If you can’t fathom why shares of Sears Holdings Inc. (SHLD) are up 20% this week and 27% year to date, you must be among the multitudes who believe the stock price depends on Sears’ fortunes as a retailer.
No. While the company’s Sears and Kmart stores continue to struggle with declining sales and brutal competition from their big-box rivals, Sears as a stock has for years been more about financial engineering, the value of submerged corporate assets and the surplus of traders who have wagered against Sears by selling the relatively scarce stock short.
The latter short-betting crowd periodically gets squeezed out through higher share prices. That’s what’s happening now, thanks in part to an aggressively bullish investment presentation by one of the company’s larger institutional shareholders, which suggests its best real estate assets alone are worth more than the company’s market value.
Edward Lampert – the billionaire former hedge-fund manager, chairman, CEO and controlling shareholder of Sears – has long operated the company to maximize the value of its crown-jewel brands and property assets while undertaking a “managed retreat” in the physical retailing operations.
Sears Stock Worth $100?
Now, according to the presentation by Baker Street Capital Management, owner of some 6.7% of Sears shares, the company is becoming more aggressive in marketing its valuable store locations to buyers and developers. The firm contends that, under a fair accounting for its real-estate value, Sears stock is properly worth more than $100, versus today's $57 price.
Sears last year created a real-estate subsidiary called Seritage Realty Trust to actively market Sears locations for alternate purposes. It is run by longtime retail real estate executive David Lukes, and has had some early success in realizing value from the property portfolio. While many of the Sears and Kmart stores are in tired older malls or depressed downtowns, Baker Street estimates the best 200 Sears-owned locations and the choicest 50 leased boxes alone are worth some $7.3 billion. Even after the stock’s recent surge, Sears market value is $6 billion.
More immediately relevant is the fact that, at last report, some 15% of Sears' outstanding shares were more than twice the “effective float” of freely traded shares available, once Lampert’s 59% stake, and the holdings of longtime shareholder Fairholme Capital, index funds and Baker Street are accounted for.
This is not the only supply/demand imbalance playing to the benefit of Sears shares at the moment. The Baker Street thesis cites recent comments by CEOs of large retail real estate investment trusts remarking on the almost total lack of new shopping-center construction, even as many national store chains are seeking to expand. This puts upward pressure on mall and strip-center rents and should bolster the value of Sears’ buildings.
Bullish talking points
Of course, the “sum-of-parts” thesis has been the bull case on Sears shares for at least five years, a period when the stock has traded as high as $122 and low as $29. Another bullish talking point has been the idea – aired less frequently than it once was – that Lampert is a latter-day Warren Buffett, a genius capital allocator intent on using a declining public company as his vehicle for shrewd opportunistic investing for the long term. (Buffett’s Berkshire Hathaway Inc. [BRK-A, BRK-B], remember, got its name from a doomed textile manufacturer Buffett took over in the 1960s.)
This talk is at least premature, and possibly misplaced altogether. Yet Lampert has carved up the company in a way that seems to ensure its financial liquidity while maintaining a wide array of options for preserving and increasing eventual investor value — even if the physical retail business is radically shrunk or even wound down.
He has spun off smaller hardware chains and Sears Canada Inc. (SEARF). Sears’ coveted brands Kenmore, Craftsman and Die Hard have been bundled into a discrete subsidiary allowing it over time to reap licensing revenue from third-party retailers. The valuable Lands' End subsidiary has been operated largely on its own, allowing it to perhaps be sold or spun off at some point. And, of course, the real estate is for sale across the board at the right price.
There is no guarantee Lampert can execute the kind of financial alchemy his backers believe he will. Yet the action in the stock proves the ratio of doubters to believers got too lopsided for the moment, and shows that no one should judge the company’s prospects by how many dishwashers, leaf blowers and parkas it sells this quarter or next. In the market's perverse logic, America's most-hated retailer can remain beloved by in-the-know investors.
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