Horizon Kinetics Market Commentary Out; Talks Sears

In roughly hour long Horizon Kinetics 3rd Quarter Market Commentary released October 15th, President, Co-Founder and Senior Portfolio Manager Steven Bregman provided thoughts of interest on Sears Holdings (NASDAQ:SHLD).

Sears Store

Horizon Kinetics, LLC, whom operates Kinetics Asset Management LLC founded in 1996 on it’s web site describes itself as:

an independently owned and operated investment boutique that adheres to a long-term, contrarian, fundamental value investment philosophy that the founders established 26 years ago

It’s an interesting talk and well worth your time and we’ve transcribed the section on Sears Holdings which is particularly interesting in many ways. He discusses common complaints about the stores, how Eddie has Sears structured potentially in a worst case scenario, and more.

While we recommend you view the whole thing, here is the transcribed excerpt about Sears:

Now Sears – what I’ll say about it is – I won’t say too much, because everyone loves to hate it – everybody has a different perspective on it – and as I told people myself, if most of when you’ve had Sears was personal, direct experience of having been in the Sears store – see I really hadn’t been in the Sears store before about 3 years ago – and I had a really horrible experience. I had to judge Sears by my experience of it as a retailer. And I could look around; I could be very clever about it. I could look at how the shelves aren’t stocked, I could see how they would not keep the store clean, I could see how – you know, if I’d been to it a couple of times over the course of a few years, that there were fewer employees, I could see how they were shaving costs and not supporting the business, and so forth and so forth and so forth.

And yet, those observations, as keen as I might make them based on my life experience and knowledge, would actually be – could be very misleading to me. Based on, one of the – when you learn logic and problem solving, you have to learn about systematically, the kind of errors we can make. One type of error to make in problem solving is availability error. When you make a judgment based on the available information it’s [inaudible], but you don’t know or haven’t thought about all the information that might apply.

So, with Sears, you can say a thousand things about how bad their stores are, but – that’s good and important, you have to reconcile that somehow, or evolve your thinking to incorporate some other information. One of the most important bits of information, is that starting some years ago, Eddie Lampert, who controls the company, and has a lot of personal wealth invested in stock, began restructuring the company, financially. So, after that, substantially, most of the debt of Sears is secured by a whole bunch of stores. Those are mostly lease stores, and there’s not much more – there’s not really substantial corporate debt aside from that. But, the debt is associated with those stores. However, there are a whole series – a whole package of owned stores. We’re going to presume those have a lot of value, that are in bankruptcy remote, or ring-fenced city areas. They don’t back any debt – they’re not leaned – they can’t be bought.

And then there are brands, like Kenmore and Craftsman, which are also in bankruptcy remote vehicles. They’re [inaudible] moved a couple of different ways, including their brand names [inaudible] being sold to a captive re-insurance subsidiary. The stores themselves actually lease both of those names. Well, when we look at that structure – some time ago – we can see that strategically, what he set up was a possibility that indeed, Sears as department stores could fail – might not be able to pay their own debt – but it really wouldn’t affect the corporate parent; that would be only tied to – the only recourse of a lender might be to that particular store, that particular inventory, or the particular land [inaudible], or however they did that. So it looks to me that he set up a structure which Sears, the holding company, is really like a holding company in different things that they do. And one part, they have owned land or property, another part they have certain kinds of other securities and assets.

So, I can’t know exactly what he’s doing. He seems to be a person who plays things close to the chest, and plays a long game, but the fact that some stores are losing money, or that I might see a headline that says they can’t pay back certain debts, it doesn’t concern me the way that it would if this were an ordinarily structured company. At the moment, I don’t see anything different to do.

Now, the problem with thinking about Sears, is that Sears is more complex, and there’s less information available about [inaudible: what they own as?] properties or whatnot. And my opinion, in that sense, is [inaudible]. But, there’s something that does help me orient myself – the market is down a lot, what the hell is happening? Well, sometimes you think about it, you make an error, so, if you look at another company, which is a lot less complex, there, the strategy, and the business, and the dynamics are much clearer, and I really don’t have a lot of doubt about it, in the range of doubts one can have, as a public market investor. I think nothing’s wrong with this. They’re down, but there’s nothing wrong with the company. There isn’t anything wrong with the valuation. Then I say to myself, well, it’s not the company. Something else is going on.



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