This Is How Amazon Will Become America’s Most Valuable Company

In 2014 I invested in (AMZN), much to the bewilderment of many of my clients. Even though the stock had fallen from more than $400 to below $300 per share, the consensus view was that the company was a money-losing unfocused endeavor that prioritized innovation over financial considerations. In many minds, there was no way to justify Amazon’s market value, so $280 per share was pretty much just as crazy as $400 per share.

Fast forward 30 months and Amazon shares trade in the mid 700’s. The company is reporting GAAP profits and still growing 20% per year. Prior skeptics missed several things, but at the core they did not account for the fact that Amazon sees no boundaries in terms of areas in which it will compete. The company was losing money in the accounting world, but in reality certain businesses were making money and those profits were being used to subsidize growth initiatives in other areas, some of which would fail and others that would succeed but not turn a profit on their own until years later.

We often hear growth investors focusing on a company’s total addressable market, or “TAM,” when trying to figure out how high a stock could go over a 5 or 10 year period when growth is more important to management than short-term profitability. Many Amazon investors try to gauge the company’s TAM by looking at the total retail market, and assuming e-commerce ultimately represents X percent of retail spending, and Amazon gets Y percent of that e-commerce market. That method of analysis would work for most companies, but not Amazon. The problem is that it implied that we know what categories will have an e-commerce component and that the e-commerce penetration of each category will remain somewhat consistent (such that we can predict what it will be).

Why is that problematic? Watch this video, unveiled today by Amazon:

You see, Amazon is not a traditional company. It is creating new businesses that don’t exist and it is re-imagining business models, like the convenience store. There is really no way to know what businesses Amazon will get into in the future. All we really know is that they are more willing than any other company on Earth to venture into something new that may or may not seem to make sense. This is why I believe within the next five years Amazon will become the most valuable U.S. company. There is nothing stopping them from growing because they never limit themselves.

The “Amazon Go” store you saw in the video (see the related Seattle Times article here) will open in 2017 in Seattle, about 10 miles from my house. I will eagerly await its arrival and share my initial experience when it opens. As for the stock, as the price warrants I will reduce my position over time (I already have sold some), but it is probably the only stock I have ever owned that I will continue to hold at least some of my shares almost no matter how high it goes. As long as I cannot predict where Amazon’s growth will take it in the future, it will be hard for me to confidently say the company is overvalued.

Full Disclosure: Long shares of Amazon at the time of writing, but positions may change at any time.

Will People Continue To Buy Clothes In Stores?

It is always interesting to me when Wall Street takes a few select situations and uses them to make dramatic conclusions about how the world will change forever. If you have read much about consumer spending in recent months you might come to a few conclusions, such as:

  1. Millennials are the only consumer group that brands should care about because they now outnumber baby boomers
  2. Millennials don’t spend money on clothes
  3. Instead Millennials spend money on travel, eating out, live experiences, and consumer electronics

I want to focus on where consumers are spending money because I think the idea that retail shopping is dead due in large part to a de-emphasis on clothing and accessory purchases is presenting excellent investment opportunities right now. Many leading department store chains as well as specialty retailers focused on apparel and accessories have been crushed in the public markets. They are trading at equity valuations that imply their businesses are in permanent decline due to a combination of shopper preference changes and increasing market share for online-only retailers. Even though the bricks and mortar companies have spent billions of dollars building out their online capabilities to complement their store networks, investors largely do not believe these investments will show solid returns.

First, I find it odd that investors do not want anything to do with the apparel and accessories category right now. Are we going to somehow stop wearing clothes? If not, are there technological advances in the space so great that wearing clothes will no longer result in them wearing out and needing to be replaced? The view that there is an irreversible trend toward spending materially less on clothing and related products appears suspect to me.

If you agree, then it makes sense to continue down the road and examine other supposed reasons why retail is supposedly “uninvestible” today. For instance, I hear many people point to the fact that Amazon is going to surpass Macy’s in clothing sales in the United States. Even if this is true, should we conclude that Macy’s is therefore doomed? If I think about it, it seems logical that Amazon will surpass many retailers in various categories. After all, Amazon allows any company to list their products on their site. Conversely, Macy’s has a limit to how many items they can sell, as both their stores and distribution centers have finite capacity. Isn’t this therefore an apples and oranges comparison? Honestly, I would be concerned if Amazon could not sell more clothing than Macy’s given their vastly different business models.

Macy’s stock has dropped from $73 to $33 per share in the last 12 months, bringing its equity value down to $10 billion. To give you a sense as to how negative investors view the company’s prospects, it has been widely reported that the Macy’s flagship store in New York’s Herald Square (which they own) is worth at least $3 billion. Add two more valuable stores in Chicago and San Francisco and there might be $6 or $7 billion of real estate value in just three of Macy’s 800+ store base across the country. This discrepancy tells me two things; 1) there is a large margin of safety in Macy’s stock, and 2) investors don’t think very much of the company’s retail business despite more than $25 billion in (very profitable) annual sales. Another interesting fact is that Macy’s stock currently yields 4.5%, which is higher than the yield on Macy’s corporate bonds that mature in 2023 (about 4.1%). Typically investors accept lower income payouts on equities in return for more capital appreciation potential. And in case you were wondering, Macy’s is more than adequately covering the dividend with free cash flow.

