said, at $1.25 per right when trading started (roughly $21/share equivalent), the company was compelling from a risk-reward perspective. At this level, the pricing leaves me ambivalent.
|Subject||You missed important part why stock could double|
|Entry||10/31/2012 12:50 PM|
There are two very important additional points. First, it seems Lampert's strategy is to transfer sales from big-box to small-box, i.e., from Sears Holdings (SHLD) to Sears Hometown (SHOS). Second, a likely working capital adjustment will free up ~$200 million of cash.
Transfer of sales from big-box to small-box
There is evidence that Lampert is closing the big Sears stores and transferring profitable hardline sales (appliances, tools, lawn & garden, etc.) to Sears Hometown and Outlet Stores. Sears Domestic did over $10 billion in hardline sales. If just 10% of those sales move over to SHOS, you're looking at an additional $1B in revenues for SHOS, i.e., a substantial 40% revenue increase.
Here are just a few examples.
Example 1) http://www.martinsvillebulletin.com/article.cfm?ID=35123
Example 2) http://www.wate.com/story/19667140/sears-store-closing-in-morristown-at-least-60-employees-affected
Sears is closing in Morristown, TN. Now, where does Hometown state they want to open a location on their list of opportunities? Greeneville, TN and Sevierville, TN–the two, west and east, neighboring towns to Morristown.
Example 3) http://www2.oanow.com/news/2012/sep/20/sears-auburn-close-mid-december-ar-4590639/
Sears closing in Auburn, AL. Listed available Hometown opportunity in neighboring western town, Tallassee, AL.
Example 4) http://bangordailynews.com/2012/09/28/news/lewiston-auburn/lewiston-sears-to-close-after-34-years-at-mall/
Lewiston, ME store is closing. Hometown opportunity listed a few minutes away from this closing Sears, at Libson Falls + the neighboring southern town Falmouth, ME + neighboring southeastern town Newcastle, ME + northwestern town Norway, ME + eastern town Falmouth, ME.
They surrounded this closing Sears big-box with targeted Hometown openings, all within a ~40m driving radius.
If you follow the data points diligently, I think you will conclude this transfer from big-box to small-box can be a huge boon to SHOS.
Working capital release
Also, you did not mention anything about a working capital release. SHOS carries ~$400M of inventory on its balance sheet against almost no account payables. If SHOS moves towards normal industry terms of around 45 days payable, you'd get a release of ~$200M cash.
If you check out the Merchandising Agreement between SHLD and SHOS, you'll see it states "Seller and Buyer will negotiate in Good Faith to determine the Payment Due Dates, which negotiations will take into account, among other things, then current market conditions."
|Subject||RE: You missed important part why stock co|
|Entry||10/31/2012 09:50 PM|
So the big to small box shift is an explicit goal of SHOS? How available is mgmt?
The WC release makes total sense.
|Subject||RE: RE: You missed important part why stock co|
|Entry||11/01/2012 08:22 AM|
It strikes me as unlikely SHLD is going to significantly extend terms to SHOS. Lampert's SHLD investment dwarfs the SHOS investment, and the latter arguably has a lower cost of capital.
|Subject||RE: You missed important part why stock could|
|Entry||11/01/2012 01:36 PM|
Lampert make goals explicit? That's not happening. You can only draw your own conclusions from whatever evidence is available.
Lampert owns the same % of SHLD and SHOS (actually, slightly more of SHOS). Does it make a mathematical difference to Lampert on whether a dollar ends up in SHLD or SHOS?
As for cost of capital, I believe SHLD's credit agreement is at around L + 2%. SHOS's ABL is around L + 2%. Where are you seeing the difference between the two entities?
If Lampert wanted to "punt" SHOS, why then would he not load SHOS's balance sheet with all the account payables?
Lastly, let's assume SHOS will NOT get better inventory terms. Well, SHOS has a $250M ABL, on which it can pay L + 2%. So, worse case, if we can't take out ~$200M of excess working capital for free (i.e., L + 0) through better inventory terms, then we can take out ~$150M on our ABL at L + 2%.
