P&L: Sears Will Get One Last Chance for Turnaround in 2017

on what's going on in the world of retail. Well, I guess we shouldn't even call it necessarily just retail because Sears Holdings has become more than just a retail story. It is a finance story in a big way. In here to tell us More's Bert Flickinger, Managing director Strategic Resource, a group. He can be followed on Twitter at Bert

Underscore Flickinger. Alright, Bert Underscore Flickinger Underscore what's going on for us at Sears Holdings Because they just got a loan but a credit facility, but they're also closing stores.

They're closing stores, and the worry, PIM UH to your good insight is same store sales or in a free fall, declining anywhere from UH seven to ten percent on an annualized basis and Typically when someone another department store chain, for example Macy's closes stores, uh Macy's same store sales will increase in the surviving stores or the remaining stores.

That's that's not the case with Sears, and it's f D Reports and Credit and tell of have reported very well for a long time on Sears holdings came out of a number of others. It's it's the ones that can't rebalance themselves beyond the assets. The other thing FD Credit and tel reported those the average Sears um lease pays out at about five dollars and fifty cents of square foot, and on the open market it's probably worth something.

We're closer to seventeen to twenty dollars of square foot. So, like you said, okay, so sevent square foot versus five and a half bucks. Yes, I think we can do

the math. We could definitely do the math. And we're taking the math that Cheektawaga, New York, former home of George Westinghouse and Westinghouse in the intersection of the transportation border between the US and Canada, Sears is closing its store in the GALERIUMI mall profitable store, very good customer count but Sears can make millions assigning or flipping that lease or selling it back to Galeria as supposed to making a few hundred thousand years an operator of that store.

At the same time, Sears gets to monetize its inventory and invest in other more profitable activities rather than retailing. Has Sears ever focused on online retailing in the way that Walmart says they want to focus on online retailing. That's the big opportunity that you're referencing as Sears is their online but not near where they need to be.

And what we saw on our store checks across the country from the Carolinas to California is Sears has tremendous quality of pair, particularly in lands and so the UH finishings, the fifth the fabric, the quality, the value, the color palette. UH clearly eclipses Target, UM is on par with Coles and the bonton the other moderate UH department store chains. But Sears can't get the customer count in. So you really have to go back and retail history. And we're

both retail historians. Is Arthur C. Martinez, CEO of Sacks, fith aving Oh, Bob Mettler, president of Robinson May They go in with Peter Gerjeski of Young and Rubicam creates softer side of Sears and get people coming in to buy apparel. The margins are two to three times higher. UH Sears wins financially. Metler and Martinez save Sears the first time twenty years ago. Lambert to his credits, hired

a lot of good people. If you could get the customers to give him one last chance, and with a twenty million dollar secure letter of credit that can go to UH two hundred million, that can go to three hundred million, this might be the one last chance for Sears in twenty seventeen, but it's Larry served from F and D and credit until said, if Sears doesn't do it this time, they gotta start selling the catch registers and cleaning out the cash drawers. All right, let's get

through a couple of other retailers, because we don't. I always want to get your expertise, Neiman Marcus Group burged off Goodman, what's going on there? Uh pim the bonds are really struggling. The same f D report Credit and tell the bonds of trade of the mid seventies are lower.

So while Sears is trading a triple C plus uh Neiman Marcus Burg Doors trading at triple C. And with the Trump New York White House, it's really tough to get into two of their most profitable stores, Burg Doors Men's and Women's on uh fifth Avenue, so that that's really problematic, especially after losing almost half a billion dollars in the third quarter. Tell us about Jake Crew, Jay Crew, uh fall Uh, It's it's gonna be tough. They went from the penthouse to the basement and just a few

years has probably got enamored with beach houses. The qualities uneven in the stores, the inventory is wrong, the color pellette of what's selling isn't always right in stock. But never bet against Mickey Drexler seminal genius of design and retail uh and say same with Gena Lyons. So we're hoping they come back, but they've dug themselves a big hole. So it really depends on the vendors there as well.

