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For various reasons I have recently got pretty interested in the Sears/Lampert
saga. The prevalent wisdom seems to be that it has been a complete disaster and
Lampert effectively turned stupid. I am a bit skeptical about this - while I don't think it has been
a great success, there have been enough spin-offs to make a clear assessment difficult (at least to
me). Unfortunately, I did not have the presence of mind to follow it over the years. Has anyone on
this board followed the saga over the years, and/or have a useful timeline of what happened when
(spin-offs, current value of capital initially deployed, etc.)?
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I have followed off and on.
Once upon a time I made a lot of money writing puts, since, though the business results have been terrible, the mood of the
market has at times been far worse than that. Their merely staying in business was sufficient for my purposes.

I don't have a record of the spin offs. IIRC Orchard Supply was pretty negligible in monetary terms, Lands' End bigger at maybe 23%.
Not sure about Sears Canada and Sears Hometown. Both certainly negligible now if you still hold them.
The Seritage spinoff rights were worth something like $5.60 at the time. A lot more now if you held.

Jim
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Didn't they also sell Craftsman tools, to Stanley / Black and Decker for about $1B?
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Didn't they also sell Craftsman tools, to Stanley / Black and Decker for about $1B?

Yes, but that cash went to the Sears balance sheet. I am looking for data more along the following
lines: say you bought $100 of Sears when Lampert took control, added capital to exercise all rights
granted, held all spin-off shares to present day, then what IRR on your capital do you get if,
today, you were to sell all your holdings arising this way?

Then some variations of this would also be interesting: sold all spin-offs on first day of trading,
only retaining original Sears stake. Most interesting would be to understand Lampert's own IRR on
the Sears investment, but I think the latter would be rather difficult to determine externally
without asking him (he even owns a lot of debt).
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My apologies for going off topic to your question, but this 2006 Fortune article about Lampert/Sears is a good read for investors who like to learn how to spot red flags:

http://money.cnn.com/2006/02/03/news/companies/investorsguid...

"Eddie Lampert: The best investor of his generation"
February 6, 2006: 2:05 PM EST

"NEW YORK (FORTUNE Magazine) - The mood was tense at the Bel Age hotel in West Hollywood, Calif., early last year. The top two dozen executives of Sears Roebuck & Co. were gathering for a strategy session with Eddie Lampert, then 42, the billionaire hedge fund manager who had just engineered an unlikely takeover of their venerable but struggling company.

The fact that the vehicle of his acquisition was discounter Kmart -- which Lampert had come out of nowhere to snatch control of during bankruptcy -- was only one source of unease. Once their presentations started, Lampert also began poking holes in virtually every idea.

"What's the benefit of that?" he asked again and again. "What's the value?" He shot down a modest $2 million proposal to improve lighting in the stores. "Why invest in that?" He skewered a plan to sell DVDs at a discounted price to better compete with Target and Wal-Mart. "It doesn't matter what Target and Wal-Mart do," he declared.

Eyes began rolling.
Sure, Lampert was an alluring character: He'd built himself into one of the richest men in America, survived a bizarre and terrifying kidnapping, and somehow supercharged Kmart's moribund stock into a highflier.

But when the Sears team asked him to share his vision for their company, he brushed the question aside. The impression, says one attendee, was that "Eddie was going to pull cash out of Sears to invest in the next addition to his hedge fund." Lampert says that view comes with the territory: "The pushback I get is, 'He's a hedge fund guy.' Full stop. Some places, that can be a badge of honor. In others, it's almost a term of derision."

A year after the Bel Age meeting many of those Sears executives -- including the CEO, the CFO, and the chief buyer -- are out of the picture. Sears (Research) stock is up 30 percent, and Lampert is fully in charge. While his official title is chairman, he's operating much like a CEO, calling the shots on strategy, marketing, merchandising, and more.