Also, have you read the merchandise agreement between SHLD or SHOS? It is detailed up to the point of specifying the prices SHLD can charge SHOS. If Lampert wanted to easily shift which of the two entities gets the economics, wouldn't he structure the legal language a lot more loosely?
I'd love to hear your thoughts if you disagree. Thanks.
|Subject||RE: RE: You missed important part why stock could|
|Entry||11/01/2012 06:38 PM|
Rearden, all fair questions and I don't pretend there are clear answers.
I'd suggest Lampert wants the cash at the entity in which he believes it can earn the highest return. I'd argue that entity is SHLD - whether it's through pension buyouts that are eminently accretive, real estate redevelopment that's likely in the cards, etc. But you're right - a dollar is a dollar in either entity - it's just my opinion he'd rather have that dollar in SHLD.
As for cost of capital, I'm not referencing the specific cost of the ABL which should be the same given it's the same essential inventory, but rather the aggregate cost of capital in terms of the entire capital structure. I think the latter is more relevant.
I don't think Lampert could shift third-party payables from SHLD to SHOS. For one thing, the vendors would likely have to approve. Second, it just doesn't seem to work that SHOS could owe third-party vendors for inventory it purchased from SHLD.
It makes sense there can be cash extraction from the revolver but if the intent is to scale the concept I imagine the revolver will be dedicated to inventory investment at $300k per store.
I've read the merchandise agreement which is what drove my concerns re the ability to pull KCD from SHOS should the brands be sold. I didn't read too much significance into the specificity of pricing terms. This struck me as something that was absolutely necessary given all the conflicts involved with significant overlapping ownership - what third party shareholder would want to own SHOS without very specific pricing terms? Besides, I'm not claiming anything nefarious on Lampert's part here vav shifting economics amongst the two companies. I just don't see SHLD financing SHOS to any significant extent, but rather SHOS growing on the back on the revolver.
Stepping back for a moment - I like SHOS and did a lot of work on it. I had orders in for rights but was too cheap. That has proven foolish. Maybe my view is skewed now because I regret that decision. Nevertheless, the company strikes me as fairly priced at this level.
|Subject||RE: You missed important part why stock could|
|Entry||11/02/2012 08:48 AM|
TR1898, you raise interesting points. However, I respectfully disagree.
I am still unsure why you assume SHOS has a lower cost of capital than SHLD–even if you aggregate cost of capital in terms of the entire capital structure. SHLD has a ton of unencumbered real estate. The cost to borrow against billions of dollars of real estate value is arguably much cheaper than to borrow against a franchise growth story.
In regards to the ABL, why would that cash extraction have to be solely dedicated to inventory growth? First, won't the ABL expand as the inventory grows? Second, I don't think SHOS needs to use the ABL to grow its inventory. SHOS generates gobs of cash and requires virtually no CAPEX. The substantial cash this business throws off is more than enough to support an additional $400k of inventory for each new store.
Let me know if you think differently. Thanks.
|Subject||RE: RE: You missed important part why stock could|
|Entry||11/02/2012 11:12 AM|
Fair point re the ability to self-fund inventory growth via FCF. I still find myself questioning the intent to extract working capital via the revolver, however. If the intent was to imminently dividend the cash, why wouldn't this have occurred before the spin (i.e., dividend $200mm to SHLD rather than $100mm) such that it accrues to Lampert's use tax-free?
I feel like the cost of capital discussion may be too academic. I probably shouldn't have used that term. In the end, I think the crux of the issue is where does Lampert want the cash to be domiciled? Which company has the highest opportunity cost of capital (there, that term sounds better . . .)? In my mind it's SHLD given the multitude of different investment alternatives with good return prospects and the fact I believe SHLD will ultimately be Lampert's primary "vehicle."
