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Eddie Lampert Reducing Sears' Spin-Off Orchard Supply Co.

April 09, 2012 | About:
Holly LaFon

Holly LaFon

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Eddie Lampert’s hedge fund ESL Investors LLC, which owns approximately 61% of Sears Holdings (SHLD), has not been selling shares of its ailing but slightly reduced its holding of Sears’ spin-off, Orchard Supply Co. (OSH), in the last two months. After Orchard began trading independently on Jan. 3, 2012, Lampert on March 13 reduced his holding by 0.01% at about $24 per share and owned 2,164,881 shares, according to GuruFocus Real Time Picks. Then, on April 3, he reduced his position by a further 0.09% at an approximate share price of $26, and now owns 2,122,707 shares.

Under the terms of Sears’ agreement to spin-off Orchard Supply, it would distribute all of Orchard’s Class A common stock and Orchard Series A preferred stock held by sears on a pro rata basis to holders of Sears’ common stock. Every 22.14 shares of Sears’ common stock held would equal one share of Class A common stock and one share of preferred stock.

The spin-off prospectus says that after the spin-off, ESL would receive approximately 61% of Orchard’s nonvoting preferred stock and 61% of its “outstanding Class A Common Stock, representing approximately 61% of Class A Common Stock voting power and approximately 49% of the general voting power of our outstanding capital stock.” Owning more than 50% of its voting power conferred ESL the right to elect of eight of ten of the company’s directors.

Orchard Supply Hardware Stores Corp. is a home repair and improvement retailer with 87 stores in California. From spin-off to date, its stock has declined almost 13% to open at $21.50 on Monday.

Sears’ listed its official reason for spinning off Orchard as, “Sears Holdings’ board of directors has determined that pursuing a disposition of Orchard through a spin-off is in the best interests of Sears Holdings and its shareholders, and that separating Orchard from Sears Holdings would provide, among other things, financial, operational and managerial benefits to both Orchard and Sears Holdings.”

But the decision came amid weak financial performance at Sears that led to a profit warning on December 27. Sears said on December 27 that its quarter-to-Dec. 25, 2011 sales had dropped 4.4% at Kmart and 6% at Sears, for a total 5.2% decline. “The combination of lower sales and continued margin pressure coupled with expense increases has led to a decline in our Adjusted EBITDA. Accordingly, we expect that our fourth quarter consolidated Adjusted EBITDA will be less than half of last year's amount,” the company announced. The company also responded by closing over 100 Kmart and Sears stores and taking other cost-reducing actions.

On January 5, Orchard announced that it expected its net loss for the fiscal year ending Jan. 28, 2012 to widen to $17 million, compared to a net loss of $15 million in fiscal 2011. EBITDA also expects adjusted EBITDA to decline to $40.6 million from $44 million. Comparable store sales are expected to be in the range of negative 0.3% to 0.9%, but comparable store sales for the fourth quarter of fiscal 2011 were expected to be positive, the second quarter of positive comparable store sales.

Daniel Loeb Adding Enphase Energy (ENPH)

GuruFocus Real Time Picks also shows that Daniel Loeb of Third Point hedge fund increased his Enphase Energy stake by 83.04% on April 4, 212. He owns 1,683,778 shares and is a 10% owner.

Enphase Energy Inc. delivers microinverter technology for the solar industry, which increases productivity and reliability of solar modules. The company held its IPO of 10,315,151 shares at the price of $6 per share on April 4, the same day Daniel Loeb bought. The company’s net proceeds from the sale were approximately $54.6 million. The stock has dropped almost 7% since then.

A web page for the company that no longer exists says that it was founded in 1995 by Daniel Loeb and SEC filings still list him as “director.” “We created the microinverter category and have grown rapidly since our first commercial shipment in mid-2008, with more than 750,000 units shipped through May 31, 2011, representing over an estimated 25,000 solar installations,” the company says.

The company’s net revenues have increased substantially in recent years. Net revenues were $1.7 billion in 2008, $20.2 million in 2009, and $61.2 million in 2010. Net losses were $14.5 million in 2008, $16.9 million in 2009 or $21.8 million, as cost of revenues have been close to or exceeded revenue in the last three years.

Enphase expects to incur losses in 2011 and for that trend to continue in future years as it continues “to invest substantial resources to support the growth of the business.”

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