"I'm not from a retail background, but I am a shopper," says Lampert, whose contained, sometimes shy manner is the last thing you'd expect from a big swingin' hedge fund guy. "I come to this with practical, logical ideas."

Eddie Lampert is the Steve Jobs of the investing world: He thinks differently, and acts differently, with extraordinary results. "He's the greatest investor of his generation," says fellow billionaire (and onetime mentor) Richard Rainwater, and Lampert has the numbers to prove it.

His hedge fund, ESL Investments, has delivered average annual returns of nearly 30 percent, after fees, since its 1988 launch, according to several of its investors, who include Dell founder Michael Dell, media mogul David Geffen, and the Tisch family. Geffen, who gave Lampert $200 million to invest in 1992 (when Lampert was just 29), says that had he not periodically taken money out for diversification, he would have $9 billion today. As it is, says Geffen, "I've made more money from Eddie than from all the businesses I've created and sold."

Lampert is wealthier than Warren Buffett was at his age. And his $15 billion fund has outperformed Buffett's Berkshire Hathaway during its 18-year span (though of course the bigger Berkshire is a heavier load to move). Unlike other hedge funds, ESL doesn't typically short stocks, or trade derivatives, or dabble in currencies, or use aggressive leverage.

Lampert buys cheap stocks and holds them for long periods (see "How Lampert Picks His Stocks"). He made his first big money in the 1990s with IBM and financial stocks like Wells Fargo, and became a billionaire by buying AutoNation and AutoZone, which have tripled and quadrupled in value, respectively, since he invested in them.

But the capper so far has been his coup with Kmart. In 2004 alone, the stock soared 300 percent, ESL's stake grew from $1.3 billion to $5.4 billion, and as a reward that year he raked in a reported $1 billion in fee income.

Now the question is this: Is Lampert's Sears acquisition another inspired work of genius, a stepping stone to Berkshire Hathaway -- like wealth creation for public investors? Or has he finally gone a step too far?

In a series of revealing interviews -- the first in-depth discussions he's had with any outsiders, including Wall Street analysts, since the Sears deal -- Lampert acknowledges that he has nearly all of his own money in his hedge fund. That means his personal fortune is also riding on the fate of Sears Holdings, as the combined Sears-Kmart is now called. After rocketing to $163 last summer, shares of Sears Holdings have dropped to a recent $121.

With same-store sales at Sears down 12 percent this Christmas season, the sniping among retailing purists -- for a time overshadowed by Wall Street's cheers -- is getting louder.

"These financial guys, including Eddie Lampert, have no idea who the customer is," says Britt Beemer, chairman of America's Research Group, a retail industry consultancy. Former Sears CEO Arthur Martinez calls the plunge in holiday sales at Sears "very troubling" and wonders how long Lampert can sustain such a poor showing.

If Lampert is blinking, he sure doesn't show it. His hedge fund owns 40 percent of Sears Holdings, a stake worth almost $8 billion and by far its largest position. (He takes no salary for his role as Sears chairman.) From ESL's tiny offices in an unremarkable four-story building in Greenwich, Conn., Lampert manages the $54 billion, 330,000-person retail giant by phone, e-mail, and videoconference. He regularly holds court in his spartan conference room, diagramming on a big whiteboard for Sears executives who tune in remotely. The key points on his agenda: Be willing to sacrifice sales for profitability. Ignore Wall Street expectations. Question everything.

Lampert, who is a white-knuckle flier, has been to Sears' headquarters near Chicago just six times. But chief information officer Karen Austin says Lampert is the company's No. 1 user of a computer-based tool to analyze sales, margins, and inventories by store, by region, and by merchandise group. A geek at heart, he spends hours at his Connecticut office drilling down into the data, zeroing in on whatever isn't making money.

His critics argue that judging a single item's profitability in isolation is unsophisticated -- that a retailer's menu of offerings is what's important, even if an individual item lags. Lampert disputes that. While Sears' December sales drop was disappointing, as he admits, year-end earnings, due out in mid-March, are expected to show improving margins.

