Amazon Holiday Fun Facts 2013 ($AMZN)

They never give specific numbers, but Amazon (AMZN) always takes plenty of time in crafting their holiday press releases. Here’s an excerpt from today’s:

Holiday Fun Facts:

  • Amazon shipped to 185 countries this holiday.
  • The last Prime One-Day Shipping order that was delivered in time for Christmas was placed on Dec. 23 at 10:22 p.m. PST and shipped to Carlsbad, California. The item was a Beautyrest Cotton Top Mattress Pad.
  • The last Local Express Delivery order that was delivered in time for Christmas went to Everett, Washington. It was a Plantronics Audio 655 USB Multimedia Headset in Frustration Free Packaging ordered at 12:26 p.m. PST on Christmas Eve and delivered at 3:56 p.m. PST that same day.
  • Amazon.com shipped enough items with Prime this holiday to deliver at least one gift to every household in America.
  • Prime was so popular this holiday, that Amazon limited new Prime membership signups during peak periods to ensure service to current members was not impacted by the surge in new membership.
  • On Cyber Monday, customers ordered more than 36.8 million items worldwide, which is a record-breaking 426 items per second.
  • More than half of Amazon customers shopped using a mobile device this holiday.
  • Between Thanksgiving and Cyber Monday, Amazon customers ordered more than five toys per second from a mobile device.
  • Amazon customers purchased enough Crayola Marker Makers to be able to draw a line around the world four times.
  • The new Xbox One and PlayStation 4 gaming consoles were so popular that at the peak of sales for each console, customers bought more than 1,000 units per minute.
  • Amazon customers purchased enough Rainbow Looms from third-party sellers that the bands can stretch around the circumference of the Earth.
  • Amazon customers purchased enough Hot Wheels from third-party sellers to stretch around the Daytona International Speedway racetrack.
  • Amazon customers purchased enough miniature flashlights to satisfactorily light four collegiate football fields in accordance with NCAA standards.
  • Amazon customers purchased enough running shoes to provide a pair to every participant in the top 10 largest marathons in the world.
  • Amazon customers purchased enough winter boots to keep everyone living in three of the coldest cities in America – Duluth, Minnesota, Butte, Montana, and Watertown, South Dakota – warm for the winter.
  • Amazon customers purchased enough cross-body purses to outfit every attendee at a typical Taylor Swift concert.
  • If you stacked every Himalayan Crystal Lamp purchased by Amazon customers this holiday season, the height would reach the top of Himalaya’s highest peak – Mt. Everest.
  • Amazon customers bought enough books in the Divergent Series – “Divergent,” “Insurgent,” “Allegiant,” and the complete box set – to wrap around Chicago’s Pier Park Ferris Wheel 263 times.
  • If you placed every upright vacuum purchased by Amazon customers end-to-end, they would reach 15 times the depth of the Marianas Trench, the deepest point in Earth’s oceans.
  • If the Nylabone Dinosaur Chew Toys purchased during this holiday season were stacked on top of each other, they would be the height of more than 950 T-Rex dinosaurs.
  • The number of “Star Trek Into Darkness” Blu-ray combo packs purchased would span the distance of 25 Star Trek Enterprise space ships.
  • If you had a single plain M&M for each Eminem album purchased on the Amazon MP3 Store over the holidays, you’d have nearly 100 lbs. of candy-coated chocolate.
  • Amazon customers purchased enough youth archery kits to outfit every resident of Katniss Everdeen’s hometown, District 12, four times over.
  • Amazon customers purchased enough Tovolo Sphere Ice Molds to fill Don Draper’s (of “Mad Men”) whiskey glasses for 251 years.
  • Amazon customers purchased enough Cuisinart Griddlers to place one in every McDonald’s restaurant in the world.