Another reason I feel cash is more coveted at SHLD is I question the ultimate scaleability of SHOS. In my opinion, Hometown is a tenuous business from the perspective of the franchisees. I visited two locations for which an exurban strip mall developer opened a Hometown in the retail center themselves for lack of another tenant opportunity. Neither of these units were profitability operating. While this is anecdotal, the Hometown business to me is not a great one vav the franchisees. Moreover, from the multiple-store franchisees with whom I spoke, I gained the clear sense that Appliance Showroom and Hardware are much better concepts for franchisees given the commissions paid. Further, the Appliance Showrooms I visited seemed to offer a more cogent, distinguishable business model versus Hometown. I just can't see that much net unit growth in Hometown. Appliance is targeted for growth, and I think this concept should be a focus. And while Hardware pays much better commissions to franchisees, I think it's a much less defensible business given the competition with Ace, etc. Plus, the negative $9mm of 2011 Hardware EBITDA points to this as well.
Perhaps I'm wrong. Maybe SHOS hits the targeted 3,000 units, and there's a tremendous runway for the profitable deployment of incremental capital, but I'm currently of the mind that cash is more desireably held at SHLD.
|Subject||RE: Payables Terms|
|Entry||12/13/2012 08:30 PM|
With the addition of the "SHLD payable" to the balance sheet, a material working capital release has already occurred. Between this payable and the normal AP, AP days stand around 23. Will be interesting to see if there are further increases.
|Entry||03/12/2013 11:06 AM|
Fast Eddie. Retail supergenius.
|Subject||RE: RE: RE: Quarter|
|Entry||06/07/2013 01:12 PM|
There was definitely a repost. It was massively bullish and it's...gone. Between this disappearance, and the way the slate was wiped clean on the ANFI writeups, I'm wondering whether these secret NSA surveillance programs extend to VIC. Curious.
|Entry||06/07/2013 02:45 PM|
Maybe it was also posted somewhere else? I don't know. There seem to be some new rules regarding what counts towards the twice yearly posting requirements, but I didn't see anything that implied posts would be taken down if they weren't exclusive for some period, just that they wouldn't count towards membership requirements. Maybe if you rep that they're exclusive, and then they're not, the VIC God takes the post down.
werd, I don't think I made the Super Genius comment on the AAOI writeup. It was way too bullish for that; I would have been subjecting myself to unlimited scorn and ridicule. But I guess there's no way for me to defend myself in that regard now that it's in the hands of the authorities.
|Subject||does anyone recall/agree with aaoi's post?|
|Entry||06/10/2013 10:58 AM|
My recollection of the argument, and it is not a very good recollection, was that Eddie can't monetize the real estate without losing billions in inventory and brand equity, so he is going to funnel the inventory and keep the brand names alive through SHOS while he slowly closes down the SHLD stores. I am sure there was more to it (aside from the mechanics and his eagerness to buy as much as possible), but that is all I can recall. In any event, I don't recall there being any push back on this "master plan" thesis. I was wondering what people thought of the post.
|Subject||RE: does anyone recall/agree with aaoi's post?|
|Entry||06/10/2013 11:59 AM|
Out of interest, why did that idea get pulled?
|Subject||RE: RE: does anyone recall/agree with aaoi's post?|
|Entry||06/10/2013 12:42 PM|
No one seems to know.
|Subject||RE: RE: does anyone recall/agree with aaoi's post?|
|Entry||06/10/2013 12:49 PM|
Someone suggested the same idea was posted at the same time on another site, which would violate the spirit of VIC. I don't know the truth to that suggestion though.
|Subject||: RE: does anyone recall/agree with aaoi's post?|
|Entry||06/11/2013 12:11 PM|
Werd, wIth a low float already and Lampert already owning more than half, is there any realistic ability to buy back stock as he has done with AZO?
|Subject||85bears, would you mind updating your thoughts|
|Entry||08/28/2013 12:13 PM|
I recognize that Eddie's fund distributed some stock, which somewhat undercut the bullish arguments, but the stock has been absolutely killed. Did you ever buy into AAOI's arguments about Eddie moving the name brands from the big box to the franchises? If not, is this just a levered housing play? Thanks.
