The WSJ’s Bad Math on Sears
- Posted by ToddSullivan
- on September 12th, 2013
I have spent the last few days going through the Baker St research (I have no affiliation with them nor have I had any contact with them), it is great stuff. Last night the WSJ came out with a counter to it (below) and at first read it just did not sit well with me. When I realized much of it came from an “analyst” who, to put it kindly does not think Sears is worth much of anything and has a $20 price target on the stock, my antenna went way up. As I got into it more, I caught the error. We need to focus on the last highlighted paragraph below to understand the flaw in this piece…
When Sears Holdings SHLD +3.87% struggles, it has a knack for turning from a retail turnaround story into a real-estate play. So once again, the notion has arisen that there’s gold in them thar malls.
A recent report from hedge fund Baker Street Capital Management, which owns a 1.4% stake in Sears, argues its real estate is “conservatively worth over $8.6 billion,” which compares with a current market value for the entire company of $5.9 billion. About $7.3 billion, or $69 a share, of that rests in Sears’s top 350 owned sites and top 50 leases—assets it reckons would be relatively easy to sell in an environment where high-quality mall assets are scarce. Throw in the value of Sears’s brands such as Kenmore, its Lands’ End operations and so on, and the firm says the company is worth $13.9 billion, or $131 a share.
The report has resonated, helping drive Sears shares about 25% higher this month to around $56. But it is also out of whack with other sum-of-the-parts analyses. Wednesday, Credit Suisse analyst Gary Balter struck back, arguing Baker Street wildly overvalued Sears’s real-estate holdings, while putting too high a price on the rest of the company, as well.
Consider: Baker Street says Sears’s top 350 stores are worth $98 a square foot. Contrast that to a May presentation J.C. Penney JCP gave to lenders, where it provided appraisal values for its stores from real-estate firm Cushman & Wakefield. The going-dark value of Penney’s stores in A-grade malls—what the retailer could get for its best locations if it shut down—was $55 a square foot.
A real reason to buy Sears shares would be signs that it was shoring up sales, not its real estate.
“Going dark” is not what the $SHLD valuation at Baker Street was about. “Going dark” implies an empty location most likely due to a Sears Chapter 11 or wholesale forced asset liquidation. Sears is not that case. The Baker St analysis was about $SHLD transitioning good properties for other uses. Think of it more like the 2012 transaction with $GGP when Sears sold 11 sites at $GGP malls to $GGP for $150sqft.
But lets dig a bit deeper. Here is the applicable slide from the $JCP presentation to lenders:
Notice the “lit” valuation at the “A” Malls? It comes out to ~$86sqft. That is more than a little different than the $55 in liquidation. Now, what do we mean Sears locations are “lit” and not “dark”. Take the Burlington Mall in MA here:
This means that Sears has tremendous options with its top locations. They can hold them and operate, sell the entire site, or redevelop it (pgs 15-22 of the presentation). That give the sites tremendous value and they can in no way be considered a “going dark” scenario. Now, to be sure there are plenty of shitty Sears locations. That is why in the report Baker St assigned a paltry value of $8 sqft for the remaining 1600 locations (below). Many of those are in fact “going dark” …. in this case I’d gladly take the $55 sqft assigned to $JCP locations in a similar scenario.
Finally, here is the Baker St applicable slide regarding their value of Sears’ top 350 locations :
The WSJ also made a math error in their calculations. Since there are 150 location in the bottom quartile, that value needs to be weighted more, making the value $93 sqft for the top 350 locations, not the $98 stated in the article. This means the true difference in the two presentations (JCP/SHLD) is ~ $7 sqft.
Even if we went with the $JCP figures it is inescapable that $SHLD, based on now two separate analyses (CRE of JCP/SHLD is similar) has a price sqft valuation of its top locations of $85-$95 sqft. That alone tells us there is material undervaluation in shares.
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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Todd's investing strategy is essentially long with the rare short. He seeks to buy undervalued issues with an upcoming catalyst that will help them realized.... More »
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