What I’m Looking For To “Shop Sears’ Way” ($SHLD)

After an impressive initial pop following the release of a bullish presentation by one of the company’s larger institutional investors, shares of Sears Holdings (SHLD) have made a round-trip back to the mid 40’s after two negative news developments. First, CEO Eddie Lampert increased the company’s float after distributing more than 7 million shares of SHLD to limited partners who asked to exit his hedge fund. Second, Lampert decided to spin off clothing division Lands’ End to shareholders and the company’s financial statements previously undisclosed looked far worse than many had presumed. Even on a day when the Dow rose 300 points last week, SHLD stock could not manage to eek out a gain.

While there has rarely been any doubt (to those who have looked closely at the company anyway) that there is value within Sears Holdings’ assets outside of the ongoing retail operations (Sears and Kmart stores don’t make money), the questions pertinent to investors have always been “how much, how, and when?” as to the form in which that value would be extracted for their benefit. And on the issue of gaining clarity on those questions the results have been disappointing.

Eddie Lampert, Sears’ CEO and largest shareholder, has been experimenting and shuffling deck chairs at the company now for nearly a decade, with little in the way of positive results. You can look at any number of metrics to judge success or lack thereof; free cash flow per share, book value per share, net debt per share. Every one has gotten worse since Sears Holdings was formed in 2005 after the merger of Sears Roebuck and Kmart.

Finally though it seems that Eddie may be getting impatient. Meaningful restructuring actions (including store closings and sales, spin-offs, rights offerings, special dividends, etc) have accelerated over the last couple of years, which leads many to believe (myself included) that over the next 2-3 years we may finally get a clearer picture as to what Sears Holdings will look like long-term. Progress on that front would very much be a welcomed development for SHLD watchers.

But despite undeniable value within Sears’ assets (rights to brands such as Kenmore, Craftsman, and Diehard, over 80 million square feet of owned (not leased) real estate, a 51% stake in Sears Canada, over 700 Sears Auto Center locations, and Lands’ End to name the bigger ones), Lampert still faces an uphill battle in the near-term. The bulk of Sears’ revenue fails to generate any profit, annual capital expenditures and interest on Sears’ rising debt load both number in the hundreds of millions per year, and Sears’ pension plan, while frozen, is significantly underfunded. The result is that Sears is on track to burn through more than $1 billion in 2013, and unless the retail business improves next year (and there is no reason to believe it will to any material degree), will be set up to burn another $1 billion in 2014.

This is problematic because Sears will be forced to restructure, sell, and/or spin-off assets simply to replace the cash that is flowing out the door. It’s not unlike blowing air into a punctured balloon; any progress you make inflating it simply goes out the other end. As long as Sears is forced to get smaller in order to merely tread water from a financial condition standpoint, it is hard for me to see how the stock is poised to go higher in the short term, and more importantly, stay there for any length of time.

For that to happen, one of two scenarios has to play out, in my mind (both would be ideal, but let’s not get carried away). First, Sears has to figure out a way to get the retail operations to break-even or better on a free cash flow basis. This job will get a bit easier as time goes on as the pension expense is reduced and capital expenditure needs decline as more and more money-losing Kmart and Sears stores are closed. Still, there appears to be another year at least, and maybe more, where the weight of capex, pension needs, and interest expense cannot possibly be negated by retail cash flow. Even if the retail stores earn a small profit, it might not be enough to cover interest and capex needs, which together come to approximately $500 million per year.

The other scenario would involve Sears announcing a major asset sale. By “major” I mean something in the neighborhood of $1.5-$2.0 billion. To get a number that high, the company would likely have to part with some of its vast real estate holdings (it owns more than 800 of its 2,000 stores). Such a windfall would dwarf the annual cash needs of the entire company, leaving Lampert a cushion of a couple of years to restructure without having to worry about using any of the cash raised to cover operational losses in the meantime. It is not unreasonable that SHLD’s retail operations could lose $1.0-$1.5 billion in cash in 2014 and 2015 combined. Selling some real estate to pre-fund two years of cash needs would not only reinforce to the market that the real estate value is vast and demand is there from buyers, but it would take near-term liquidity concerns off the table (by “concerns” I mean the need to sell assets to replace retail losses, nothing remotely like a bankruptcy situation) and allow further asset monetization proceeds to be used for the benefit of equity holders, rather than creditors.

