searsIn January of 2009 (nearly three years ago, which is ironic), I went bearish on Sears due to a variety of reasons, the least of which was less than competent management (hedge fund managers don't necessarily make good department store managers), macro conditions and fundamentals sloped towards hell. Although this was initially a very profitable trade, the rip roaring bear market rally of 2009 shredded the short profits - turning them into losses if uncovered, and simutaneously disguised the many issues that we brought up in our initiail short analysis. Well, you can run but you can't hide, and the truth will ultimately rear its head. On that note...

CNBC Reports In the Wake of Poor Sales, Sears to Close Stores 

Sears Holdings plans to close between 100 and 120 Sears and Kmart stores after poor sales during the holidays, the most crucial time of year for retailers.

In an internal memo Tuesday to employees, CEO and President Lou D'Ambrosio said that the retailer had not "generated the results we were seeking during the holiday."The closings are the latest and most visible in a long series of moves to try to fix a retailer that has struggled with falling sales and shabby stores.

Sears Holdings Corp. said it has yet to determine which stores will close but said it will post on the list online when it's compiled. Sears would not discuss how many, if any, jobs would be cut.

The news sent shares of Sears [SHLD  36.50    -9.35  (-20.39%)   ] to their lowest point in more than three years, and it was posting the biggest percentage decline in the S&P 500 Index.

As does Bloomberg: Sears Plunges on Plans to Close as Many as 120 Stores

Sears Holdings Corp., the retailer controlled by hedge-fund manager Edward Lampert, tumbled the most in... Sears fell (SHLD) 18 percent to $37.65 at 9: 42 a.m. in New York,...

As shoppers may realize, the retail store is at a disadvantage this year for sales activity has simply been weak. Thus,  U.S. Stores Ramp Up Bargains as Sales Lag. I discussed the effects of this on retail malls last week in The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's The Internet! The kicker is the effect on Sears will be most exaggerated since it has real estate, fundamental, macro, industry induced and management issues to deal with as well as the paradigm shift towards internet shopping (which it should have been able to hedge with Sears.com and Kmart.com, alas this brings us back to the management issues, doesn't it?. BoomBustBlog subscribers, please refresh your memories by downloading the following...

 

pdf SHLD ResearchReport 29May2009 (398 KB)

spreadsheet Retail Sector Shortlisting 042110 Pro Addendum (355 KB)

Those who don't subscriber can view the 4 page preview below. Access to our services without direct interaction with our staff is now avalable for as little as $11 per month.

Sears reportSears report1Sears report111

 

 

Published in BoomBustBlog

Here's the rub upfront for those who desire quick summaries:

  1. We had a massive CRE bubble which bust - See The Commercial Real Estate Crash Cometh, and I know who is leading the way.
  2. The CRE bubble bust, even as disguised and manipulated as it was, claimed some serious retail casualties. See GGP and the type of investigative analysis you will not get from your brokerage house.
  3. A public-private partnership of misdirection allowed the popping bubble to be disguised. See The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
  4. Even with the "kicking the can down the road mentality", fundamental and macro realities are bound to rear their heads. See The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance and then see Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate 
  5. ... and will do so both in the US and abroad, see The "American Realist" Says: Past as Prologue - Re-blown Bubble to Pop Before the Previous Bubble Finishes Popping!!!!
  6. Those who truly believe that the more conservative EU nations will skate past this are sorely mistaken. See "Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly?" Then see The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History
 
The fact of the matter is that there is a very fundamental, and sparsely recognized reason for retail real estate to take a tumble.
When discussing the proposed Dutch real estate short release to my subscribers a couple of weeks ago (see The Real Estate Recession/Depression is Here, Eurocalypse Style and The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History), I asked my analysts if there was evidence of increeased retail web activity affecting European mall sales. I know that was the fear in the Netherlands (see the last two videos at the bottom of the post here) and the reality in the states (see below). After all, Amazon.com doesn't pull in all of those hypergrowth billions of retail online dollars through physical malls. And if Amazon is making it, some mall store is losing it. Now, said mall store could open up its own website and potentialy successfully compete with Amazon (think Walmart.com, etc.) but exactly where does that leave the overbuilt, and probably over leveraged mall operator???
Exactly! Fu@ked! Professional subcribers can see the rapid growth of online retailing in Europe via this document -File Icon Online Retail Sales Penetration, as excerpted...
image005

Online retail sales in Europe - Source: comScore Media Metrix

               In 2010, the online retail sales penetration increases noticeably among all major European nations, reaching an average 74.5% in Jan 2011 versus 66.0% in Jan 2010. This is a sharp increase. 