|Subject||Roller coaster round trip|
|Entry||08/30/2013 11:24 AM|
Broken stock? Seems there is brutal competition and competitors are eating lunch. Also seems SHLD is using SHOS to tack on costs, not the other way around.
|Subject||RE: A few questions|
|Entry||11/19/2013 06:01 PM|
I’ve done a fair bit of work on this so thought I’d share my views:
(1) Economic impact of franchising of Company-owned/operated stores = From the Company’s perspective, the sale/transfer of stores from Company to Franchisees is largely net-neutral from a P&L/FCF standpoint and mildly accretive from an ROIC perspective (due to absence of PP&E investment). From franchisees’ perspective, the upside comes from (i) opportunity to be your own boss, and (ii) opportunity to increase revenue per store by improving local advertising efforts, higher close-rates on sales, etc. My legwork indicates this has been borne out in the data (i.e. the 50+ stores who’ve gone from Company-owned/operated to Franchisee-owned/operated).
(2) Home Depot's "small-format" stores = Sears Hometown stores are comprised of 3 distinct formats – (I) Sears Hometown [average ~10k sq. ft.], (II) Sears Appliance Showroom [average ~5-10k sq. ft.], (III) Sears Hardware [average ~30k sq. ft.]. The only SHOS format comparable to the ill-fated and now defunct Home Depot smaller-format store concept is Format III, which make up roughly 7% of SHOS’s total store base / revenue and probably ~5% of EBIT. The history of HD’s small-format stores came in two iterations, the first lasting between 1999-2004 under Nardelli’s tutelage (~10 stores in northern New Jersey, Chicago, Brooklyn, and Staten Island; formerly known as Villager’s Hardware then later re-named Home Depot Urban Stores) and the second lasting between 2007-2009 (5 stores in suburban Northern California, known as YardBirds).
The basic idea for both was to shrink down the SKU count by 50% (from ~40k SKUs to ~20k SKUs) and get the store-level unit economics to work using a floor space 50% smaller. The concepts were a bit different (the former were concentrated in high density / high rent areas; the latter in an area undergoing a major swoon in residential construction & repair) but the core problem was the same – they couldn’t sell enough of their core products to justify the occupancy & labor costs (think lots of low-ASP / high volume items like lumber, plumbing equipment, etc.).
SHOS’s Format III stores are about 1/3 smaller than the HD “small-format” stores, are largely in suburban locations, and sell a much higher percentage of high-ASP / low-volume items (mostly power tools / lawn & garden equipment).
Could HD give it another crack using smaller store footprints and better focus on high-ASP / low-volume items? Sure – it’s retail, there’s always going to be competition (in fact, that is part of the reason why Lowe’s purchased Orchard). Naturally though, this is where the nature of historical brand association for product categories and maintenance / replacement support comes into play for Sears and its competitors.
(3) "Competitiveness" of franchisees = The franchisees do not make decisions on merchandise prices and margins, SHOS does. That said, the franchisee is the one sticking his neck (and his capital) out for choosing store locations, so you’ll find store-level economics are always top-of-mind for franchisees when you go out and talk to them.
(4) Franchisee ROICs = For both liability and practicality reasons, no franchisor (be it in fast food, hotels, or anything else) will tell you what average per store ROIC will be generated by an average franchisee. Same applies here (I know because I looked). From my conversations with various franchisees though, I’ve heard ROICs ranging anywhere as low as <0% (particularly for those in a new area during the first 3-6 months) to as high as 25%. All depends on location / store format / store associates, but the franchisees I spoke with were happy by-and-large (note: the plural of anecdote is not data).
(5) Lampert entities' Management equity compensation = The absence of equity-based compensation (in the case of both SHOS and OSH) is just not true – the SHOS BoD has set-aside 4m shares as part of the LTIP (vs. 23.2m shares currently extant, or ~15% of the equity on a pro forma basis before any share buybacks). That is a significant amount of equity.