Current Sears investors are quick to point out that since 2011, there is more and more evidence that asset monetization transactions are on the horizon. Over the last several years Sears has spun-off half its interest in Sears Canada, raised more than $400  million via a rights offering for its Hometown and Outlet store business, collected more than $300 million in special dividends from its Canadian subsidiary, and announced a spin-off of the Lands’ End clothing business. All of that is true, but where has that money gone? The company has more debt outstanding today than it did before those deals were completed, so the company is in no better financial shape. All of that money has gone towards the various needs of the business. It has not been distributed to shareholders, or used to acquire other businesses to help Sears Holdings grow via acquisition, or to buyback stock, or to pay down debt. As a result, equity holders have not benefited from these monetization actions. That is what must change.

Before I can get comfortable with owning this stock given today’s landscape, I have to at least see signs that we are making progress on one, if not both, of these objectives. If not, I firmly believe that asset sales will not be able to more than adequately cover retail store costs, pension obligations, debt service, and capital expenditure needs. And in that case, there will be very few catalysts that could turn around the fortunes for long-suffering investors in Sears Holdings. And if I have to pay more than the current $45 per share price when that time does come, I’m fine with that. Simply assuming Lampert has it all figured out given his intellect and vast ownership stake has not proven profitable for many, many years.

This is definitely a situation to watch carefully. If Lampert starts turning over a new page and shifts strategy, there could be plenty of good times ahead for investors. I simply do not have enough faith to assume he will come out smelling like roses, as he has proven over the better part of a decade that while he is a brilliant hedge fund manager, even this job is a lot more difficult than many initially believed. I would imagine he would agree.

Full Disclosure: No position in SHLD stock at the time of writing, but positions may change at any time (and in this particular case, you should know what to look for to know if they have).

Potholes On Baker Street: More Issues With Their Bullish Sears Holdings Valuation ($SHLD)

Shares of Sears Holdings ($SHLD) have traded significantly lower since my last two articles on the company. On November 26th I wrote an article for Seeking Alpha highlighting how much of a disaster Sears’ merger with Kmart has been over the past nine years (Believers In Sears Holdings Transformation Are Ignoring Eddie Lampert’s 9-year Failure). The stock was trading at $65 per share at that time. A little over a week later I followed up with a post on this blog about how the bullish case made by Baker Street Capital Management in September appeared to me to be overly optimistic (Baker Street Capital Management Bullish Thesis on Sears Holdings Begins to Show Cracks). Today the stock sits at $45 per share, about 30% lower in less than a month (and in my mind a far more reasonable price). So am I a buyer? Not yet, but I am definitely paying closer attention after such a large decline.

As I have dug deeper into Sears Holdings, I even went as far as to mimic the process Baker Street Capital Management undertook to try and gauge the value of the company (albeit with far less aggressive assumptions given my initial trepidation with their extreme level of bullishness). My conclusions so far have not turned me into a bull on the stock, but I can certainly see a path that could get me there; essentially a combination of attractive stock price and more clarity on the cash flow of the company over the next year or two (they burned through $1.9 billion of cash during the first nine moths of 2013).

For those who have even a mild interest in Sears Holdings I figured I would share a couple of other issues I have found with Baker Street’s wildly optimistic valuation ($92-$169 per share, depending on various scenarios). My beef with their presentation had nothing to do with their process, but rather the inputs they chose to use (and therefore the magnitude of the conclusions they drew regarding the value of Sears). Accordingly, below I will highlight a couple of additional issues I took with their numbers, as I try and figure out how much I believe the company may be worth (and what price I may want to re-enter the stock after a more than five-year hiatus).

