If you look at the current and recent past balance sheet of Sears Holdings, you will see nasty, nasty things. Pretty much every qualitative and quantitative value that is treasured on this site is found lacking when applied to Sears.
The company is currently selling as much as it did in 2005, while generating only about a quarter of the cash flow that it did almost a decade ago. After making $1.4 billion in net profit for shareholders in 2006, the company fell into the abyss—losing $500 million in total for shareholders in 2011, $200 million in 2012, and $700 million in 2013. Estimates for 2014 seem to indicate that this will be a throwback to 2011 for Sears shareholders, as the company is on pace to lose $400-$500 during the current year. The company hasn’t had a profit margin since 2010, when it made 0.5% on its operations net of all costs. Furthermore, it is a corporation that responded to the idea of merging with K-Mart by saying, “Yeah, we’ll do that.”
Despite crumbling in competition to the Wal-Marts and Amazons of our retail landscape, a long-term investor in Sears would have put together something quite good for himself. Why is that? Because Sears has been systematically dismantling itself for the past two decades, and the gradual accumulation of a business here, a business there has enriched the investors in Sears in a much more extensive way than a look at the core Sears business alone would reveal.
What’s happened to the old Sears in the past two decades? Let us count the ways.
In 1993, Sears spun off Dean Witter Discover. In 1997, Dean Witter merged with Morgan Stanley. For someone that had started out with 500 shares of Sears, he would now be sitting on 780 shares of Morgan Stanley. But wait! In 2007, Morgan Stanley spun off Discover Card Services to create a standalone company that could successfully compete with Visa. You got a half share of Discover for every Morgan Stanley share that you owned, so you’d have added 390 shares of Discover Card Services to your portfolio as well.
In 1995, Sears had an insurance operator under its corporate umbrella that you know: Allstate. You would have picked up 920 shares of Allstate relative to your initial 500 share investment in Sears.
Also, along the way, the old Sears transformed itself into “Sears Holdings” and “Sears Canada” so that 500 shares in the old Sears became 250 shares of Sears Holdings and 105 shares of Sears Canada.
In 2011, the company spun off Orchard Supply stores (awarding one share of Orchard Supply and one share of Orchard Supply preferred stock for ever ~22 shares of Sears Holdings), which had a rough go of it—Orchard went bankrupt and its assets got picked up by Lowe’s for $200 million.
A new chapter to the story was written in April, when Sears Holdings decided to spin off Lands’ End at a rate of 0.3 shares of Lands’ End for every shares of Sears Holdings owned. Your original investment in the old Sears would now give you 75 shares of Lands’ End as well.
Even though the core Sears’ company has been working its way towards a corporate death, it has given life to many other individual companies in the past two decades that would have taken care of Sears’ investors quite well.
Here is the summary of what happened to the true buy-and-hold investors in Sears over the past twenty years:
The initial 500 shares were purchased for $20 a piece in 1993, making for a $10,000 investment.
Now, you would have:
780 shares of Morgan Stanley worth $32 a piece, for a total value of: $24,960.
390 shares of Discover Card Services worth $62 a piece, for a total value of: $24,180.
920 shares of Allstate worth $59 a piece, for a total value of: $54,280.
250 shares of Sears Holdings worth $41 a piece, for a total value of: $10,250.
105 shares of Sears Canada worth $12 a piece, for a total value of: $1,260.
75 shares of Lands’ End worth $27 a piece, for a total value of: $2,025.
Add it all up, and over the past twenty years, your $10,000 investment in Sears turned into somewhere in the vicinity of $116,955. Not bad for a company that is a shadow of its former self, losing hundreds of millions of dollars per year.
As a personal matter, I used the case study at Sears to inform my analysis of Bank of America. Bank of America is distinguishable from Sears in that the company possesses an underlying profit engine that is set to grow with time (the problem with Bank of America has always been the share count dilution during the financial crisis and the terrible outgrowth of the Countrywide acquisition). For someone that holds Bank of America for the next twenty years, it’s plausible that you could have a situation where you are collecting new businesses such as Merrill Lynch, some international banking divisions that are considered non-core, and yes, even a clean-up mortgage division. No guarantee a spin-off will happen; that’s always up to the direction of the board, but the potential is there, and the company will likely do well even if there is no spinoff in the next 10-20 years. There is a reason why Buffett made Bank of America his fifth-largest investment (indirectly speaking, since he won’t exercise the Bank of America warrants until 2021).