But nine nine percent of the vendors supported Sears. Hopefully they'll support j Crew and niemen Bergdorf to the tell me about what's going on with J C. Penny is that to turnaround that's working. It's a turnaround that's working because they threw out Bill Ackman and as proverbial carpet baggers from Pershing Square that didn't know the detail and rhythm and retail left Penny on death store step another sex along Steve said Off X CEO comes in, teams

up with Mike Aullman. They created dream team around Marvin Ellison who got trained by one of the other seminal geniuses of retail, Frank Blake, and Penny UH partnership with Sephora. They've got five more stores to do for perspective. Sephora on the Chansa Liz attracts as many visitors in Paris is the Eiffel Tower and the Eiffel Tower as longer hours co exclusive with with Disney, Penny dot COM's building

Penny Homes Building. So Penny is a big comeback as his toys or us and both of them were left for dead, both the bonds UH and the credit ratings just a few years ago. And it's it's great to see those Rocky Bellboll type comeback stories. Marvin Ellison at j C. Penny doing the job. Stock is up more this year. Marvin Ellison's the Rocky Bellball of retail retail uh or or the Bob townsendavas Uh we we try harder and the win. I want that. Maybe, you know, maybe you can print that as a banner for the

for the new year. Tell me about what's going on now at the Macy's because of course that is a continuing story, Macy's continuing story UH closing hundred stores, the Macy's International and Macy's Bloomingdale looks like it has high potential. UH. Macy's has more fashion resources. Bloomingdale seems to be hitting

on all cylinders. Is we were going through North From stores, they seemed to be having a struggle with their associate shifting sales, particularly in the Shoot apartment to North from dot Com, so the commission sales people got less money they were interviewing at Bloomingdale's. We saw the same thing at the Neiman Marcus stores in Chicago, UH, California and elsewhere. So so it seems like Bloomingdale's and Macy's is recruiting the best of the brightest in a shrinking sector and

ultimately Macy's Bloomingdale's is the consolidator in the winter. All Right, Well that's Terry Lundgren at Macy's that shares a Macy's up about four percent this year with Jeff Janetta and Karen Hoga. Very good leaders, quick ten seconds, Kate Spade, get bought or not bought. We'll get bought. It's selling in Paris, it's selling in Pasadena, California, in every place in between. People love the brand. Thanks very much, We

love you. Thanks a lot. Managing Director, Strategic Resource Group, talking about all things retail, Washington, d C. On January the twenty one. Well, that will be a day after the inauguration. What will the district leaders wake up to? Here to tell us more is David Howell. He is the executive vice president and chief information officer for mcinnerney Associates, based of course in Washington, d C, which is home to Bloomberg one and one oh five point seven h

D two. David Howell, thank you for being with us. Thank you. You are a veteran of the real estate industry in the district and in the region, and I wonder if you could describe for people that are not familiar with it, what is the biggest mistake we all make about new administrations coming to Washington. Well, I think there's a general um misperception that there's this avalanche of new people that come to town that provide a huge shot in the arm for our real estate market. UM,

And that historically has not been the case. We don't think it will be the case this time. Either. It will be a boost, but it's not a it's not a boom, and it's not a boom because just the numbers of people that will turn over in the new administration, they're not necessarily going to have the money to buy new homes. Absolutely. You know, there's roughly four thousand presidentially appointed jobs, um. And first of all, they don't all happen on day one. It can take as long as

twelve and eighteen months to fill all those positions. Our experience shows, and even thus far with the new Trump administration, roughly half the people that will fill those jobs already live in the Washington area, and roughly half the ones that are coming from out of town are going to rent rather than buy. So every sale is a welcome one. We we treasure every transaction, UM, but it's generally not

enough to move the needle in a major way. Fifty homes are sold annually in the metro DC area, and you've got a population of anywhere from six hundred and eighty thousand, and then it swells well over a million every day when commuters come in. Tell us some of the areas of Washington, d C. That you see are thriving and improving, albeit without the effects of a new administration. Sure, the district itself, that market has been incredibly hot, where

the suburban markets have not been quite as hot. So the immediate surrounding counties, UM, in cities City of Alexandria, Arlington, Fairfax, Montgomery County, in Maryland, Prince George's County, they're all doing fairly well, but nowhere near as hot as the district. The district's been our hot at market for the last several years. UM. Why is that? UM? I think first of all, the district's done a very good job in UM sort of reorienting themselves to be more attractive to businesses.