There are many other examples of retail stocks that I believe are being mispriced today. Some have inherent real estate value due to owned stores vs leased stores. Others have high dividend yields that actually point to undervalued stocks rather than distressed operations. Others have no dividend or owned real estate, but instead have real growth opportunities ahead of them and simultaneously are trading on public markets as if they are shrinking in size. Because the opportunities vary in shape and size, I recently began buying a basket of five names that I find particularly attractive as a way to spread the risk around (retail will always be an extremely competitive business) but make a macro bet on the apparel space continuing to operate quite profitably. There are many values to be found if you, like me, believe that clothing and accessories is a retail category that will remain in style for decades to come.

Full Disclosure: Long Macy’s and many other retailers at the time of writing, but positions may change at any time

Whole Foods Market: 2015 Update

It has now been about 18 months since I began accumulating shares of Whole Foods Market (WFM) in the high 30’s. Since that time the stock briefly had a huge move back into the 50’s before losing steam again. Same-store sales have decelerated but my investment thesis remains unchanged; just because competitors are copying WFM’s model and seeing success does not mean that the company cannot continue to be the leader in the healthy food space. Investors were not pleased with WFM’s quarterly earnings report last night, but the stock is finding some support around $30 and might be forming a bottom.

So how bad are things really? Well, if you only look at the stock you might conclude the company is all but dead. For instance, traditional supermarket chain Kroger (KR) now fetches a higher relative valuation (cash flow multiple) than WFM, despite the fact that they have more than 2,600 stores nationwide compared with 431 for Whole Foods. Yes, investors think Kroger will deliver better financial results going forward. I don’t suggest taking that bet.

The financial media has concluded that WFM’s troubles are due to people shunning their stores for the likes of Wal-Mart, Target, Costco, and smaller, regional WFM copycats since all of those places now sell organic food. While this may be true to some extent (especially with local WFM wannabe stores — not many Whole Foods shoppers frequent their neighborhood Wal-Mart), there are other explanations that are ignored because they are not as obvious and do not make for interesting headlines.

A big one is the fact that Whole Foods is cannibalizing itself by continuing to open new stores at a rapid pace (32 in the just-completed fiscal year). In Seattle, where I live, there are now 7 Whole Foods stores, with several more in development. Over the last 6 years WFM has increased their store count by 50%. As soon as a new store opens that is 10 minutes away, people are going to stop traveling to the one that is 20 or 30 minutes away.

Interestingly, the company provides information about its store performance based on the age of the store. If the media was 100% right and people were simply switching from Whole Foods to Target or Kroger, sales at all WFM stores would suffer equally. But look at the data for fiscal year 2015:

Store Age       SSS

<5 years         +7.6%

5-11 years       +1.5%

>11 years        +1.1%

ALL                 +2.5%

The older the store, the worse the sales growth. This makes sense, right? If there has been a store in your neighborhood for a decade, chances are you will already be shopping there if you are at all interested in doing so. It’s very hard to boost sales at older stores, especially considering that Whole Foods stores already sell far more food per square foot of space than any other grocer.

And when they open new stores those stores do well for many years, at the expense of the older stores. Existing WFM shoppers will migrate to the closer location (hurting older store sales) and shoppers that had no interest in driving longer distances just to shop there might check it out now that it is more convenient to do so.

Notice that none of this has anything to do with the fact that Safeway now sells Annie’s fruit snacks.

Accordingly, the investment thesis for WFM must incorporate the fact that growing same store sales for the company’s existing base of 431 stores is going to be very hard. In fact, I am assuming that they cannot post sales gains above inflation, which implies flat traffic growth for all stores after they have been open for a few years. So why invest?

First of all, the company has 431 stores vs over 2,600 for Kroger, so it is entirely plausible that Whole Foods ultimately reaches their 1,200 store goal in the U.S. And secondly, the company’s stores are massively profitable even if sales do not grow. For all of the heat the company has gotten lately, fiscal 2015 same store sales actually grew 2.5% and operating cash flow totaled more than $1.1 billion. That’s more than $2.6 million of cash flow per store. For comparison, Kroger does about $1.6 million per store, and their stores are bigger.

At $30 per share, Whole Foods stock trades at less than 8 times EBITDA and less than 14 times existing store free cash flow, both below their less impressive competitors. Such a price would only be justified if the company had minimal growth ahead of it.

Lastly, I cannot conclude without commenting on some of the odd analyst questions from last night’s quarterly conference call. More specifically, the investment community is criticizing the company’s decision to borrow money (they have never had any debt before) to buy back stock aggressively over the next few quarters.

Normally, companies are mocked for buying back stock as it hits all-time highs and then halting the purchases when things turn sour. Despite the fact that WFM did not start buying back any stock until last year (after it dropped dramatically) and now is accelerating those purchases (as it is hitting levels not seen since 2011), everyone just seems to want to pile on. Here is the first question from the conference call:

“Thanks for taking my question. So my one question has to do with share buybacks. I just wanted to understand the rationale for taking on debt and buying back shares right now maybe instead of waiting until maybe comp trends stabilized. So if you could maybe help us with your thought process.”

I was shocked at this question. Whole Foods has no debt, more than a half a billion of cash in the bank and stores that generate over $1 billion of cash flow per year, so they are in pristine financial shape. The stock is hitting 4-year lows and trades at a discount to traditional supermarkets despite being far better in terms of sales and profits. And the analyst wants them to wait until business gets better before buying back stock?

It should be obvious why they are doing this. Because they know if they can improve the business at all going forward the stock is going to go up a lot. Buy low, sell high, right? In fact, if they took Oppenheimer’s advice and waited until the stock was $50 before doing any repurchases, they would probably get mocked for doing so. This just tells me how negative the sentiment is for Whole Foods Market right now.

