SHLD anyone?

[bargainman]

The $45 strike 2013 put has a bid of $14.20.  The $45 strike call has an ask of $8.95.

Meanwhile the stock is $46.

Why are you guys buying the shares?

On my bought shares I participate in Interactive Brokers' "Stock yield enhancement" program which gives me some money for lending my shares out. I'm not sure if it's enough to offset the advantage of doing a synthetic long, but it's something.  Also I'm not sure if anyone saw this analysis, but would appreciate comments.  They supposedly take the real estate and assets into account, and still come up with $6/share target.  According to them it's the deteriorating cash flow plus the pension liabilities.

http://notablecalls.blogspot.com/2011/12/sears-holdings-nyseshld-worth-6.html

Sorry if that's been posted already, I haven't worked my way through all the SHLD threads just yet :-)

[RichardGibbons]

BTW, anybody knows why it's always SHLD that seems to have these weird options pricing.

It's because of stock/option equivalence.  A synthetic short, which is short calls and long puts, is equivalent to a short position.  So, if there's a bunch of people who want to short but can't find shares, you get the price to borrow the shares increasing.  Then, of course, it would make sense to do a synthetic short instead, to avoiding the expense of borrowing.  So everyone would do that instead.

So, that pumps up the price of puts and decreases the price of calls.  (How much?  Well, I'd guess that it would get skewed to such an extent that you'd get the same profit from lending out your long shares as you would doing a synthetic long.)

For what it's worth, this also happened with Fairfax back in the day.  When the stock was at $150 or so, you could make $10 by converting from long stock to a synthetic long.  Worked out pretty well. 

[ERICOPOLY]

They supposedly take the real estate and assets into account, and still come up with $6/share target. 

http://notablecalls.blogspot.com/2011/12/sears-holdings-nyseshld-worth-6.html

Where do they take liquidation value of the real estate into account?  They just seem to be capitalizing the EBITDA number and then subtracting liabilities from it.

And after doing so they are saying it's worth $591m ($6 per share):
1x their FY11 EBITDA estimate
3x their "net adjusted" EBITDA.

Quoting:

Our midrange enterprise valuation is approximately $6.514bn, which is 11x our FY11 EBITDA estimate of $590.7, 32x our FY11 net adjusted EBITDA estimate of $203.7mn. After deducting $3.474bn of secured debt, $765.9mn of unsecured debt and the pension/post-retirement liability of $1.68bn, we estimate value to the equity of just $591.8mn, or $6 a share, down 91% from the current share price of $60.49.

[DCG]

Seems like a majority of K-Marts I've seen around the country are in crappy locations and are poorly maintained run-down buildings. I don't think it would be as easy to sell a lot of these locations as some people think. Real Estate is only worth what people will pay for it. I do think that K-Mart is an awful business that should be shut down and liquidated though.

[oddballstocks]

Seems like a majority of K-Marts I've seen around the country are in crappy locations and are poorly maintained run-down buildings. I don't think it would be as easy to sell a lot of these locations as some people think. Real Estate is only worth what people will pay for it. I do think that K-Mart is an awful business that should be shut down and liquidated though.

A few Kmart's that I know of are in shopping centers that are half empty so in factoring in the real estate value I'd maybe chop off 30% or so for bad locations and the length of time to sell. 

I was actually in a Kmart this past weekend, it's one of the only places you can buy ginormous clothes (3x and up for a relative) and the store is quite sad.  A lot of inventory that looks like it hasn't moved in years, the place just has this mishmash feel.  One minute you're next to washing machines, then suddenly you're in the middle of a toy section, and a few steps later you're looking at $1000 TVs which are next to piles of cheap Christmas candy.

[JEast]

For all the talk about using the option market, I would mention that the option market makers aren't stupid.  With the skewed price of the puts, I would suspect that they are priced right.  Meaning that SHLD will probably go lower.  Anyway, just a cautionary note.