Are like most other major cities, UM, we have enormous traffic issues, and I think people are making quality of life decisions that they want to live closer to where they work and not have to deal with the enormous commutes that sometimes suburban drivers and commuters have to deal with UM and the district has just become a very hip cool place to be, a hip cool place to be. But you say that new construction is not keeping up with household formation. Why not? Well, first of all, we've

got a lack of land UM. Like again most of the major urban areas, UM is just tougher to find places to build UM, and it's it's a challenge to get developments through. All the jurisdictions have fairly long development processes to go through. And based on the studies that we read, UM, there's roughly a shortfall of fifty thousand household units UM to keep up with household formation over the next five years. So that contributes done ongoing shortage

of supply, particularly acute in the district. All right, so you've got tight inventories. Talk about the expansion of public transport and the rehabilitation of public transport in the district. Well, it's it's hugely important in our metropolitan area UM, and as some of your listeners may have heard, our metro system has had some challenges of late, being diplomatic, which is appropriate for being in Washington. UM. We've and so

Metro has kind of got to get get its act together. UM. But frankly, I think one of the interesting things we've seen it was tinging our agents a couple of weeks ago with the safe track issues UM, and those are the taking lines down for a period of time where they're having to do extended maintenance. People are changing how they're commuting UM. One of our agents was saying that a lot of her clients have actually just switched to

Uber because it's more convenient. And when Metro is back in its rightful place, UM, they may have a bit of a battle getting some of those writers back. As they say, necessity the mother of invention. Tell us about interest rate increases, what I really have a change on on whether people buy or don't buy in the area. It certainly does have some impact, you know, with the with the rate increase of roughly a half a percent over the last six weeks or so, that's taken about

six percent of buying power away from prospective purchasers. And that's certainly UM is a factor. But we've also learned that interest rates are a factor and whether someone buys a home, they're not the factor by any means. When our company started over thirty years ago interest rates for people still bought and sold home, so it's it's not just that number, but there's no doubt that on the short term it has both a real and a psychological impact when you lose that buying power and you see

rates ticking up. UM. One of the things it does is it gets some fence sitters off the fence and into the market before they feel like they can get priced out of the market because rates are too high. But because we've had rates low for such a long period of time, we don't really know where the psychological wall is. UM. If it's five percent, five and a half percent of rates get that high, if buyers finally

really get discouraged. But right now, let's face at four person interest rates, which is where they are right now, is still from an historical perspective, very low and very attractive. Thanks very much, David Howe, Executive vice president, chief information Officer McNerney Associates. Sixteen the year marks the beginning of the end of hedge funds as we've known them, so writes Katherine Burton. Cathy Burton is our hedge fund reporter joins us Now for Bloomberg News. Kathy Burton, thank you

very much for being with us. You're welcome. So tell me about agonists. This is really from Milton. It means it's about Samson wrestling with adversity and trouble. You say, now, the title of your report is hedge fund Agonists. What's going on in the hedge fund world? Well, the hedge fund world is finally or investors are finally realizing that they shouldn't be paying managers to in the normal two

and twenty as it's known. Uh. Basically, the managers get rich off the management fees even if they don't make money for their investors, which they haven't been doing for several years now. Is that why the theme, at least for Robert Mercer's The Hedge Fund Titan Robert Mercer the theme for his holiday costume party was villains and Heroes. No, I think that's more of a political uh uh, political comment.