I may have been early last year with the stock in the $37 area, but since I invest with a five year horizon I am happy to average down and wait for the water to warm up. Right now the company is getting absolutely no credit for what they have built, how successful it continues to be even today, or any future growth opportunities that exist. It is the epitomy of a contrarian, long-term investment.

Full Disclosure: Long shares of WFM at the time of writing, but positions may change at any time.

New Amazon Disclosures Reinvigorate Bull Case For Investors

Amazon (AMZN) is a fascinating company for many reasons and their latest investor relations move has gotten the markets excited about their stock once again (it’s up 57 points today alone as I write this). Bulls and bears on the shares have long had a disagreement about the company. Shareholders argued that Jeff Bezos and Co. were purposely “losing money” in order to invest heavily in growth and attain massive scale. Bears insisted that the spending was required to keep their customers coming back, and that if the company started to show profits the business would suffer dramatically. Regardless of which camp you are in, one thing is clear; Amazon chooses growth over profitability in the short term if it thinks they can be successful.

So when the company announced that it would break out the financial results of its Amazon Web Services (AWS) business segment for the first time in its nine-year history starting in 2015, the consensus view was that the division would show losses. After all, if Amazon embraces short term losses in exchange for growth, and AWS is its fastest growing business, why would you think otherwise? So imagine the surprise last evening when Amazon announced that AWS is profitable, and not just a little bit. Operating margins for AWS during the first quarter of 2015 were 17%. Add back an estimate of depreciation expense and EBITDA margins are likely approaching 50%. And the stock price is rocketing higher on the news.

All of the sudden it is possible that Amazon does not hate reporting profits (some have speculated that income tax avoidance is a motivating factor). Instead, maybe they are being sincere and simply invest capital when they think they have a good reason, regardless of whether it results in short-term GAAP profits. And maybe the thesis that Amazon’s business model does not allow for profits is incorrect. That is surely what investors today are thinking. Given their corporate philosophy, there is no reason Amazon should be running AWS at a large profit, but they are. Why? Perhaps they have built a very good business. Simple enough.

The implications for the stock are important. We now have evidence that AWS is probably worth the $60 billion or so that the bulls have long thought. At the lows of the last year (below $300 per share), Amazon’s total equity value was only a little more than double that figure ($130 billion). The bears on the stock will probably stick to their guns that the current share price (approaching $450) is irrational, but if you actually run the numbers, it is not that hard to value Amazon in a range of $200-$250 billion based solely on what we know today, given that non-AWS annual revenue will approach $100 billion this year and AWS alone can account for 25-30% of that valuation. The stock is getting close to my personal fair value target, but is not quite there yet. And given that Amazon could very well surprise investors more going forward (they don’t exactly set the bar very high), I am not in a big rush to sell.

Full Disclosure: Long shares of AMZN at the time of writing, but positions may change at any time

Eddie Lampert Correctly Equates Sears And Kmart With Land Line Phones, Then Keeps Pitching Them To Consumers

With operational losses mounting at Sears and Kmart stores nationwide quarter after quarter, an interesting thing has happened. CEO and largest shareholder Eddie Lampert has started to speak publicly about the company, the reasons behind his previous decisions, and his vision for the future. This is notable because Eddie never used to speak to anyone about Sears Holdings. If you were a shareholder you could attend the annual meeting for a couple of hours and read his annual letter to investors, but that was it. Now that creditors, suppliers, and customers are becoming more and more concerned about the company’s viability as a retailer, Eddie is giving interviews and is writing on multiple blogs on a regular basis. For the first time, investors are getting a better sense of where Eddie’s company is headed.

Despite the policy of silence over the last decade, it has not been difficult to gauge the company’s progress under Eddie’s leadership (either as CEO, majority shareholder, or both). The operational results have been dismal, which made it clear to any financial analyst that Lampert and his team lacked the retail experience and were ill-equipped to compete against other large mass merchants. Eddie has been quick to admit that the company is struggling but he has also insisted on drawing parallels in history to describe the journey he is taking with Sears as it tries to transform and return to growth and profitability. The more Eddie speaks and writes, the more obvious it becomes that he does not have a firm grasp of why Sears and Kmart are losing a billion dollars every year. For example, consider this excerpt from a blog post Eddie published on December 15th:

“How much retail floor space do we need to deliver great experiences that meet or exceed our members’ expectations? Are our locations where they need to be? With more and more of our sales and member engagement happening online or via mobile and shipping straight to home, do we need the same kinds of stock rooms and warehouses?

Sears Holdings is far from alone in tackling these questions. To take just one example, in virtually every city across the country, real estate owners and communities are trying to figure out what to do with large, windowless buildings that once held essential – now useless – telephone equipment to make landlines work. Some developers are trying to convert them into offices or apartments. Other entrepreneurs think the solid construction and robust electric power could support data centers for new generations of businesses. None of these transformations are simple.

Similarly, some of our stores are simply too large for our needs, given that populations shift, new roads are built and new retail areas open constantly. Restoring them to profitability has been a challenge. At the same time, many of our stores are in some of the most attractive mall locations in the country. Though we expect most of them to stay open for the foreseeable future, in some places mall owners and developers have approached us with the opportunity to reposition our stores for other uses and are willing to compensate us. When they’ve offered us more money to take over a location than our store there could earn over many, many years, we’ve accepted offers. We’ve used this funding to invest more in our transformation. We have also adjusted the size of our stores by partnering with retailers like Whole Foods, DICK’s Sporting Goods, Forever 21, Primark, and others. In these cases, we continue to operate in the same location, in a smaller (but still large) space, leasing out the rest to retailers who will drive traffic and who compensate us for that space.”

