In July 2015, Sears Holdings Corporation (NASDAQ:SHLD) announced that it had closed its rights offering and sale-leaseback transactions with Seritage Growth Properties (“Seritage”), a recently formed, independent, publicly traded real estate investment trust (“REIT”).
In the transaction, Sears sold 235 Sears- and Kmart-branded stores to Seritage along with Sears’ 50 percent interests in joint ventures with each of Simon Property Group, Inc., General Growth Properties, Inc. and The Macerich Company, which together, hold an additional 31 Sears Holdings properties. Based on our rough estimate, this represented less than 25% of the company’s real estate assets.
Sears Holdings received aggregate gross proceeds from the transaction of $2.7 billion, which provides the Company with enhanced financial flexibility to accelerate investments in its transformation to an asset-light, member-centric, integrated retailer.
However, from our perspective, the most important thing that happened was that Seritage is now a public company and when its stock trades daily, we have a more reliable way of assessing the real estate value in SHLD indirectly. We also know that pre-Seritage and post-Seritage, the profile and the quality of the properties held in Seritage and SHLD is roughly the same.
At the current price of $15 for Sears, the company is being priced in the market for about $1.5 billion. Even if you include the debt of roughly $3 billion, we believe that the price of Sears is severely underpriced.
However, the comparison is not apples to apples. Seritage is a clean real estate company whereas SHLD has some serious problems with its retail operations. As every day goes by, the losses from operations are eroding the value of SHLD that comes from its real estate and brand names. Those brand names such as Kenmore, Craftsman and Diehard, we believe collectively could be worth as much as $3 billion. The transformation from the bricks-and-mortar business to their member-centric Shop Your Way (www.shopyourway.com) is happening; whether it is going to be successful or not is another story. These types of ventures should be classified as “venture capitals” and in spite of all the positive spins written about the transformation, it is still a hit or miss affair. Still, netting out all the negatives and all the losses from operations, we believe that the intrinsic value of Sears is far above the current price of $15.
From Francis Chou (Trades, Portfolio)'s 2015 annual shareholder letter.