The UK recorded the highest Retail site penetration at 89.4% of the total online audience (up 6.3 points from last year). The Netherlands was ranked fifth with penetration of 80.2 percent (up 4.9%). The average minute per visitor for Europe was 52.4, close to 50.2 for Netherlands. For UK and France, this figure is above 80 minutes. This could imply that online spending would increase more sharply in the Netherland than in the UK, France and Germany. 

You see, during the bubble, a massive amount of retail space was built - much more than could possibly be effiiciently utilized. This is particularly true in the US, but also valid in Europe and even Asia as well (re: Ordos of empty cities fame). According to Howard Davidowitz, "We have 21 sq. ft. of retail selling space for every man, woman and child in this country." That's a tad bit much, eh? Do you know what makes it even worse? That selling space is becoming even less valuable, becuase more and more (and more) sales are being done online versus in a physical mall. I commented on Davidowitz's take, which is lockestep with mine this time last year: Davidowitz On Overt Optimism In The Retail Space And Mall REITs, Stuff Which We Have Detailed Often In The Past 

In December of 2009, I posted and article and accompanying research titled, "A Granular Look Into a $6 Billion REIT: Is This the Next GGP?" The following are excerpts from it:

The results of these activities have been congealed in our analysis of Macerich’s entire portfolio of properties (118+ properties), including wholly owned, joint ventures, new developments, unconsolidated and off balance sheet properties. Below is an excerpt of the full analysis that I am including in the updated Macerich forensic analysis. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).image001.pngimage001.pngimage001.png

Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV’s above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates. Now, if you recall my congratulatory post on Goldman Sachs (please see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), the WSJ reported that the market will now willingingly refinance mall portfolio properties 50% LTV, considerably down from the 70% LTV level that was seen in the heyday of this Asset Securitization Crisis. Even if we were to assume that we are still in the midst of the credit bubble and REITs can still refi at 70LTV (both assumptions patently wrong), rents, net operating income and cap rates have moved so far to the adverse direction that MAC STILL would not be able to rollover the debt in roughly 37 properties (31% of the portfolio) whose LTVs are above the 70% mark – and that’s assuming the credit bubble returns and banks go all out on risk and CMBS trading. Rather wishful thinking, I believe we can all agree.

For those of you who didn't catch it in the table above, I'll blow it up for you...

Notice anything familiar??? There is a very strong chance that every single property on the list detailed in the forensic reports will be taken over by the lenders, that's a lot of properties. Subscribers should reference MAC Report Consolidated 051209 Retail MAC Report Consolidated 051209 Retail 2009-12-07 03:46:49 580.11 Kb , MAC Report Consolidated 051209 Professional MAC Report Consolidated 051209 Professional 2009-12-07 03:48:11 1.03 Mb, those who don't subscribe should download my  CRE 2010 Overview CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb. For those who want access, click here to subscribe!

So, why has Macerich and the entire REIT sector defied gravity despite the fact they are getting foreclosed upon faster than a no-doc, subprime, NINJA loan candidate who just lost his minimum wage job amongst all of these “Green Shoots”??? Well, I took the time to answer that in explicit detail... I urge all to read The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?

More hard hitting BoomBustBlog commercial real estate commentary and research from Reggie Middleton:

Archived retail research and opininion from BoomBustBlog...

This is an example of exactly what we were talking about in our subscription documents regarding the ridiculous run up in consumer discretionary shares when taken in context of  the American consumer and the stress born from the Pan-European Sovereign Debt Crisis (click the link for our detailed analysis). You can find the earlier articles in this consumer mini-series as follows:

  1. What We’re Looking For To Go Splat! Part 1: macro arguments against the spike in retail stocks
  2. What We’re Looking For To Go Splat! Part 2: A list of 147 retail stocks with attributes that causes on to question their gain in prices, with a shortlist of companies who may very well go “splat”!
  3. Is the Consumer Really Back? Well, It Depends On If You Believe What the Government Tells You or Whether You’re An Indendent Thinker – The American Recovery and the North American Economic Outlook.

  

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Another BoomBustBlog Susbcriber victory to notch on your respective belts. Kudos! I'll keep this post short and simple.

Courtesy of William BanzaiCourtesy of William Banzai

Frist... Thursday, 16 June 2011 and before the Groupon IPO...