Cheers
Jeast

[value-is-what-you-get]

Seems like a majority of K-Marts I've seen around the country are in crappy locations and are poorly maintained run-down buildings. I don't think it would be as easy to sell a lot of these locations as some people think. Real Estate is only worth what people will pay for it. I do think that K-Mart is an awful business that should be shut down and liquidated though.

A few Kmart's that I know of are in shopping centers that are half empty so in factoring in the real estate value I'd maybe chop off 30% or so for bad locations and the length of time to sell. 

I was actually in a Kmart this past weekend, it's one of the only places you can buy ginormous clothes (3x and up for a relative) and the store is quite sad.  A lot of inventory that looks like it hasn't moved in years, the place just has this mishmash feel.  One minute you're next to washing machines, then suddenly you're in the middle of a toy section, and a few steps later you're looking at $1000 TVs which are next to piles of cheap Christmas candy.

I second that observation - went into Sears and they have good stock but the overall impression is "tired" - the sales staff give the impression that they are doing their best "under the circumstances".  There's no pinning a number on all this of course but I really have to scratch my head wondering what is the end game here for Lampert et al.  If it's to use retail cash flows to buy back all the shares and then sell the real estate, wouldn't you want the real estate to be wearing it's Sunday best?  Many of the Sears here in Canada are anchor stores and when they slide, to a certain extent the whole property/mall slides a bit too.  I have two daughters who will drive 40 minutes to another mall with better stores, and the one here seems pretty good to me!  My big nagging question is why would someone buy up all this retail when they clearly don't care that much about retail?

[zarley]

My big nagging question is why would someone buy up all this retail when they clearly don't care that much about retail?

Instead of focusing on why Sears isn't a great retailer, think about how Lampert got control of KMart and Sears and then think about maximizing the return on a collection of assets which were acquired for pennies on the dollar and which are now allocated to generic big-box retail but might be better allocated in different ways.  Would you continue to spend liberally on stores that are destined to lose money year after year, or would you work on transitioning away from those stores while minimizing costs?  And, if you know you need to reallocate stores to other uses or just sell them outright, how would you manage that in the face of the macro environment of the last 3 years?

Yes, the story was better 3-4 years ago when the retail operation turned out $1 billion in cash flow and the real estate values trumped most everything else, but the capital allocation from SHLD has been, IMO, appropriate.  Yes, SHLD would be much better off if the retail execution was better and the retail operation was incredibly profitable.  But, at the right price the retail doesn't need to be Target quality to make a decent return.

[FCharlie]

Seems like a majority of K-Marts I've seen around the country are in crappy locations and are poorly maintained run-down buildings. I don't think it would be as easy to sell a lot of these locations as some people think. Real Estate is only worth what people will pay for it. I do think that K-Mart is an awful business that should be shut down and liquidated though.

Kmart's historical operating income:

2007: $401 million
2008: $172 million
2009: $190 million
2010: $353 million

Not sure why you'd shut and liquidate something that produces operating cash flow year after year.  It's not a beautiful place, and the shoppers aren't exactly the most beautiful people, but they have cash and they spend it. You could argue that Sears is the laggard here, but then I think Sears is being held back because of housing starts at 600K. Housing starts need to rise 150% just to return to "normal". 

The pension is the biggest problem here, but the pension is frozen to new employees and eventually will run off. Interest rates being held at 0% are an issue. Lampert thinks every 1% rise in rates = $500 million change in pension liabilities. I think a lot can change w/ Sears over time. Seems like it's priced for near total failure here.

[dcollon]

Combining two threads here quickly, but maybe this helps the 4th quarter.  It's also a great thing to see.

http://www.lancastereaglegazette.com/article/20111221/NEWS01/112210303/Donors-pay-off-Kmart-layaway-accounts?odyssey=tab|topnews|text|Frontpage

http://abcnews.go.com/Health/Wellness/complete-strangers-touched-altruistic-layaway-angels/story?id=15199745#.TvIls_Le58E