But he's one of the managers who's actually managed to make money all these years, all right, So if he's managed to make money, then isn't it just a natural selection in which those that don't won't have customers, and those that do, we'll have customers that are willing to pay the fees or not really No, that's exactly what's happening now. We're seeing a many more closures UM then

we have in the past. UH. This year looks to be on track to have the most closure since that's an innate financial crisis, and people expect to UH, people expect that the industry could be cut by as much as a quarter over the next year, as much as a quarter. What what takes? What took the investors so so such a long time to actually do the math and and discover that they weren't making the money they

thought they were. I think what happened is that a lot of the money that came in came from pension funds, and they didn't start investing until relatively recently. So they and they're very slow moving, So they sort of started to invest just as returns overall started to fall, and so it probably took them five or so years to get into the program, to figure out it didn't work, and then to get out. That's what's happening now. Well, you document that public retirement plans in Kentucky, New York,

New Jersey, Rhode Island, they pulled the plug. They pulled money rather from hedge funds, as did the State University in Maryland and other endowments. That's correct, and there are other people that are. If they're not cutting their allocations the hedge funds, they're definitely cutting the number of managers they use. The University of California is doing that, and they may also end up cutting their exposure as well if they continue this trend. What kinds of hedge funds

will be left? Just those that perform well in the past or have a track record that is measurable in decades. Yes, and I think that it's going to be uh the smaller funds to a lot of them that are more nimble, that are able to make money. Uh. A lot of the funds that used to be good are their return suffered as they added assets. Now those assets also translated, as you described, into fees, and those fees translated into things such as higher real estate prices in New York

City's condos and a sky. That's absolutely correct. Um, the number of billionaires on the FORBS four hundred has grown a lot amongst the hedge fund set, and those people have UM certainly driven up prices of real estate in certain buildings and UH, certain art. Yeah. Well, you give the example. In two thousand and six, a leven hedge fund managers were in the Forbes four hundred. Fast forward

ten years, that number climbs to twenty seven. Right. So, and is it as much a public relations disaster for the hedge fund industry as it is a performance issue? Yes, that is true because people got tired, especially in the public pension sounds where there's unions and uh, teachers and firemen, and they don't like to see these guys spending a lot of money and their conspicuous consumption um when they're

not getting much in the way of returns. So they're actually connecting the personal behavior of the hedge fund manager with the returns that they see when they're just looking for an increase in the amount of money they make. Exactly. Yeah. Now, just to follow up on these apartments, these trophy real estate investments, I wonder if you could just tell us about Steve Cohen, who is now running his own family office.

Just described because he's he's not a dumb bunny. What he bought what nine thousand square foot duplex at one Beacon Court, that's correct. I think he paid about twenty million dollars for it, So even if he sells it at the highly reduced UH price of sixty seven million, he'll still be making a lot of money. But at one point he thought he could get a hundred and fifteen million dollars for that apartment. But now I guess it's a bargain at sixties sixty seven and a half

million exactly. So still make a huge off it, but not quite as much as he thought he was going to make. Just give you about ten seconds. Are there any hedge funds that are that are combating this whole issue and getting ahead of the game. Uh, certainly, some of the quantitative guys are raising money um and people like Renaissance Technologies is still putting up huge returns, although they don't take a lot in the way that's hoide money.

But thanks very much. Cathy Burton, our hedge fund reporter for Bloomberg News. You can follow her on Twitter at Burton Cathy. What to do with your money in ten Perhaps nothing, but maybe not. Maybe the dog of the Dow theory is the way to go. Let's find out from jug Doug Cioca. He is the chief executive officer and partner at Cavar Capital Partners, helping to manage a little bit more than half a billion dollars. He's based in Leawood, Kansas. Doug great to always speak with you, um,

dogs of the Dow. Why don't we start there because that may highlight why the Dow Jones Industrial Average is up nearly four this year while the SMP is up a little bit more than Yeah, PIM, thanks for having me on a happy new year, and I think it's been interesting. There seems to be a lot of tax loss selling that's taking place in certain sectors of the

Dow in the SMP. But you know, whether it's in staples or healthcare and what we are calling the trailblazers of this changing face of retail, right, those companies that focus on direct to consumer as opposed to same store sales. Seems like some paradigm shifting has caused a little bit of consternation in certain sectors that um, we think offer

some pretty good opportunity going into next year. Right, So much of what we're trying to determine from an asset allocation perspective is, you know what areas of the stock market have pulled forward the prospects of economic and earnings per share improvement ahead of it actually materializing it. Can you give us some details thats hows some industry goose particularly I know industrial stocks, well, industrial stocks, financials, and and and energy post election have been on a parabolic

