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November 12, 2008


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The larger issue, imho, is that the asset stripping strategy has backfired on SHLD big time. It is a horrible retailer and, contrary to the popular belief of the "investor class", sales do not come out of thin air. No self-respecting retail manager would work there, consequently over the last 4 years you've had a massive negative selection going on. With subpar management you end up with the implosion you're now seeing in their operations. ESL is a smart financier but it can only take you so far when you have a challenging business. Ref. Steve "we do not need to be heroes to earn a good return on Chrysler" Feinberg.

Nadav Manham

Thanks for your comment. I think the massive share buybacks are a symptom of what you cite. Buy choosing to buy back stock rather than spend on the stores, he "reinvested in the business" in the finance sense, when he should have "reinvested in the business" in the business sense. There is also a kind of circularity to it: buybacks make sense only if the stock is undervalued, the stock is only undervalued if the business is worth a lot more than the stock price, the business is only worth a lot if you spend money to keep it that way.

"Financiers who don't know about business" is one of my pet peeves. See my recent post on Buffett:


And also my "Consigliere Creed" post, especially the end:


Nadav Manham

Sorry, the second link was wrong:



With the firm selling well below book value, and BS real estate values drastically understated, why should Lampert care about the retailing aspect of the firm since the vast majority of retail turnarounds fail miserably?

Other beliefs, look for DieHard batteries to be sold at AutoZones and AutoNation locations around the US (and other similar brand deals), the Sears website will continue to strive for the best retailing website around, and underperforming stores will start closing so the real estate can be sold or leased.



Read your article, and it is right on. I had a similar experience in my MBA program: lots of guys (and gals) from upper/upper middle families with all the right brand name high schools, colleges and jobs, and yet with a very faint idea of what operating a business entails. Out of my entire class (in the hundreds), I think one guy went on to GM and one onto the GE leadership program.

To Scott's comment, SHLD in fact should trade around liquidation value. However, only Lampert knows what it is. I'd think they have already sold the prime spots, and with cap rates up, I doubt the remaining (possibly older and smaller on average) stores would be that valuable. There is some value in DieHard, Kenmore, Craftsman and Lands End, as well as the franchising network. The slowdown has hit all these categories hard (don't know about batteries): look at the pure plays, like Whirlpool, the failed GE appliances sale, Newell's tool lines or Stanley, or J Crew. All are struggling. SHLD is above 0 but who knows how much above. It was almost a $200 stock, now it is under $40.


Liquidation value may be difficult but its not $5B. Inventory was $9B+, net debt was ~$2B, and then you have the real estate and brands (of which Lands End and Great Indoors will remain viable business's and I assume inventory would be discounted 10-20% over time). I do understand your argument, I just think at $39/share there is little risk and plenty of upside.

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