Sears Holdings: Tangible Assets Exceed Market Value

1. Company

Sears Holdings (SHLD, Financial) is one of the worst-performing public companies today. Its stock has underperformed, and Managment has been unable to reverse the constant reported losses every year. So why would I write a value idea article on a company that is clearly in a sector or business decline? The reason is simple and easy: Sears' tangible assets, value based on its real estate and brands, exceeed the market value by at least 50%. At it current price Sears is giving potental investors at least a 50% margin of safety.

Sears Holdings is a multinational corporation headquartered in Hoffman Estates, Illinois. The company in its current form was created in 2005 when Hedge Fund Manager Eddie Lampert mergered the company with Kmart. Today the company operates 4,000 retail locations under the the combined companies' brands and subsidiaries. Sears is the tenth-largest retailer by annual revenues in the United States. After the merger and the rising value for the company real estate caused by the real estate and financial bubble of the early 2000s, company stock rose as high as $198 per share; since then it has been on a slow decline to its current price of $35 per share. Eddie Lampert and his managment team have been unable to restore the company to profitablilty with the company continuing to report losses quarter after quarter and year after year.

Company History

Sears Roebuck & Company

• Sears, Roebuck & Company was founded in 1893 as a mail order catalog.
• Sears, Roebuck & Company was producing a 532-page catalog in 1895.
• Sales were greater than $400,000 in 1893 and more than $750,000 two years later.
• In 1933 Sears issued its first Christmas catalog known as the Sears Wishbook.
• From the 1920s to the 1950s Sears built many urban department stores, and the department stores began to overshadow the mail-order business.
• In the 1950s the company began to expand into the suburban markets and malls in the 1960s and 1970s.
• In 1959 the company formed the Homart Development Company for developing malls.
• Starting in the 1930s the company began to diversify by adding Allstate Insurance Company in 1931.
• Over the decades the company established major national brands such as Kenmore, Craftman, Diehard, Silvertone, Supertone and Toughskins.
• Kmart announced its intention to buy the company in 2004.

Kmart

• Founded in 1963 and is the third-largest retail store in the United States
• In 1977, the company changed its name from S.S. Kresge Corporation to Kmart.
• In the 1980s the company sold its remaining Kresge and Jupiter stores in the United States to McCrory Stores.
• During the 1980s many of the company's stores were outdated and in decaying conditions.
• Starting in the 1980s the company began to focus on companies that Kmart created or acquired just as The Sport Authority, Builder Square and Waldenbooks.
• The company started to offer exclusive merchanise by Martha Stewart, Kathy Ireland, Jaclyn Smith, Lauren Hutton and Thalia.
• In 2002 the company filed for bankruptcy. The company closed 300 stores and laid off 34,000 employees.
• While in bankruptcy ESL Investments a hedge fund run by Eddie Lampert purchased a significant amount of Kmart's outstanding debt.
• He accelerated the bankruptcy process and in March 2003 the company emerge from bankruptcy as Kmart Holdings Corporations and began to trade on the NASDAQ in June 2003. ESL Investments owned 53% of Kmart after emerging from bankruptcy.
• Announced its intention to buy Sears in 2004.

Sears Holdings founding

• The new corporation announced that it would continue to operate stores under both the Sears and Kmart brands.
• . Kmart and Sears merger closed in March 2005, following approval from shareholder in both company's and goverment regulatory approval as well.
• After the completion of the merger Sears Holding introduced a new store format called Sears Essentials.
• Sears Essetial concept was combining Sears and Kmats format to help the company compete better against Walmart (WMT, Financial) and Target (TGT, Financial).
• The project a since been redesign and merged with Sears Grand concept.
• Sears Holding began to cross-brand selling merchantise between Sears and Kmart. Craftman Tools are now available in Kmart.
• Sears Holding currently holds a 51% stake in Sears Canada and also holds a 20% stake in Sears Mexico.
• In 2005, Sears Holding sold a stake in hardware chain Orchard Supple Hardware to private equity firm Ares Management.
• In 2011, the company announced that it wold spin off its remaining holdings in Orchard to shareholders.
• In 2007, the company placed its three major brands in KCD IP, a separate, wholly owned, bankruptcy-remote subsidiary.
• KCD IP stands for Kenmore Craftsman, DieHard.
• KCD IP then issued $1.8 billion in bonds that were sold to Sears' insurance subsidary in Bemuda. Sears would thus pay KCD for the use of the three brands' trademarks.
• In 2008, the company launched Serviceline.com, which was intended to connect Sears customers with local contractors for home improvement projects. The site was designed in 2010.
• In 2010, Sears Automotive business launched a new independent Sears Auto Center franchise progam that offers automotive dealerships the opportunity to operate a licensed Sears Auto Center.
• Since the merger of Kmart and Sears, the company has seen consistent quarterly declines.
• In December 2011, after poor holiday sales the company announced 100 to 120 Sears and Kmart stores would close.
• In Februray 2012, the company announced that it was going to close all nine of The Great Indoor stores.
• In December 2013, the company announced that it would spin off Lands End catalog business and it began to trade on the NASDAQ in April 2014.