The approval & dispensation of the SHOS incentive award plans had not yet occurred as of the April proxy, hence why those equity boxes were all empty.
As for Orchard, Mark Baker (CEO) was to receive 3% of the Company’s equity if they hit performance targets and time-based vesting timelines – things didn’t work out obviously, but Lampert understands manager incentives as well as anybody.
(6) Management Performance Metrics = If you think about where SHOS is headed as a business, you’ll find yourself less concerned about the implications of an EBITDA-based compensation plan (read: an asset/capex-lite model means nearly all EBITDA translates to pre-tax cashflow) as compared to a “normal” retailer. That said, if you go through the proxy, you’ll see the compensation plan language hitting all the right performance measures (cf: “cash flow,” “return on equity,” “EVA,” etc.).
|Subject||RE: RE: RE: A few questions|
|Entry||11/19/2013 09:14 PM|
Sure, in order...
(1) Inventory / WC = after talking with the CFO, I do not anticipate a liquidity windfall accruing to SHOS' benefit after year-end per the "market terms w/ SHLD" language as alluded to earlier in the commentary here. Instead, I'd anticipate a slow creep in DPOs as the franchisee store base and non-KCD inventory purchases expand over time. While this may disappoint some people who were looking for a working capital Easter egg (rather, I should say another working capital Easter egg for those amazed by how quickly the ABL was paid down after the spin), I think about it this way -- given the nature of the formats being targeted for expansion (namely, the inventory-lite Appliances Showroom formats and, to a lesser extent, the Hometown format whose sales %'s are increasingly being fulfilled online), this means that growth will require very low amounts of WC investment by SHOS.
(2) Buyback = ABL Amendment filed Aug 29th obviates the Oct 12th buyback/dividend negative covenant. For Reg FD reasons, Management would not tip their hand on level of activity in the market during my conversation.
|Subject||RE: RE: RE: A few questions|
|Entry||11/20/2013 04:00 PM|
(1) Source for financial impact from Company-operated to Franchisee-operated = I spoke w/ Management.
(2) Source for HD "smaller-footprint" stores = filings, news articles, and scuttlebutt with salespeople / people in the industry. Yardbirds was profitable at the time of the acquisition, but its closure had less to do with mismanagement than with the regional market -- much of their sales volume was derived from the speculative residential construction & repair boom in the Napa / Sonoma / East Bay (San Francisco) housing markets, and like any high-cost marginal supplier in any industry, they felt more pain than anyone when the tides went out (especially in light of the largely fixed costs inherent to all home improvement retailers).
As for OSH, they are strictly California (~65 stores) / Oregon (~2-3 stores) and predominantly lawn & garden / tools & paint. SHOS Hardware has no presence outside the Midwest / Northeast, but Lowe's level of success with the format on the West coast is something to keep an eye on.
(3) Equity compensation = yes, we'll start seeing the SBC figures in the numbers next year.
(4) Buybacks = if you think about the level of trough EBIT in 2008, the minimal go-forward CapEx & WC investment, the full cash tax-payer status (39%), and the $2-3m interest expense from seasonal ABL draws today, you'll come to the same place that I've landed -- further buybacks are less a matter of "if" or "how," but "when" and "how large."
(5) BoD Members = no, I don't know anything about Gooch other than that he has a last name some folks in Italy can't wait to slap with a trademark infringement suit. Kidding aside, I generally look out only for patterns of nepotism / back-scratching when it comes to BoD's... others view these types of things differently though.
|Subject||RE: SHLD implied revs|
|Entry||11/22/2013 05:31 PM|
It's tricky -- if you take the YoY SHLD sales numbers to SHOS, it looks like they were down dramatically. But then one recalls that they signed the new Merchandise Agreement on 8-Aug-12 which eliminated the ~25-30% gross margin mark-up.
Between the unknown % on exact mark-up, the mid-period nature of the adjustment, the "extra" inventory that was sold to SHOS before the spin, and the fact that these revenues are sell-in not sell-through for SHOS, it's tough for me to get a meaningful read.