What Does Groupon and The Matrix Have in Common?

BoomBustBlog subscription document icon Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36): Groupon_Valuation_Page_03

Second... Monday, 26 September 2011, Just before the IPO launches...

I Suggest Groupon Offer Coupons To It's IPO Investors, They're Going To Need Them

For those who are being pitched this IPO by their all so trustworthy bankers and brokers should feel free to download our subscriber update to the Groupon piece File Icon Groupon Revenue Restated,

 

Third.. Sunday, 13 November 2011

What's The Best Way To Profit From Groupon's IPO?

Groupon_charg

'Nuff said! Click here to subscribe!

Published in BoomBustBlog

Over the summer, in June, I posed the question What Does Groupon and The Matrix Have in Common? Groupon had an unsustainable business model that pushed phenonenal growth, but into rampant competition with practically no barriers to entry. I also broight up suspicous accounting irregularities, an issue that I haven't read about in the media for analyst reports. Long story short, any fundamental investor and many retail businesses who actually believe in the stated valuations and viability of Groupon and its extant business model have yet to be unplugged. Which color pill did you pick? Subscribers should reference Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36).

As subscribers should remember, I posed (quite early on) whether it was "Right To look To Groupon’s Sales As A Performance Metric?"

Groupon’s revenue consists of the gross amount paid by customers for purchased Groupon while gross profit is the amount that the company retains after paying its merchants an agreed upon percentage of the purchase price to the featured merchant. So the comparable number for price-to-sales to use for Groupon is gross profit, or the fees it collects from merchants, which the management has correctly stated as the best proxy for the value created by the company. To put things into perspective, if eBay used the same math as Groupon does, it would have report revenues of $61bn instead of $9bn. The company reported gross profit of $530m over last 12 months. At $25bn valuation that would put the valuation at 42x “comparable sales”. To put things in perspective, Google trades at Price-to-sales of 5.8x, Apple at 4.7x, Microsoft at 3.3x, Amazon at 2.6x and Yahoo at 3.4x.

As excerpted from page 3 of the BoomBustBlog subscription document Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36):

Groupon_Valuation_Page_03

In particular, I would like to point out this nugget from said report...

“Groupon’s revenue consists of the gross amount paid by customers for purchased Groupon while gross profit is the amount that the company retains after paying its merchants an agreed upon percentage of the purchase price to the featured merchant. So the comparable number for price-to-sales to use for Groupon is gross profit, or the fees it collects from merchants, which the management has correctly stated as the best proxy for the value created by the company. To put things into perspective, if eBay used the same math as Groupon does, it would have reported revenues of $61bn instead of $9bn. The company reported gross profit of $530m over last 12 months. At $25bn valuation that would put the valuation at 42x “comparable sales”. To put things in perspective, Google trades at Price-to-sales of 5.8x, Apple at 4.7x, Microsoft at 3.3x, Amazon at 2.6x and Yahoo at 3.4x.“

image037

Well, as it turned out it appears as if I had a very valid point. Three months later in September, I Suggested Groupon Offer Coupons To It's IPO Investors, They're Going To Need Them. I felt the reason was obvious. As quoted from the NYT Deal Book column: Accounting Change Cuts Groupon’s Revenue

Groupon disclosed a major accounting change on Friday, essentially halving its once-jaw-dropping revenue after it encountered resistance from regulators with its filing to go public.

Groupon, the online coupon titan, announced separately that its chief operating officer of about five months, Margo Georgiadis, had stepped down.

The changes in the revised filing and the executive departure are likely to spur additional questions about Groupon, a much-envied rising star in the constellation of new Internet companies. The company has grown rapidly, but its ability to sustain that growth, the ways it measures growth and the eccentric public persona of its chief executive have come under fire at times.

Despite those criticisms, and the current turmoil in the stock market, Groupon is still aiming to go public next month, people briefed on the matter have said. That offering could value Groupon at more than $15 billion.

The company’s revised filing for an initial public offering also incorporated portions of a memorandum sent to employees by the company’s chief executive, Andrew Mason, that were subsequently leaked to the press. Analysts had questioned whether that letter ran afoul of a mandatory “quiet period” for companies seeking to go public.

The revenue accounting change is Groupon’s second since it filed to go public in May. Early last month, it removed references to an accounting metric that critics said misleadingly showed the company turning a profit.