Subsidiaries

Current

• Kmart – a chain of discount stores throughout the United States.
• Big Kmart – a chain of discount stores that sells everything Kmart sell but with an emphasis on home decor, children clothes and and more food items. Since the merge the store has been rebranded as Kmart.
• Kmart SuperCenter – is a chain of hypermarkets that carry everything a regular Kmart does but has a full grocery section.
• Super Kmart – is a chain of SuperCenter that features a garden center, a video rental store, a brank of a local bank, an arcade, a portrait studio, and many other third party services. Most of these locations were briefly remodeled and re-branded to Sears Grand.
• Mygofer – is an online and brick and mortar retail concept launched in 2009. Offering customers the benefits of online shopping paired with the convenience of a storefront.
• Sears Full Line – is a chain of department stores that are located in shopping malls. The stores are usually multi-level. There are over 900 of these stores in the United States. Also there are 300 in Canada and 33 in Mexico.
• Sears Grand – is a chain of hypermarkets that offers everything Sears and Kmart offer, and these stores used to be Super Kmarts.
• Sears Appliance & Hardware – is a chain of hardware stores that carry the whole Sears line of hardware and is usually free-standing or located in strip malls.
• Sears Home Service – is a division of Sears that specializes in appliance repair, lawn and garden services, HVAC services and home services as well. Also Sears Home Services can do repairs on small appliances in-store.
• Sears Parts & Repair Centers – is a chain of service centers that typically sell parts for lawn and garden equipment and appliances.
• A&E Factory Service – is a joint venture between Whirlpool and Sears Holdings. A&E Factory Service is a network of mobile service vans that repair appliances.

Management

Eddie Lampert is the chairman and CEO of Sears Holdings and own and runs ESL Investments which he founded in 1988. He has extensive experience in business and finance and he has a long history of investing in retail companys with lots of success. Since becoming the chairman of the company has seen nine straight quarter of report losses and continued decline in cunsumer demand for the company's products and services.

Top Executives

• Eddie Lampert – Chairman of the board and CEO and Hedge fund manager as well.
• Ronald D. Boire – Executive Vice President, Chief Merchandising Officer and President, Sears Full Line and Kmart formats.
• Robert A. Schrieshein – Executive Vice President, and Chief Financial Officer.
• Jeffrey A. Balagna – Executive Vice President, and Chief Information Officer.
• Imran Jooma – Executive Vice President, and President, Online, Marketing, Pricing and Financial Services.
• Dane A. Drobny – Senior Vice President, and General Counsel and Corporate Secretary.
• Leena Munjal – Senior Vice President, and Customer Experience and Integrated Retail.
• Robert A. Riecker – Vice President, and Controller and Chief Accounting Officer.
• Dorian R. William – Vice President, and Deputy General Counsel and Assistant Secretary.

Excutive Compensation

• Eddie Lampert – $4,309,524
• Ronald D. Boire – $1,308,887
• Robert A. Schrieshein – $1,498,245
• Jeffrey A. Balgana – $3,590,828
• Imra Joom – $1,061,534

Total Executive Compensation – $11,769,018

Financial Summary

For the 13 weeks ended in May 2014, the company reported an revenue decrease of 7% to $7.8 billion and net loss increased 44% to $402 million. Revenues reflect Sears' domestic segment decrease of 5% to $4.29 billion and Kmart segment decrease of 7% to $2.9 billion. Comparable Store Sales Growth decreased from -2.6% to -7.6% and Retail Sales for Sears' domestic segment decreased 5% to $4.29 billion.

