Beauty, like supreme dominion
Is but supported by opinion.
Benjamin Franklin, in Poor Richard's Almanack, 1741
Depending on whom one asks, Sears Holdings is either a bad retailer, guided by an inexperienced helmsman, trading at +20 times earnings or an undervalued asset holding company managed by one of the better capital allocators in the last 20 years.
As would be expected, Whitney Tilson is taking the contrarian view:
Liquidation analysis of SHLD results in about $195 per share and assumes the following:
• Spin-off of real estate holdings at a REIT
• No value assigned to leased real estate.
• Brands (Land's End, Kenmore, Craftsman, Die Hard) valued at 0.50 to 0.75 times estimated sales.
• Merchandise inventory valued at 0.5 times balance sheet amount.
• Assumed tax rate of 35% on sale of real estate, brands and Sears Canada.
Sears Holdings Break-Up Value
($ Billions ; Per Share )
REAL ESTATE $20.0 ; $145.31
BRANDS $5.9 ; $42.54
CANANDA $1.7 ; $12.04
Cash (4Q07) $1.6 ; $11.78
Merchandise (50% Cost) $5.0 ; $36.19
Sub Total $247.87
Pension Liability $1.3 ; $9.14
Debt as of 4Q07 $3.0 ; $21.87
Minority Interest, Other $3.3 ; $24.01
Sub Total $55.01
NET $192.85
REAL ESTATE:
SHLD could set up a REIT for all of its properties. Using a blended cap rate of 8.25% on this theoretical REIT, assuming a 15% pre-tax rate of return on the equity portion, leveraging 3:1, and a 6% rate on the secured debt would imply a multiple of 12.1x on the differential between current lease rates ($3.81 psf across the portfolio) and market lease rates. For instance, if SHLD were to lease out all 266 million square feet at $10/sqft/year, this would yield a cashflow psf of $10 - $3.81 = $6.19. Multiplying by 12.1x we get a value psf of $74.9 and a total value of $19.9B.
Sears Holdings Corp. was created by the March 2005 merger of Kmart Holding Corp. and Sears Roebuck & Co. For the year ended February 3, 2007, the company had $53 billion in annual revenue. At the end of the third quarter, SHLD had about 3,800 full-line stores and specialty stores in the U.S. and Canada. Key proprietary brands include Kenmore, Craftsman and DieHard, as well as clothing from Lands' End, Jaclyn Smith, Joe Boxer, Apostrophe and Covington. The company also offers Martha Stewart Everyday products. Headquartered in Hoffman Estates, Illinois, Sears owns about 70% of Sears Canada Inc.