In its latest filing, Groupon says that it has restated its financial results for the last three years “to correct for an error” in the way it reported revenue. Before, the company reported as revenue all the money it collected from customers, including cash that was later paid out to Groupon’s merchant partners.

Now, Groupon is reporting what it calls “net revenues,” which exclude the retailer payouts.

For example, in a version of the prospectus filed last month, Groupon reported $1.52 billion in revenue for the first six months of the year. In Friday’s filing, that number is now called net revenue and is $688 million. The original $1.52 billion figure is now counted as gross billings.

Groupon’s accounting change is the inverse of what Google did before its own public debut in 2004. The search giant initially excluded cash that was shared with distribution partners in its revenue figures. It later changed its revenue to include those payouts.

Groupon: Accounting Shenanigans That Can Make A Leprechaun Blush! - OR - I Told You Not To Trust These Guys!!!

Investors who were not BoomBustBlog subscribers at the time yet somehow found religion (click here to subscribe) and who were successfully pitched this IPO by their all so trustworthy bankers and brokers should feel free to download our update to the Groupon piece File Icon Groupon Revenue Restated, and don't forget to show a copy to those who are all so trustworthy. The valuation bands in both documents still hold quite true from our opinion. In the meantime, you can see how the GRPN stock has performed. Remember, bankers can easily create synthetic demand which will pop the stock giving a strong positive return up front by floating a very small number of shares and releasing it to a very hungry, expertly marketed to, yet highly unsuspecting (read as not BoomBustBlog reading) public. This has absolutely nothing to do with fundamentals, and this is a fundamental analysis site. 

The results were quite predictable...

GRPN

 

We have discussed in explicit detail, the valuations and realistic expectations of several "Internet" companies in the recent past. As a refresher:

  1. A Realistic Forensic Valuation of LinkedIn – There Ain’t No Surprises Here…
  2. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  3. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
Published in BoomBustBlog

This is a fairly detailed review of Dine Equity (DIN) that I have decided to release, in part, to the public. Subscribers who are wish to view and download the full analysis can scroll down to the bottom to access the appropriate links.

Background

Early in 2010 we performed a comprehensive scan of retail companies, believing that much of the market actually bought into the hype that was labeled "recovery". If we were right, than profitable short plays were available. As it turned out, we were right on point, and profitably so. I broke the retail scans into two posts with the first one detailing methodology and reasoning and the second one containing the actual initial scans:

  1. What We’re Looking For To Go Splat! Part 1 Friday, April 23rd, 2010
  2. What We’re Looking For To Go Splat! Part 2 Monday, April 26th, 2010

We created a list of 141 retail companies whose market cap is greater than$500 million and share price is over $10 that we used to create a universe of potential retail shorts. From that list we:

Published in BoomBustBlog

A BoomBustBlog reader sent me this in the mail last night and I thought I would share it with the community. I feel it is also worth taking a refresh of the consumer sector research that we released a few months ago...

Reggie:

I took a screen shot of my play money account and the shorts from the four part series on why the consumer isn't coming back.  Consumer retail has been nailed since May and from the 4 stocks you picked, here are two I chose to follow.

This is an example of exactly what we were talking about in our subscription documents regarding the ridiculous run up in consumer discretionary shares when taken in context of  the American consumer and the stress born from the Pan-European Sovereign Debt Crisis (click the link for our detailed analysis). You can find the earlier articles in this consumer mini-series as follows:

  1. What We’re Looking For To Go Splat! Part 1: macro arguments against the spike in retail stocks
  2. What We’re Looking For To Go Splat! Part 2: A list of 147 retail stocks with attributes that causes on to question their gain in prices, with a shortlist of companies who may very well go "splat"!
  3. Is the Consumer Really Back? Well, It Depends On If You Believe What the Government Tells You or Whether You’re An Indendent Thinker - The American Recovery and the North American Economic Outlook.

Those looking to subscribe should click here. Next up, Reggie Middleton takes a Big Byte out of Apple!

Published in BoomBustBlog

Hat tip to BoomBustBlogger shaunsnoll for bringing this one to our attention. Unfortunately this one is for subscribers only, but can be accessed with a retail monthly plan. Here are the highlights of a company drowning in debt, barely able to be meet debt service, susceptible to a falling euro and facing gloomy prospects trading at multiples that are higher than all of its peers.