So to summarize: Eddie would like you to believe that with the advent of e-commerce big box retail is dead. His company is losing money hand over fist because they have too many stores that are too large and therefore cannot be operated efficiently to serve today’s customer. The Sears and Kmart stores you grew up with are like land-line telephone equipment facilities and now you have disconnected your land-line, leaving those locations grossly misappropriated.

Do you buy this argument? I don’t and I think it illustrates that Eddie and his team do not understand why Sears and Kmart are getting clobbered in the retail sector. Before I share my view on what the problem is, let’s first squash the idea that it is too many stores that are too big. Below I have put together some data on store counts and retail selling square footage for major big box retailers from 2013.


The numbers are striking. Compared with four major big box chains (Costco, Sam’s, Target, and Wal-Mart), Sears and Kmart stores are not too big. In fact, if you combine Sears and Kmart the average store is approximately 112,000 square feet in size, less than all four of the competitors. It is also hard to argue that they simply have too many stores, relative to the competition. Sears and Kmart together have about the same number of stores as Target and less than half as many as Wal-Mart.

Simply put, if big box retailing was dead and there was a glut of selling square feet across the country, all of these other brands would be struggling like Sears and Kmart are right now. But they’re not. Even with Target’s credit card hacking issues recently, they are still extremely profitable. As you can see from the chart above, Sears and Kmart lag other stores considerably on a sales per square foot basis. They have the same selling space to work with but are failing as merchandisers. Consumers are simply voting with their wallets and they prefer shopping at other stores. No surprise there to anyone who has a pulse.

Eddie Lampert seems to be ignoring the obvious when it comes to fairly and accurately assessing his company’s fortunes. To me the problem is clear as day; the Sears and Kmart brands are dead. Unless you offer something very compelling and unique (and therefore have brand loyalty), consumers do not want to shop at your stores and will not do so. Even when Eddie took control of Kmart in 2004 the brand was dying (it was in bankruptcy proceedings at the time after all). He either didn’t see the brand’s shrinking relevance, didn’t place enough importance on it, or thought he could energize it. In 2005 when he merged Kmart with Sears, it added fuel to the fire. The Sears brand was also dying, so merely combining those two retail brands was not a recipe for success. As long as people think that Sears and Kmart are not good places to shop, like Target and Costco for example, there is nothing that Eddie can do.

Now, you may have noticed that Eddie’s team created a rewards program for Sears and Kmart called “Shop Your Way.” It’s not called “Sears Rewards” or “Kmart Rewards” so kudos there. A separate name is the first step towards a new, fresh brand. Progress? Maybe a little, but it’s not being emphasized. The TV commercials for Sears and Kmart this holiday season mention the old brands multiple times but barely reference Shop Your Way. They say things like “Members get more” but then you ask yourself “members of what?” The Shop Your Way program is not being advertised as the focus. Sometimes they flash the logo up silently at the end of the commercial for a split second, which is hardly engaging. It’s still all about Sears and Kmart for the most part. And that is why things are not going to get materially better unless the current strategy is changed and the company moves away from Sears and Kmart brands. Put a fork in them.

As Losses At Sears Holdings Continue, The Need To Raise Cash Helps Simplify The Investment Analysis

The bullish case for Sears Holdings (SHLD) stock has always been a sum-of-the-parts story. But for many years since CEO Eddie Lampert orchestrated the merger of Kmart and Sears in 2005 the company has been quiet about its various businesses and seemed content to stick to business as usual. That strategy has not worked in the face of intense retail competition, and over the last three years a slow break-up of Sears Holdings has been ongoing. Shareholders have yet to benefit, even though the bullish thesis was predicated on such an event, mainly because the core retail operation has been losing so much money and accumulating so much debt in the process, but there are many investors who remain hopeful.

Consider the moves made and/or announced since 2011:

*Orchard Supply Hardware spin-off (2011)
*Sears Hometown and Outlet Stores rights offering (2012)
*Partial Sears Canada spin-off (2012)
*Sears Canada special dividends (2012 & 2013)
*Lands End spin-off (2014)
*Partial Sears Canada spin-off (2014)
*Proposed Sears REIT rights offering (2015 – estimate)

Cumulatively, SHLD investors have reaped approximately $20 per share of value from these transactions, assuming they held onto all of the separate entities. Now, that has not resulted in any profits (SHLD shares started calendar year 2011 trading at $73.75 and presently trade for $43), but the company has been liquidating slowly like they wanted. The 15% or so loss sustained by equity holders over the last four years has been driven by less-than-expected financial performance of the retail operations.

Today we learn that yet another transaction is in the works; the rights offering of a REIT that will hold 200-300 stores owned by Sears Holdings. The new entity will lease back the properties to Sears. The stock is up more than 30% today on this news, but in reality nothing has changed. The company has the same asset base and is operating at the same level of losses as it has been. Combine short covering with a small float and the clear sign that the liquidation is accelerating, and you can explain the $10 increase in the share price today.

So if the assets are the same, but the price is higher, is there anything positive to come out of this for those investors who are watching from the sidelines? Yes, simplicity. As Sears breaks up it becomes a lot easier to value each of its parts. First, with every spin-off we get to see the segregated financial statements for each entity, which we could not previously. Second, as the parent company becomes smaller and smaller, it becomes far easier to value. SHLD today really consists of the retail operations of Sears and Kmart in the U.S., the proprietary brands Craftsman, Kenmore, and Diehard, and about 700 owned properties. As a result, it is a much less tedious process to value SHLD than it was when you had the Canadian operations, a clothing company, a couple thousand franchised hometown and outlet stores, and a hardware chain in the mix. And if SHLD goes ahead with the plan to sell nearly half of its owned real estate to a public REIT entity, we will be able to better pinpoint the value of the real estate owned by each company with the additional disclosures.