In the second quarter Shop Your Way members drove 73% of eligible sales in the quarter. Also Integrated Retail Initiatives drove online and multi-channel sales up 18% in the quarter and 22% in the first half. The company has reduced our inventory by $1.7 billion over the past three years as the company closed down stores and improved productivity. In the first half of 2014 Sears Holdings generated $665 million in proceeds towards its $1 billion goal for the year. The company has continued to decrease its liabilities by decreasing lease obligations by over $1 billion over the past three years. Also the company has reduced its underfunded pension status by over $600 million and has reduced its overall pension liability by making a lump sum payment of $1.5 billion in 2012 to the company's pension plan participants.

Sears Holdings plans to close over 130 stores in 2014 and has already closed 95 to date. In 2013, these stores generated almost $1 billion in sales but generated an EBITDA loss of about $26 million. By closing these locations the company will generate $26 milion in incremental EBITDA and reduce its working capital for the year by $161 million. Over the last three years the company has reduced it fixed expense structure by $800 million. Throughout the first half of 2014, the company reduced it fixed expense by $30 million.

Sears Holdings revenues per square foot in its apparal business about one-third of the industry average. For every $10 improvement in its sales productivity per square foot represents $100 million in incremental annual EBITDA. If the company could turn over it inventory one more time per year, that would reduce net working capital requirements by about $400 million. That freed up capital could be use to further invest in the companys transformation.

Balance Sheet

Cash Flow Statements

Real Estate

“Generally Accepted Accounting Principles (“GAAP”) mandate valuing their real estate at the lower of cost or market. GAAP would force the Dutch settlers to value Manhattan today at the 1626 purchase price of $23.70.”

– Bruce R. Berkowitz, FAIRHOLME, June 30, 2012

Putting Sears Real Estate Portfolio in Perspective

"Sears Holdings has one of the most diverse and valuable real estate portfolios in the
country and I look forward to helping create additional value for the company by
enhancing and repositioning selected parts of its real estate portfolio."
– David R. Lukes, President of Real Estate Development, March 20, 2012

$7.8 billion or 84% of the company real estate value lies just in 20% of the stores, at the top 350 stores and 50 leased locations. The company is currently developing its real estate even moving into mix-used development it very clear that the company's managment see that the value of the company is its real estate portfolio. The redevelopment and monetization of real estate is consistent with the companys goal of becoming less reliant on stores and inventory.

Seritage Realty Trust LLC which is a Sear subsidary that was formed in 2012, to redevelop some of Sears' and Kmart's most shovel-ready properties The company is a commerical real estate developer whose portfolio contains over 200 properties located in 33 states throughout the United State with over 18 million square feet. The Burlington Mall Project is a plan to shrink Sears' footprint to produce more income by leasing the remaining space to new tenants. Subdivision allows the company to keep its core square footage while monetizing the remaining footage through leasing income. The company's plan for subdividing its stores will allow the company to monetize its valuable real estate through lease income. Also this will allow the company to focus on its most profitable segments –Â appliances, tools and lawn & garden. Sears plans on taking advantage of its prime real estate location in Cupertino, California, by sudivding its store and leasing out 76k square feet to a upscale gym. It is very clear that Sears plan own subdividing its other stores as well and will continue to sublease it to bring in more income.

Valuation

Sears Holdings is clearly undervalued and misunderstood with investors and the market not seeing the clear plan to move the company away from being dependent on its stores and inventory. It is also clear that management understands the way for the company to begin to make profits and turnaround its 9 straight quarter loss is to monetize its real estate by subleasing it out. This plan does two things for the company –Â it reduces its inventory to just its most profitable segment and produces a steady and constant source of income from tenants. Sear Holding real estate is worth somewhere between $7.1 billion to $8.7 billion or per share $85 to $122 per share in real estate. The real estate value is higher than the current stock price. It you buy Sears stock today you're getting over half of its real estate portfolio for free and at least a 50% margin of satefy. By investing in Sears you are going against the crowd and going to have to deal with a very volatile stock that has been own a constint decline the last for years as well.