1) Baker Street Appears To Miscalculate Its Own Estimate of Sears/Kmart Retail Operations’ Value

On slide 37 of Baker Street’s presentation the firm provides its internal estimates for the break-up value of the company under three different scenarios. The share price range from $92 (low) to $169 (high), with $131 as the midpoint. If you look closely you will see that the assigned values in each scenario for the core bricks and mortar retail business in the U.S. are ($4.0 billion), ($3.6 billion), and ($3.2 billion), respectively. They get to those negative values by taking their estimate of net working capital and subtracting both debt/pension liabilities and their estimate of how much it will cost to wind down unfeasible stores.

While I take no issue with their methodology, look at the slide more closely (below) and see if you can spot the same summation errors that I did. I added a blue box highlighting the section detailing the calculations in question.

Baker-Street-Slide37-Errors

So I see two errors. First, the adjusted working capital figure of $1.4 billion appears to be overstated by $100 million ($8.8 billion less $7.5 billion equals $1.3 billion, not $1.4 billion). Second, if you subtract the debt/pension liability line and the wind down cost line from the adjusted working capital line, you get numbers that are $400 million (low case), $600 million (mid case), and $800 million (high case) lower than the values they show for “Sears Roebuck and Kmart Retail.”

As a result, if you simply use the same formula they use and each line item figure that they provide, but you sum the items up yourself rather than simply look at their totals, you realize that they seem to have overstated the value of Sears/Kmart retail even using their own assumptions.

Now, you might say that in a 139-page presentation of any kind there are bound to be errors, and I would agree. Nobody is perfect and I am sure I have made multiple errors in presentations I have given in the past. I am not pointing these out just to be picky. Rather, it is the magnitude of the error in the context of the conclusions drawn that make them seem important to me.

Let’s take Baker Street’s “low” scenario of $92 per Sears Holdings share. If we take $8.8B – $7.5B – $4.9B – $0.9B, we get a negative value for the retail business of ($4.5 billion), or a delta of $500 million. That amounts to approximately $5 per SHLD share. Now, if you are using Baker Street’s estimates to provide a higher degree of confidence that SHLD shares at their current price are a good investment, a $5 per share differential will be material to your analysis. After all, it is ~10% of the current stock price and ~5% of their “low” break-up value.

Now, let’s assume you are very bullish on SHLD stock and prefer to use Baker Street’s “high” scenario. Again, let’s use their own figures and calculate the negative value attributable to the retail operations. If we take $8.8B – $7.5B – $4.9B – $0.5B, we get a value for the retail business of ($4.1 billion), for a delta of $900 million. Now we are talking about a $9 per share difference. That is 20% of the current share price!

If I am reading these numbers right, this is material to the analysis. It might not change one’s view of the stock by itself, but it’s worth noting in my view. Let’s move on to another part of the Baker Street valuation, and in this case the mistake appears to be due to more than just a simple mathematical error.

2) Baker Street’s Revenue Assumptions for Sears’ Services Businesses Appear Overstated By $800 Million

It is no secret that the service businesses within Sears Holdings are important for investors. In fact, they are some of the only segments of the company that actually make a profit. Accordingly, in their analysis Baker Street assigns a value of between $1.6 billion and $3.1 billion to three Sears services businesses; Auto Centers (700+ service centers), Home Services (in-home repair and installation), and Protection Agreements (extended warranty contracts). These businesses in total account for 16%-17% of the total value of SHLD, according to Baker Street’s analysis.

Baker-Street-Slide37-Errors-2

Baker Street gets to their value estimates by assuming annual revenue of $2 billion for Sears Auto Centers and $2.5 billion for the combined Sears Home Services/Protection Agreement businesses. Based largely on that $4.5 billion total service revenue assumption, they value these business at between $15 and $29 per SHLD share, so the services business are very material to the value equation for both current and potential investors.