That, in part, is because unprofitable items are disappearing from the stores. Sears recently stopped carrying traditional televisions, now offering only pricey flat screens. As for DVDs at Wal-Mart and Target prices, they're also a thing of the past. An in-store test showed that full-priced DVDs produce plenty of volume and a lot more for the bottom line. Eddie was right."
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is a good read for investors who like to learn how to spot red flags

Actually, I very much differ with you on this. Those parts that you highlight in bold
reveal a guy who very much has return on invested capital ingrained in his DNA. As far as
I can tell, Lampert's "mistake" hasn't been his capital allocation ability (I think he is
very good), but rather his failings in understanding interpersonal/social relationships
(which Buffett excels at and are important in actually running a firm in a managerial
sense).

Lampert's fundamental observation (again my opinion) in investing in retail operations
seems to have been: buy based on earnings power, but since retail can be a tough business
make sure under appreciated real estate assets provide a margin of safety (what he
screwed up with is trying to run Sears day to day instead of just focusing on overall
capital allocation). I think this is an eminently smart and simple idea (to some extent
well known, i.e., Lampert doesn't necessarily deserve credit for originality here). What
makes Sears so interesting is as a case study of what happens when this margin of safety
is actually called into action?
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What makes Sears so interesting is as a case study of what happens when this margin of safety
is actually called into action?


Sears* effectively invented the catalog business. The "killer app" was the satisfaction guarantee.
They were the Amazon.com of the 19th century.

After WWI Sears began building retail stores in city centers.
After WWII they followed the population into the suburbs.

In 1993 they ended their catalog** business.
Amazon was founded in 1994.


----------
* Along with Wards.
** Wards had done so in 1985.
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TS,

For various reasons I have recently got pretty interested in the Sears/Lampert
saga. The prevalent wisdom seems to be that it has been a complete disaster and
Lampert effectively turned stupid. I am a bit skeptical about this - while I don't think it has been
a great success, there have been enough spin-offs to make a clear assessment difficult (at least to
me). Unfortunately, I did not have the presence of mind to follow it over the years. Has anyone on
this board followed the saga over the years, and/or have a useful timeline of what happened when
(spin-offs, current value of capital initially deployed, etc.)?


I have followed closely, and owned debt since 2009 (still do).

The equity holders have realized a horrible return. Even factoring in "spin offs". The reason is simple. There were no spin-offs after OSH... they were all rights offerings. And in general, the rights offerings were mixed.

OSH - spin-off, equity zeroed.
SHOS - rights, equity obliterated
SCC.T - rights, Ch 11, equity close to zero
bonds + warrants - rights, bonds down, SHLDW now deminimis, + coupons (call it flat)
LE - rights, it's down but ok

Quickly done, so I'm missing some I'm sure.

All these things have "value" in a way, but SHLD equity holders *paid* to retain their stake.

I think the most charitable argument is that SHLD equity holders (from 10 years back) on a weighted average basis - that aren't ESL/RBS - did pretty ok as $5B in buybacks paid them out at very high prices.

Ironically, this argument in favor of investors doing well is also a simultaneous condemnation of ESL's "capital allocation" skills.

SHLD bears make some of the dumbest arguments I've ever heard, but the there is no getting around the fact that since ESL took over SHLD his return for "remaining" shareholders has been an unmitigated disaster.

Even measured from his original KMART debt, I think his basis is similar to current equivalent value of SHLD + spins.

I think he's honest, but he lost his head on this one. I own the debt because I think he hasn't lost his head entirely and there are assets remaining > debt + burn.

Hope that helps.
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Quickly done, so I'm missing some I'm sure.

Of course SRG I missed, the biggest one which has done well.
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Ben,

Thanks! That's really interesting. Do you have any more insight/details as to what
happened with the rights offerings? Were the resulting entities not well
capitalized? I am a bit surprised that so much equity was obliterated.
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TS,

I think generalizing here is actually apt.