Despite today’s announcement, my view of SHLD has not changed. I did not like the equity when it was worth $3 billion yesterday because of the $6 billion of debt in front of it and the continued operating losses. That same equity at a value of $4.5 billion today is even less attractive. However, if we get a new real estate entity it will be a worthwhile exercise to value that and see how the market prices it. Given that Sears will be the main tenant (the more diversified the REIT, the higher the valuation), coupled with the fact that small spin-offs often fly under the radar, it is possible the new REIT could be a good investment. We will know more when SHLD discloses which stores it will hold and what the ultimate price will be.

Lastly, since I anticipate many will ask about my current position (long Sears debt maturing in 2017 and 2018), I can tell you that little has changed on that front as well. The thesis for owning the debt is that Sears has enough assets to pay back its creditors for at least several more years. Today’s announcement does not change that, it just maybe gives some people more confidence that it is actually true. Accordingly, I am happy that the debt is trading up nicely today and I will continue to hold it (after all, it has outperformed the equity with lower risk).

Investors in Biglari Holdings Now Getting Core Steak ‘n Shake Business for Free

It has been a while since I last wrote about Biglari Holdings (BH) and their efforts to diversify into a holding company far bigger than just the core Steak ‘n Shake restaurant operations. BH has acquired a 20% stake in Cracker Barrel (CBRL), as well as purchased Maxim magazine, First Guard Insurance, and Western Sizzlin outright. Accounting for a recently completed rights offering that raised $86 million, BH has around $200 million of cash and no holding company debt (the Steak ‘n Shake subsidiary does have debt of $220 million). An update seems in order now that BH shares are trading for $330 each, for an equity market value of $680 million.

Why? Well, the valuation seems off, to put it mildly. At the current quote of $103 per share, BH’s Cracker Barrel stake is worth $488 million. Add in a net cash position of approximately $200 million and you quickly realize that buyers of BH today are getting Steak ‘n Shake (a business with more than $700 million of annual sales) for free, as well as all of the company’s other assets. To give you an idea of how ridiculous this is, consider that the Steak ‘n Shake generated annual free cash flow of $60 million in 2010 and 2011 (that figure has come down in recent years as CEO Sardar Biglari has invested a lot of capital into accelerating Steak ‘n Shake’s franchising business globally). As such, it is not a stretch to value Steak ‘n Shake equity at multiple hundreds of millions of dollars (accounting for its debt load). Getting that business for free is a big deal on a percentage basis considering that BH’s total equity capitalization is currently valued at less than $700 million by the market.

I am not the only investor who sees value in BH shares. Och-Ziff Capital Management (OZM) recently filed a 13G disclosing an 8% passive stake in the company, and that filing was made when the stock was trading over $400 per share. It will be interesting to see if they increase their stake at current prices. Accordingly, you may not be surprised to learn that BH is currently my largest equity holding.

Full Disclosure: Long shares of BH at the time of writing, but positions may change at any time.

Sears’ Shop Your Way: Not A Better Mouse Trap

“We believe we can build a better mouse trap.”  — Eddie Lampert (CEO), 2014 Sears Holdings Annual Shareholders Meeting

Sears believes that they can build “Shop Your Way” into a profitable and successful multi-channel online retail platform and that it will have a meaningful position in the marketplace alongside Amazon, eBay, Wal-Mart, Target, Macy’s, and every other retailer out there. Given how much the Sears and Kmart brands have eroded over the years, coupled with retail industry competition that has only increased during that time, I believe such an investment is a waste of shareholder capital. Skeptics aside, the company continues to press on, but it’s not pretty. Sears Holdings today reported more red ink in their second quarter results.

Now, it’s true that the jury is still out to some extent. Just because Sears and Kmart have been losing customers by the boatloads and burning cash for several years running does not mean that Shop Your Way can’t work. When you have more than 1,800 stores nationwide and tens of billions in annual sales, there are clearly people who are willing to do business with you. It really comes down to whether or not you can serve them in a satisfactory way.

Along those lines, I decided to give Shop Your Way a try. They’ve been building this platform for several years, so most of the kinks should have been worked out by now. And while I would never suggest that anyone make investment decisions based on their own personal anecdotal evidence, I do think it is fair to say that one’s own experience is likely to be indicative of what is typical in many instances. Below I will detail my two recent experiences with Shop Your Way.


First I downloaded the company’s Shop Your Way mobile app just to play around with it. After linking my wife’s Shop Your Way account (she is already a member thanks to sporadic purchases over the years from Lands End — which until recently was a subsidiary of Sears), I was unimpressed (the $0.88 worth of points in her account notwithstanding). The app lacked a lot of features. Perhaps most glaring was the lack of an order history. If you want to look-up a past purchase you have to login to their full web site rather than use the app. That seems rather odd. You can also not change personal information in your Shop Your Way account, such as password, phone number, email address, etc.

So while there are lots of features missing, there are others that Sears seems to think are important. One is GPS tracking that allows the app to know when you are in a Sears or Kmart store. Your phone will vibrate upon detection of your presence, ask you to post a status update (yes, just like Facebook) and offer you coupons that you can use that day. For avid Shop Your Way users, I can see this being a nice feature.