So what’s the problem? Well, it should be very easy to estimate the revenue of Sears’ services businesses because they disclose revenue by segment in their annual report. Sears Holdings does not disclose operating profits by segment, but they do provide sales figures (see below for the actual results recorded in 2012).

Sears-Svc-Rev-2012

Since Sears Canada (SEARF) is a separate publicly-traded company and Baker Street assigns a value to it separately in its calculations, we can ignore the Canada column. Total services revenue in the U.S. was $3.73 billion last fiscal year. This figure includes total services revenue from the three businesses in question, as well as approximately$20 million in annual revenue earned from its agreements with Sears Hometown and Outlet Stores (SHOS). Accordingly, Baker Street has overestimated sales of Sears’ services businesses by $800 million, or nearly 20%. If we similarly adjust their value estimates by a comparable percentage, their estimated break-up value for SHLD would fall by an additional $3-$5 per share.

Taken together these two issues alone result in a reduction of Baker Street’s break-up values for SHLD by $8-$14 per share. That might not sound like a lot, but it tells me that my initial take on the Baker Street report might very well be right, and their numbers in general are likely overly aggressive. I point this out because it is easy to conclude that if the stock is trading at $45 and a hedge fund that owns 2 million shares of the company thinks it is worth at least $92 per share, then it must be a screaming buy. So far, I’m not so sure, especially given that it could take years for Sears to extract “break-up” values from their asset base, a fact that Baker Street seems to have ignored in their presentation.

There is no doubt that Sears Holdings has an asset base underlying its stores that has the potential to outshine the core retail business that the company continues to operate at a loss. While the retail side is shrinking, with the smaller size has not yet come better financial results. In fact, the company’s cash losses have been getting larger lately, not smaller. The question for me is not whether the 800+ stores Sears Holdings owns outright are worth a lot, or if there is a lot of value in some of their better leases if they chose to terminate them early, or if there is some real value within ancillary businesses such as Sears Auto Centers, Lands End (due to be spun off to shareholders in early 2014), or their proprietary brands (Kenmore, Craftsman, and Diehard). Clearly all of these assets taken together have value, to the tunes of billions of dollars.

The big questions for me, and the reason behind why I have not yet purchased the stock again (I invested in Kmart in 2004 and held the merged Sears Holdings shares until 2008), is how exactly those assets get monetized, how much they fetch, and how much of that value will actually be left for the shareholders after CEO Eddie Lampert figures out what to do with the money-losing retail business. As long as you have the largest part of the business burning cash, the value that accretes to equity holders by monetizing the other smaller businesses is capped to some extent.

I’m planning at least one more Sears post soon, which will discuss what I have to see over the next several quarters to start to seriously consider taking a sizable position in the stock, both personally and for my clients. Stay tuned.

Full Disclosure: Long Sears debt and Sears Canada stock only at the time of writing, but positions may change at any time.

Single Family Rental REITs May Have More Potential Than Wall Street Believes

Tom Barrack, the founder of real estate giant Colony Capital LLC, recently appeared on CNBC and made some interesting comments about the single family rental market that I think are worth considering from an investment standpoint. Colony Capital is one of the big private equity firms, along with Blackstone (BX), that has been an active buyer of single family homes, which it intends to spruce up and rent out.

At first glance you might think that the single family rental market would be a solid business model, provided you have experienced people making the operational decisions and savvy financial people ensuring an adequate return on capital can be realized. However, much has been made in the financial media about how the likes of Colony and Blackstone have caused sudden and dramatic price increases in the markets they have entered (mostly those that saw housing prices fall the most, and therefore presented great entry points for those firms who had the capital to buy foreclosed homes). In markets like Las Vegas and Phoenix, price increases have been stunning, with 25-30% one-year increases not uncommon.