I think generally the spun off businesses (SRG seemingly the exception) have seen reduced cash flows / profits and in many cases turned to cash burn. Any capital returns by the group (limited) have also been done via buybacks which has compounded the loss.

I think there is a broad misconception that Eddie was somehow spinning off (again, wrong word) assets to "strip" sears. In reality I think he was / is trying to separate the businesses and get them to have their own incentives and managements. But this couldn't be done w/o cash infusion(s) to buy the assets from shld due to debt restrictions.

I think (again) Eddie is honest and ethical, but greatly misjudged retail-pocalypse as well as his ability to be an operator.

Ben
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Ben,

Thanks for the comments! The perspective is quite helpful.
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my god i thought they'd never ask. this kind of question can be as complicated as you like. first, the simplest answer. this isn't what i'd call the perfect answer, but it's coherent. it uses all the bloomberg adjustment factors. an adjustment factor for a spin gives sears ex-ante credit for the value of the spin at the time of the spin, just as if it were a dividend. this makes sense if you want to argue that shareholders could have sold their spin receipts in the open market for cash. for a rights offering, it makes a much smaller adjustment based on where the rights were trading when they were issued (this is the market-implied discount embedded in the subscription price).

when the SHLD/KMRT merger closed in March of 2005, the stock was at $133. using all the bloomberg adjustment factors for the interim divestitures, shareholders received around $53 of interim loot. so you paid $133 in 2005, received $53 over 12 years (actually all in the 2011-2015 period), and have a stock trading at $9. So you lost 54% of your money plus 12 years of time value. not great.

another way to look at it is ex-post. after all, SHLD could have theoretically split into 4000 individual spinCos the day after the deal closed -- one for each store -- then gone to zero six months hence. an ex ante adjustment method would give it credit for all $133/sh returned to shareholders...not quite capturing the zeitgeist of the moment. and since lampert mostly held his own stakes in the spincos, the case is even stronger for an ex-post look. that would start like this:


Ditched Ex-Date Type Shares Value Adj Factor
Seritage 6/10/2015 Rights 53.3 1577 0.911226
SHLD W 11/3/2014 Rights 22 625 0.941172
Canada 2 10/17/2014 Rights 40 380 0.988333
Land's end 4/7/2014 Spin 33.5 991 0.810273
Canada 1 10/31/2012 Spin 48.8 507 0.931226
Hometown 9/13/2012 Rights 23.1 347 0.965189
Orchard 12/14/2011 Spin 5.15 121 0.978978


so what do holders of all that detritus actually have today? first, the 3 spins. the ex-post spin analysis is simple. instead of giving credit for market value at the time of the spin, you pretend the spin never happened. orchard supply went to zero. sears canada is trading at around $.80 a share, about $40 million. But canada also paid out $234 million in interim dividends (attributable to the spun shares). So $274 million total. Land's end is trading at $430 million. So $704 million in remaining value for these three spins.

now the rights. in an ex-post scenario, the "rights" value is ignored. then you have to replace the actual cash proceeds (by assuming it is valued at cash in the current SHLD price, though time value always intrudes if you want to do it to the bitter decimal) with the current value of the subscribed securities.

hometown is trading at $55 million. the 40 million canada 2 rights offering missed the dividend party, and is trading at only $30 million. the warrants are a little complicated; this was the capital raise where sears combined debt and warrants into one unit and the market traded the combined rights with ~$200m of value, implying a discount for shareholders. the warrants are now worth ~$50 million (vs $375m at the time of the spin). The debt is trading at 81c. it's reasonable to say this issue has zero net excess value in the market, at best. then you have seritage. the seritage spin shares are trading a $2.56 billion, above the $1.57b raised by SHLD in the rights offering.