That said, the other day my wife and I were in Starbucks enjoying a beverage when my phone vibrated. I assume it was a new text message, but no, it was the Shop Your Way app. It wanted me to “check-in” (they call it “shop’in“). At this point I was baffled. Why would I check-in to Shop Your Way at a Starbucks? Are they doing some sort of cross-promotion with the coffee chain?

Well, it turns out there used to be a Sears store in the same complex as this particular Starbucks and since I was within a few hundred feet of it, the app thought I was actually shopping at Sears. Normally I would give them a pass here, since GPS tracking on mobile phones typically is only accurate to within a few hundred feet. But this instance is a little different because this particular Sears store actually closed permanently a few months before. In fact, the app seems to know something isn’t quite right. Under the store’s details it shows the store’s street address as “lease ending 12/31/2015.”

So the whole experience is bizarre, but at least I know sales at that Sears store were so bad that they closed the store before the lease was up even though they are still paying rent on vacant space. Pretty telling if you ask me. Anyway, I obliged and submitted a status update as requested. Answering the question “what are you up to?” I simply typed “having breakfast at Starbucks, that Sears store closed months ago.” Talk about a first impression.


Okay, so the app isn’t updated with the company’s current store base, but what about making an actual purchase with it? After all, e-commerce is what’s of utmost importance here, right? Well, a chance to test things out presented itself recently.

My wife wanted to buy a mini refrigerator for her office at work and I suggested we look at Sears since they are big in the appliance market. After comparing selection and prices, Sears actually did have a fridge that matched best with her desired parameters, so I offered to fire up the Shop Your Way mobile app and complete the purchase, hoping to have the item shipped to the Sears store at our local mall. The purchase went smoothly and the app told us the item would be ready for pick-up in 6-8 days, at which time they would email both of us (I added myself as a pick-up person in case it was more convenient for me to get the item). The time estimate of 6-8 days seemed on the long side (especially if we are comparing the convenience of Shop Your Way to the competition), but since this purchase was not super time-sensitive, waiting a week was fine (the fridge was shipping from Illinois — where Sears and Kmart are based, which is likely why it would take that long to get to Seattle).

Exactly 7 days later we both received an email alerting us that the fridge was ready to be picked up at the Sears store we had designated. Kudos to Sears for being on-time relative to what was promised. It was downhill from there, however. Here is a screenshot of the email my wife received as it was displayed in Gmail:



Oh boy. Where to begin. Of the four sentences in this email meant to give the customer important information, three of them have problems.

The second sentence appears to be trying to tell me where in this particular store the online order pick-up area is located. That would be very helpful information that would reduce the likelihood that I find myself wandering around the store looking for where to go. But that field was left blank.

The third sentence says that upon arrival at the store you can either scan the bar code at the top of the email or enter the salescheck number in order to initiate the pick-up process. That would be great, aside from the fact that there is no bar code at the top of the email and the salescheck number appears to be a media file that does not load when you view the email (and yes, I made sure that Gmail was set to display all media attachments).

Lastly, the fourth sentence contains another blank field that was clearly supposed to insert my name letting my wife know that I received the same email and could pick-up the item for her.

If you are trying out Shop Your Way for the first time, does this experience scream out “better mouse trap!” to you? Hardly. And we have yet to even make the trip to the store yet. Needless to say, I was dreading the trip since I knew that 1) I did not know where to go, and 2) I knew I was likely to have issues once I got there since I had neither a bar code nor a salescheck number to provide them.

But before we get to that, how about a screenshot of the email they sent me as the designated secondary pick-up person:



So much for thinking/hoping that the first email may have just been a glitch. Houston Hoffman Estates, we have a problem.

The same day my wife and I head to the Sears store to pick-up the fridge. There is one sign on the lower level designating the corner where online pick-up area is located and we walked right past it due to where we happened to park and enter the store, so that was not a problem (but it might very well be if you entered from the interior mall entrance directly, as there were no signs pointing us in the right direction). In the designated pick-up area there is a kiosk sitting outside of the warehouse area where they keep the inventory stored. Fortunately, you can use your credit card or phone number to look up your order if you don’t have a bar code or a salescheck number (I guess we are not the only ones to have this problem, but in that case, why not do away with both and just let people use the phone number linked to their Shop Your Way account for order retrieval?).

After finishing with the kiosk, which was quick and easy, our order is shown on a monitor on the wall that is tracking how long it takes for the item to be brought out to us. The company’s goal is 5 minutes or less and on that mark they succeeded. There were two employees working the warehouse area so while there was nobody in plain sight to answer any questions you might have, the kiosk worked just fine. So despite the issues with their email system, this particular Sears store has a perfectly adequate pick-up area. In fact, there were 3 other people picking up items in the 5 minutes or so we were there. If you are looking for a silver lining in all of this, there you go.

Summing everything up, it isn’t hard to understand why Sears is losing money. This $100 item likely cost them $70-$75 wholesale. They had to ship it from Illinois to Seattle on their own dime (it was about 50 pounds, so shipping wasn’t cheap). Then they incur costs at the store to get the item to the customer when they arrive. The idea that they can compete with Amazon or Wal-Mart or Target or Home Depot in this fashion seems suspect to me. And so far their financial results aren’t proving otherwise.

Noodles & Company Falls Back To Earth, Still Not A Bargain

About 14 months ago fast casual restaurant chain Noodles and Company (NDLS) had one of the most successful initial public offerings of the year, more than doubling on its first day of trading from an offer price of $18 per share. That very day I warned how overvalued the stock was at its then-$36 price. Investors trampled over each other to buy the shares for a few more days (the stock peaked at $51.97 on its third day of trading) and then reality slowly began to set in. Paying more than 40 times cash flow for NDLS, or any stock for that matter, is a very dangerous proposition.

