Highlights of Fairholme Capital's third quarter 13F (Part 3 of 9)
Fairholme Capital’s 3Q14 positions
In addition to a new position in Chesapeake Energy (CHK), Fairholme Capital Management increased its position in Sears Holdings Corporation (SHLD). During 3Q14, the fund sold its common equity positions in government-sponsored enterprises Fannie Mae (FNMA) and Freddie Mac (FMCC) and exited its stake in Genworth Financial (GNW). It also reduced its positions in American International Group (AIG), St. Joe Company (JOE), Lands’ End (LE), and Leucadia National Corporation (LUK).
Fairholme Capital and Sears Holdings
Despite Sears Holdings’ (SHLD) ongoing distress, Fairholme increased its position in Sears. In 3Q14, Fairholme bought 833,000 shares in the struggling retailer, taking a stake of ~24% in the company. According to Fairholme’s 13D released in October 2014, the increased stake in Sears is the result of a 6.25% participation in the $400 million short-term debt raised by Sears from its CEO’s hedge fund ESL Investments in 3Q14.
Overview of Sears
Sears Holdings (SHLD) is an integrated retailer with 1,831 full-line and specialty retail stores in the United States that operate under the Kmart and Sears banners. Sears is home to the online member-based social shopping platform Shop Your Way that offers rewards and personalized services.
Deconsolidation of Sears Canada
Sears Holdings completed its rights offering of its Canadian arm, Sears Canada, on November 7, 2014, to ESL Investments and its affiliates. Upon completion of the rights offering, Sears Holdings received $380 million in proceeds, which includes the $169 million received in 3Q14. Sears now has approximately 12% ownership interest in Sears Canada compared to 51% a year ago and therefore will no longer be consolidating its Canadian operations going forward.
3Q14 financial performance
Sears Holdings’ revenues decreased by $1.1 billion year-over-year to $7.2 billion for the quarter ended November 1, 2014. The revenue decline can be attributed to the following:
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The spinoff of the Land’s End business
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Fewer full-line stores in operation, 864 full-line stores as of 3Q14 compared to 903 a year ago
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Deconsolidation of its Canadian business
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A 9.5% year-over-year decline in same-store sales
Sears struggles to break even as it continues to book losses at the operating level. The company’s operating loss for 3Q14 was $490 million compared to $497 million in 3Q13. Management attributes its operating loss for the period to store closings, severance and pension costs, and operating losses incurred at Sears Canada. Due to a valuation allowance on Sears Canada’s deferred tax assets coupled with increased foreign taxes in Puerto Rico, effective tax rates spiked to 33.9% compared to a benefit of 0.4% in the prior year. As a result, the company returned a net loss of $548 million compared to a net loss of $534 million in 3Q13.