  • The company has a high debt-to-equity of over 107% and a net debt-to-equity of over 111% as of quarter ended March 31, 2010.
  • Interest coverage for 1Q2010 was low at jut over 1.ox, however higher than 1Q09. Annual interest coverage ratio has continuously declined from just under 2.8x in 2007 to about 2.6x in 2008 to less than 1.7x in 2009.
  • The business can be hurt by a Euro drop, which is currently occurring at a historically unprecedented pace, as the company is expanding its business outside US (primarily in Europe).
  • Approximately 15% of the debt is payable in 2010, which accounts for 76.0% of annualized operating cash flows for 2010.
  • The Company’s ROIC over the last few quarters has been continuously declining except its recent improvement in 1Q2010. The Company’s weighted average cost of capital has been far higher than the recent figures shown for ROIC. What we have here is a classic case of destruction of economic value!
  • Currently the share is trading at a very high P/E of over 35x. The share price has more than doubled over the last one year without any significant improvement in fundamentals

Subscribers may access the review here: File Icon 050510 Release Candidate

Published in BoomBustBlog

This is a continuation of the reporting yesterday on the American consumer. You can find the earlier articles in this consumer mini-series as follows:

  1. What We’re Looking For To Go Splat! Part 1: macro arguments against the spike in retail stocks
  2. What We’re Looking For To Go Splat! Part 2: A list of 147 retail stocks with attributes that causes on to question their gain in prices, with a shortlist of companies who may very well go "splat"!
  3. Is the Consumer Really Back? Well, It Depends On If You Believe What the Government Tells You or Whether You’re An Indendent Thinker - The American Recovery and the North American Economic Outlook.

Is sustainable spending back? Can we rely on the consumer to justify those gains in retail, commercial real estate and casino stocks? Well the most recent consumer spending data points have been released through the pop media, and most of the mainstream is all abuzz with notions of consumer recovery. We at the BoomBust aren't wholly convinced, though. We are still facing the same stalwart, stiff headwinds as last year (housing/real estate, unemployment, credit, deflating assets), simply blowing from a slightly different direction.

Published in BoomBustBlog

A quick summary of mainstream American news broadcasting shows a bright green light toward economic growth as the “Great Recession” finally disappears in the metaphorical rearview mirror.  A variety of shapes and letters have been used to describe the path of the economic recovery, most famously, the “V shaped” return of American output.  A quick look at data from the 2010 1st quarter Gross Domestic Product report released by the Bureau of Economic Analysis on April 30th reveals the following:

  • GDP grew at a 3.2% annual rate, as compared to 5.6% in Q4 2009. As forecast by Roubini et. al., GDP growth rate would collapse once the effect of stimulus measures wore off.  I have claimed that the structural changes needed to effect true insurance against an economic relapse borne from financial contagion were never enacted, hence we never fixed the problem that caused the first crisis, leaving open the possibility for a another crisis in the very near future.
  • Personal Consumption Expenditures increasing at a 3.6% rate, with non-durable goods purchases climbing to 11.3%
  • Personal Savings declined from 3.9% to 3.1% (even as personal disposable income increased by $41.7 billion in comparison to $94.4 billion in Q1 2009). This gives a very likely source of the spending boost.
  • Motor vehicle output contributed to 15% of the total increase in Real GDP (.52% of the 3.2% annual rate)

An initial take away from the data is that the American consumer is alive and kicking after almost two years in the gutter.  However, a look back into the makeup of US growth from  2006 shows a different style of consumer makes the recovery more of a question than a definitive event.  In regards to 2006, data from the BEA release last Friday extends back to Q2 2006 on a quarterly basis.  During a one year period spanning from Q2 2006 to Q1 2007 (arguably the high of bubble mania), personal consumption expenditures contributed to the percent change in total GDP from 93% to 1700%, while its largest positive contribution to GDP in the past year has been less than 90%.  In a sentence, the bubble expenditure behavior has not returned (and probably will not return in this generation), and those relying on its return to support business models and valuations (CRE, retail, manufacturing, advertising, etc.) will be sorely disappointed.

Published in BoomBustBlog

In my previous post, I gave a quick snapshot of the retail sector macro environment.  In this post I will present a list of potential shorts for subscribers as well as the entire universe of companies used for those who don't subscribe.

Below is a list of 141 retail companies whose market cap is greater than$500 million and share price is over $10 that we used to create a universe of potential retail shorts.

[iframe http://spreadsheets.google.com/pub?key=t-O2vhJY5LECZgfPgzCuSMQ&single=true&gid=0&output=html&widget=true 600 600]

Then we:

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