After several quarters in the public spotlight, many recent high-flying IPOs have crashed and burned. Most are in the retail space, such as The Container Store (TCS) or Zulily (ZU). Amazingly, even after huge drops, most of these stocks are not yet bargains. Circling back to Noodles & Company, which is trading below $20 per share today after reporting lackluster earnings last night, the stock still trades at about 15 times cash flow (enterprise value of more than $600 million for a company that booked EBITDA of about $20 million during the first half of 2014). That price is still on the high side of fair, even if you believe in the growth story and think NDLS will succeed in continuing to grow its unit base by double digits annually for many years to come. I’m not a huge fan of the company to begin with, so a 15 multiple is not even in the ballpark for me to consider it as an investment, despite the fact that I have favored growth stories in the restaurant area for a very long time.

For bargain hunters, it certainly makes sense to watch these recent IPOs as they crater back to earth. However, be careful not to jump at something just because it is down 50% or more from its peak. NDLS is a perfect example of a stock that is down a ton (62% in the past year) but is still not cheap. You really need the valuation to be favorable to justify bottom fishing in recent IPOs. Some of them went so far above a reasonable price right out of the gate that a price drop alone puts them in the “less expensive” category, as opposed to “undervalued.”

Full Disclosure: No positions in NDLSTCS, or ZU at the time of writing, but positions may change at any time

Sears Holdings: Confirmed Third Party Tenant Leases

As has been discussed on this blog, Sears Holdings (SHLD) has been devoting material resources in recent years to leasing out space in the company’s stores. That way the company can close or reduce the size of money-losing locations and lease them to other retailers in order to boost cash flow. This post will keep a running list of confirmed Sears and Kmart locations where retailers have signed a lease to occupy space. Since the company discloses minimal information about its leasing activities, my hope is that others will contribute to this list (please use the comments section to share links to articles or other evidence of leases not listed here) and it can be a valuable shared online resource for those who are watching the ever-changing operations of Sears.

Update: 04/01/15 – Today Sears Holdings announced the formation of Seritage Growth Properties, a new REIT that will commence trading on the public market in June 2015. Seritage will purchase and lease back 254 stores from Sears Holdings, as well as own a 50% interest in a joint venture with GGP that will operate another 12 stores. As a result, going forward the list below will only be updated with third party leases signed by Sears Holdings itself. Since Seritage will be filing publicly there is no need to reproduce updated information about that entity on this site going forward. The list below will be rearranged to better reflect these developments. Please continue to provide new leases for the list, as Sears Holdings is selling less than 40% of their owned stores to Seritage and will retain a large number of valuable properties for the time being. 

Update: 05/18/15:  – Seritage Growth Properties has updated their registration filings to include Q1 2015 pro-forma financial results:

Total revenue: $68 million

Operating expenses: $24 million

G&A expenses: $5 million (including $4 million of public company costs)

Joint venture income: $6 million

Pre-tax income: $45 million

Interest expense: TBD (example: debt of $1.25 billion at 5% implies interest of $16 million per quarter)

For those of you trying to pinpoint a value for Seritage, annualized funds from operations (FFO) should be in the neighborhood of $120 million annually. This figure assumes $1.25 billion of debt (leverage ratio of 6.9), which is simply a guess given that we do not know the capital structure yet. I will update these figures when the terms of the deal and the ratio of equity to debt is known.

Last Updated 04/01/15


Entire Kmart Stores (3 locations, ~250,000 SF)

Ansar Gallery – Free-Standing Store (Tustin, CA) – 108,000 sf >>> link
Fiesta Mart – Free-Standing Store (Houston, TX) – 42,000 sf >>> link
Zion Market – Free-Standing Store (San Diego, CA) – 94,500 sf >>> link

Kmart Box Splits (5 locations, ~200,000 sf)

Best Buy (proposed) – Free-Standing Store (Rockford, IL) – 45,000 sf >>> link
Gold’s Gym – Free-Standing Store (Charlottesville, VA) – ~25,000 sf (estimate) >>> link (photo only)
Kroger – Village Square at Kiln Creek (Yorktown VA) – 90,000 sf >>> link
Planet Fitness – Free-Standing Store Sublease (Sacramento, CA) – 22,000 sf >>> link
Rio Ranch Market – Free-Standing Store (Desert Hot Springs, CA) – 29,000 sf >>> link

Sears Box Splits (7 locations, ~350,000 SF)

Forever 21 – South Coast Plaza (Costa Mesa, CA) – 43,000 sf >>> link
Level 257 Restaurants – Woodfield Mall (Schaumburg, IL) – 40,000 sf >>> link
Primark – Willow Grove Park Mall (Willow Grove, PA) – 77,500 sf >>> link
Primark – Freehold Raceway Mall (Freehold, NJ) – 66,500 sf >>> link
Primark – South Shore Plaza (Braintree, MA) – 70,000 sf >>> reader tip
Sears Hometown Stores – Offices at Sears HQ (Hoffman Estates, IL) – 36,000 sf >>> see SEC filings
Whole Foods Market – Friendly Shopping Center (Greensboro, NC) – 34,000 sf >>> link

Sears Full Property Redevelopments (1 location, ~80,000 SF)

Marianos/Sears/TBD Rebuild (Elmwood Park, IL): ~80,000 sf (planning stages) >>> link