There are two ways of looking at these developments. The bearish case is that private equity investors have bid up prices of these homes too much, and the returns they will ultimately achieve from renting them out will be unimpressive. This view seems to be winning the day right now, as several single family rental real estate investment trusts have gone public recently [Silver Bay Realty (SBY) and American Homes 4 Rent (AMH) to name a couple], and they are mostly trading around or even below book value per share. Typically companies that earn a decent return on equity trade at a premium to book value, so investors clearly doubt the viability of the business model right now.

Mr. Barrack, on the other hand, offered a more bullish view on the sector during his CNBC appearance. Now, you can say that since his firm has purchased tens of thousands of single family rental properties, he is simply talking his own book. But given Colony Capital’s track record, I don’t think Tom Barrack’s opinion is something investors should simply dismiss. Besides, he really has little to gain at this point in his career from disingenuously talking up the single family rental market. Ultimately, the renters will determine how well his firm’s investment performs.

Barrack believes the single family rental market will provide attractive investment returns, provided companies due their homework and don’t overpay for their properties. Given how far home prices fell peak-to-trough in the markets where private equity investors have focused, the mere fact that their buying activity has pushed up prices does not ensure that future returns on rentals will be sub-par. It is widely believed that many areas of the country saw home prices reach absurdly low levels (below replacement cost by a wide margin), so it is entirely possible (and I would argue likely) that private equity involvement has merely accelerated the timetable for when these homes returned to a more realistic market value. And assuming rental market demand remains solid, there is likely plenty of money to be made.

On that end, Barrack pointed out that there is a wide disconnect between the valuations of the single family rental REITs (again, at or below book value in many cases) and the large apartment rental REITs like AvalonBay Communities (AVB) and Equity Residential (EQR), which both trade at 1.8 times book value. In his view, the single family rental companies will be able to prove they can earn solid returns over time, and as a result, he believes their stocks will trade closer to the valuation levels of apartment REITs. If that is the case, there is quite a bit of potential in the single family rental market, not just for the private equity firms themelves, but for smaller investors as well who want to play the trend via the stock market.

This investment thesis makes a lot of sense to me, although I admit I have just started digging into these relatively new single family rental companies (my research is hardly complete at this point). That said, it”s hard for me to articulate why the underlying business fundamentals and return characteristics of these two markets would be materially different from one another. After all, is there really a big difference between buying a 50-unit apartment building and buying 50 single family homes and renting those out? Other than slightly higher costs associated with managing 50 separate properties instead of a single, larger one, it seems to me that the business models are very similar and could very well yield similar results.

Full Disclosure: No positions in any of the companies mentioned, but positions may change at any time

Baker Street Capital Management Bullish Thesis on Sears Holdings Begins to Show Cracks

You may recall that the recent strength in shares of Sears Holdings (SHLD) had been largely attributed to the release of an investment presentation from Baker Street Capital Management, owner of 1.5 million SHLD shares (1.4% of the company). The stock reached a new 52-week high of $67 per share in November, just two months after Baker Street published its internal break-up analysis, which valued Sears at no less than $92 per share (and far higher in more optimistic scenarios), more than double the market price of $44 at the time.

A couple of recent company developments are starting to show that Baker Street’s assumptions are indeed overly optimistic. The bulk of the value in Sears is the company’s vast real estate holdings. Not only does the company own many of its stores, but even its leases come with below-market rents, which allows them to occasionally close a store and actually get paid by the landlord to vacate the property (to make room for another tenant, to whom they can charge a market rate). In Baker Street’s least aggressive scenario, more than 70% of Sears’ break-up value comes from their real estate holdings ($7.1 billion out of a total of $9.8 billion).

The problem is not with that assertion more generally (real estate is surely Sears’ most valuable asset), but rather with the assumptions used to gauge that value. To give you an example of how upbeat Baker Street’s figures are, consider slide #123 of their presentation:

BakerStreet-Slide123

As you can see, they estimate the value of the Sears lease at Eaton Center in Canada at a whopping $590 million. Now, why focus on a single lease when Sears Holdings has over 2,000 stores? Because this Eaton Center location is one of the company’s most valuable properties. In fact, Baker Street assumes that this one store (which is leased, not even owned outright!) comprises 6% of the total value of Sears Holdings ($590 million out of $9.8 billion). With an asset this valuable, you should assume that Baker Street took a very detailed approach to estimating its value, and therefore it should be very, very accurate.