So in total the rights offerings are worth $2.56b+$55m+30mm = $2.65b. The cash they raised for SHLD (ignoring the cash raised in the debt/warrants offering) was $2.3b. So $350 million in additional ex-post value. this is actually slightly less than the total rights-value bloomberg attributes to sears ($454 million) over and above any implied value from the cash proceeds.

so if we add the $2.65b in rights value to the $704m in spin value we get $3.35b in current divestment loot. this is $31 per current SHLD share. Add $9 for SHLD stock and you get $40. But now you have to subtract the $2.3 billion in rights cash received (bc we are unwinding those deals), which is $21 per SHLD share. That gets you $40-$21 = $19 per share in SHLD. So from that ex-post perspective, shareholders who paid $133 on the day the merger closed now have $19 in value over 12 years. even less great. -86%.

note that one way this ex-post analysis hurts SHLD a bit is because it is subtracting more than 100% of its current market value in the form of cash previously received in rights offerings. this ignores the fact that sears has successfully transferred some of its market value losses onto holders of its liabilities, which is a benefit to shareholders. an alternative ex-post methods caps the $2.3 debit for rights proceeds received at SHLD's current market value of ~$1b, but this is the difference between grim and grimmer.

there was a time when sears was very interested in discussing these sorts of adjustments:

https://blog.searsholdings.com/shc-updates/2014-performance-...

but that time is yesterday.

here are the total returns over those same 12 years for what people would have probably used as the most obvious comps in 2005:

Dillards: 144%
Macy's : 3%
Kohl's : -5%
JCP : -80%
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@howardroark

Thanks! This is exactly the sort of data I was looking for.
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"@howardroark

Thanks! This is exactly the sort of data I was looking for.
"

+100

much better than my off the cuff response.

Thanks Roark.
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I have followed this with interest but not with any numbers, nor would I post them if I had them being downthread from Howard Roark's post. I will say this:

I watched Laurence Tisch nearly dismantle CBS, step by step, asset by asset, while I was at Westinghouse (Broadcasting) and all of us sat there thinking "How can he do this? He's killing an American icon!" We were not saying "Oh no, he's changing something", we were saying "He's burning the furniture to stay warm."

Over the course of eight years, magazines went, music went, books went, he passed up several fabulous cable opportunities, slashed the workforce, lost most of the institutional memory, and (I am told) made money for shareholders even as he crushed the future of the corporation. Yes, he got rid of some stuff that didn't belong, too. But he got into it to stave off a hostile takeover and ended up nearly ruining the company anyway. It got to the point where Westinghouse could finally afford to take it over, which was something given that Westinghouse was practically bankrupt itself (thanks to some funny lunchmeat in the credit division.)

Anyway, I've watched Lampert sell off the crown jewels, and hey, maybe there *is* no future in retailing, but I'm absolutely sure there's no future if you don't have any products worth selling, and if your here-to-fore best brands are now available down the street or across the plaza for less. Craftsman Tools. Land's End. Kenmore. DieHard. What's left, the real estate? OK, but they don't even have that now, as Eddie's fist is in that pie, too.

The end of the Westinghouse story is that they came back and pumped money into CBS and made it #1. [Recall that in the 90's conventional wisdom was that there was no future for the networks.] They bought a substantial interest in a second network, the CW. They acquired a decent collection of cable channels. They bought their way back into the NFL and MLB. They hired Mel Karmazin who quadrupled the size of the radio group and doubled margins. They acquired KingWorld (Jeopardy, Wheel of Fortune, Oprah) and other syndicated products. The invested mightily in great products, ancillary product lines, and marketing. At one point they went through a marriage and divorce with Viacom. They had one of the premier billboard companies in the country.

The end of the Sears story is that Lampert took over one of America's historic retailers, combined it with another, decidedly worse retailer, pushed the stars out the door and made a large vat of poop soup. I trust his shareholders no longer think he's a brilliant chef, even if he did run a successful restaurant in a former life.
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