Sears Auto Center Redevelopments (9 locations, ~150,000 SF)

Woodfield Mall (Schaumburg, IL): ~30,000 sf total >>> link
Colonial Park Mall (Harrisburg, PA): ~18,000 sf >>> link
Genessee Valley Mall (Flint, MI): 12,000 sf >>> link
Lincoln Mall (Matteson, IL): ~13,000 sf >>> link
Northwoods Mall (North Charleston, SC): ~16,000 sf >>> link
RiverTown Crossing Mall (Grandville, MI): 12,000 sf >>> link
Smith Haven Mall (Lake Grove, NY): 8,000 sf >>> link
Woodland Mall (Grand Rapids, MI): 20,000-40,000 sf >>>  link

In-Store Embedded Space (~3.65 Million SF)

Lands End: 236 locations (as of 01/22/15), 7,400 sf each = ~1.75 million sf >>> link
Sears Optical: 541 locations (August 2014), 1,500 sf each (est) = ~800,000 sf >>> link
Jackson Hewitt: 400 locations (December 2012), 2,000 sf each (est) = ~800,000 sf >>> link
Sears Hearing Centers: 191 locations (February 2014), 1,500 sf each (est) = ~300,000 sf >>> link



24 Hour Fitness – The Village at Orange (Orange, CA) – 54,000 sf >>> link
Aldi – Free-Standing Store (Hialeah, FL) – 18,000 sf >>> link
Aldi (Hackensack, NJ) – 17,000 sf >>> no details known, headline only on
At Home – Pueblo Plaza (Peoria, AZ) – 105,000 sf >>> link
At Home – Willowbrook (Houston, TX) – 134,000 sf >>> link
At Home – Kickapoo Corners (Springfield, MO) – 113,000 sf >>> link
At Home – Free-Standing Store (Ypsilanti, MI) – 92,000 sf >>> link
At Home – Free-Standing Store (Phoenix, AZ)- 152,000 sf >>> link
Altamonte Mall Auto Center (Altamonte Springs, FL): ~16,000 sf >>> link
Aventura Mall Redevelopment (Aventura, FL): ~275,000 sf (design plan submitted) >>> link
Corner Bakery – Westfield UTC Mall (San Diego, CA) – ~4,000 sf >>> link
Destination XL – Corbins Corner (West Hartford, CT) – 8,500 sf >>> link
Dick’s Sporting Goods – Mall at Rockingham Park (Salem, NH) – 79,000 sf >>> link
HomeGoods – Hastings Ranch Plaza (Pasadena, CA) – ~27,000 sf (estimate) >>> link
Kroger – Cumberland Mall (Atlanta, GA) – 93,000 sf >>> link
License Bureau Inc: (St Paul, MN) – ~3,500 sf (est) >>> link
McCain Mall Auto Center (North Little Rock, AR): ~21,000 sf >>> link
Nordstrom Rack – The Mall at Sears (Anchorage, AK) – 35,000 sf >>> link
North Riverside Park Mall Auto Center (North Riverside, IL): ~21,000 sf  >>> link
Oglethorpe Mall Redevelopment (Savannah, GA): ~50,000 sf (actively seeking tenants) >>> link
Old Time Pottery – Free-Standing Kmart Store (Orange Park, FL) – 84,000 sf >>> link
Primark – Staten Island Mall (Staten Island, NY) – 70,000 sf >>> link
Primark – Danbury Fair (Danbury, CT) – 70,000 sf >>> link

Ridgedale Center (Minnetonka, MN): ~25,000 sf total >>> link
Sears Outlet (6 stores in MA/NC/NV/VA/WI) ~150,000 sf (estimate) >>> see SEC filings
Sears Hometown (3 stores in IL/KS/MI~30,000 sf (estimate) >>> see SEC filings
Ulta – Marketplace at Braintree (Braintree, MA) – 11,000 sf >>> link
Westland Mall Auto Center (Hialeah, FL): ~43,000 sf (actively seeking tenants) >>> link
Whole Foods Market – Colonie Center (Albany, NY) – 32,000 sf >>> link

Pembroke Mall (Virginia Beach, VA)
REI – 27,500 sf >>> link
Nordstrom Rack – 32,500 sf >>> link
DSW – ~25,000 sf (estimate) >>> link

Landmark Crossing (Greensboro, NC)
Floor & Decor – 70,000 sf >>> link
Gabe’s –  50,000 sf >>> link
Sears Outlet – ~25,000 sf (estimate) >>> see SEC filings

Janss Marketplace (Thousand Oaks, CA)
DSW – ~25,000 sf (estimate) >>> link
Sports Authority – ~45,000 sf (estimate) >>> link
Nordstrom Rack – 40,000 sf >>> link

King of Prussia Mall (King of Prussia, PA)
Primark –  – 100,000 sf >>> link
Dicks Sporting Goods – ~75,000 sf >>> link

Burlington Mall (Burlington, MA)
Primark –  70,000 sf >>> reader tip
Auto Center –  ~60,000 sf (actively seeking tenants) >>> link

Westfield Countryside Mall (Clearwater, FL)
Whole Foods Market –  – 38,000 sf >>> link
Nordstrom Rack – Westfield Countryside Mall (Clearwater, FL) – 38,000 sf >>> link

Oakbrook Center (Oak Brook, IL)
Pottery Barn – ~16,000 sf (estimate) >>> link
Pinstripes – 40,000 sf >>> link
Auto Center – ~17,000 sf total >>> link
West Elm – ~14,000 sf (estimate) >>> link