It turns out that on October 29th, Sears agreed to sell that lease back to the landlord at Eaton Center, along with leases on 4 other stores. Here is the text of the press release:

“Sears Canada Inc. announced today that it will terminate its leases in respect of five stores for a total consideration of $400 million. The agreement is definitive and only subject to customary closing conditions. The transaction is expected to close on or around November 12, 2013. Four of the five stores are owned by The Cadillac Fairview Corporation Limited (Cadillac Fairview) and are located in Ontario: Toronto Eaton Centre, Sherway Gardens, Markville Shopping Centre and London-Masonville Place. The fifth store is located at Richmond Centre in British Columbia and co-owned by Ivanhoé Cambridge and Cadillac Fairview.”

Can you see the problem? Baker Street thought the Eaton Center lease alone was worth $590 million, but Sears sold 5 leases for a total of just $400 million. Even if you assume Eaton Center was by far the most valuable of the five stores (let’s say $300 million versus $25 million each for the other four), Baker Street likely overestimated its value by 100%. And considering how it was one of company’s most valuable stores, that is a problem. Is it unreasonable to think Baker Street could be that far off on many of its other estimates of value as well?

Switching gears to a second issue, we learned on Tuesday that Eddie Lampert’s controlled stake in Sears Holdings was cut this week from 55% to 48%. This was the result of 7 million shares of Sears being distributed to the limited partners of his hedge fund due to their request to exit the fund. Why is this important, given that Lampert’s investors make their own investment decisions in terms of when to request their money back? Well, one of the arguments Baker Street made was that Eddie Lampert was personally investing more of his own money in Sears stock. In fact, on slide #40 (see below) they tout Lampert’s personal purchases over the last year as a sign that he believes the stock is dramatically undervalued.

Interestingly, Lampert acquired those shares directly from his hedge fund investors who asked to cash out of the fund in late 2012 and early 2013. Rather than sell Sears stock to pay his investors in cash, or give the investors Sears stock directly, he purchased their shares from them using personal funds, which allowed him to increases his Sears stake while allowing for cash payments to his exiting hedge fund investors.

BakerStreet-Slide40

I find this interesting because this time around Lampert decided not to buy the shares from his investors. Instead, he simply gave them Sears stock in lieu of cash, thereby reducing his controlled stake (the number of shares he controls as a hedge fund manager, not his personal holdings – which remained the same).

So what can we take away from this move? I don’t think we should overthink it. Lampert thought the stock was quite cheap between $40 and $44 per share, but not nearly as attractive at $63 (the opening price on December 2nd, the day of the redemptions). For those who believe that Baker Street Capital is correct and the stock is worth $100 per share or more, that should be a concerning development.

I continue to agree with Sears investors who believe that the company’s vast real estate holdings give them a margin of safety and will prevent the company from facing any serious liquidity issues, despite continued losses at the core Sears and Kmart stores. I simply disagree that the stock is worth anywhere near $100 today.

Even if you were to be optimistic and assume that Baker Street’s “low-end” case for Sears’ break-up value of $92 per share was a good estimate, it will take years for Lampert to actually break up the company and realize full value (if he closes one store every day from now on it would take 6 years to liquidate them all!). If you take present values into account and apply a 10% discount rate (a huge error in the Baker Street analysis, in my view, is that they ignored the time value of money), the stock is likely worth no more than $60 per share (versus yesterday’s closing price of $55).

Full Disclosure: No position in Sears Holdings common, long Sears Canada common, and long Sears Holdings debt at the time of writing, but positions may change at any time.