UH scream higher, which is great. And I think that it is embedding some optimism that was dormant for a period of several years. And you know, whether it's because that the set is going to have the green light and be buttressed by underlying economic growth that it feels that it can raise rates progressively and that's a very

positive immediate impact for profitability of banks. Whether this functional fiscal policy that we're hopeful will make its way through the legislative process is going to be great for industrial companies that have seen a pretty significant ebb in their order flow um or whether it's it's the energy stocks that now feel like, okay, shoot the US, let's join OPEC. I mean, we've got enough natural gas, we've got enough energy.

If if a mom had had hit and poined himself the energy president and we've had all these discoveries, can Trump then get it effectively transported through pipelines where it can actually make a material improvement in the economy and bring back the whole manufacturing base that we feel may have been abandoned. So are just gonna say, just breaking

on on energy. I didn't know. I just recently learned this that the United States is on a tap to pump about eight point eight million barrels of oil a day, correct, I mean, we're somewhere around there now, but we're that was the level that it was about two years ago. Because of course the price of oil having come down, a lot of wells have been shut in and so on. You know, we're doing We're producing that amount of oil

with a third of the number of rigs. So the technology, I mean, it's just underscores the technology change that has gone on in the in the energy business. I agree, and it's fascinating. And I think that was one of the red the predictions when they were in place of Famously Dennis Gartman, I think in February said oil would never bring back to forty in his lifetime because it

wasn't that there was a lack of demand. There was an ebulent amount of an amazing amount of supply, and that supply was going to be um drilled for in mind so efficiently that there would be no reason to see such upward pressure on prices at any point in the future. So yeah, I think that that plays a

big part. And the technological progression and efficiency stress is across industries, which is really interesting as much as the technological and the innovative components are out offshoot of tech. The tech the tech industry which has been one of the main laggards after the election because of this um this theory that Trump hates tech because of the lack of very prominence, certainly doesn't hate Twitter in the campaign. No,

he loves Twitter. So alright, So having so looking at let's say you got it us an allocation model, and you're saying to yourself, all right, now that I've made some gains in energy stocks, I've made some gains in industrials, financials, and I need to rebalance, right, this is my discipline. I'm going to rebalance my portfolio. What do you have to add to do the rebalancing. You have to add

more tech. You need to have more tech, need to add more healthcare, And I think you have to double back on some of the staple stocks, no question, I mean I think this there is an overreaction in the market to some perceived threat of unwinding the globalization efforts

that tech has really been the primary representation thereof. I think there are unfounded concerns about the restrictions on intelectric capital mobility for tech companies as well with VISA threat propositions and things of that nature that I actually think this is far more embarked than it is bite and I think for Trump to really extract the benefit of becoming the pro economy president, he realizes that tech has

to be a sidecard to that propulsion. All right, So if you are unbalanced in your asset allocation, take a look at what you take a look at technology, take

a look at at healthcare and also biotechnology. I would imagine as part of that no, it within healthcare, I mean everything throughout the vertical him UM as it relates to producing drugs, purchasing drugs, in consuming drugs, that that that vertical has been under assault, whether it starts with Martin Squarelli in the catapults forward with the epipenda BACCLE and UM. Then we're trying to understand what we're in the in the in the process of PBM really fits

and HSU Pharmacy benefit management companies. Correct, We we're just I believe we're just talking recently about United Health and they have an optim unit that accounts for about of their profits and that is basically a technology business and it has a pharmacy benefit management UH division within that. How many about bonds? If you have gains in bonds,

should you take them or should you wait? Well, if you have gains in bonds and you probably had a very strong bond portfolio, given the pullback in bond prices that's taken place over the last six or seven weeks, we think there's a lot of opportunity in the fixed income market just because you had you had a pull back very similarly to what took place during the tape Re tangion to two thousand thirteen. But it has provided entry points that on a spread basis, we've not seen

really sustainably since maybe before the Great Recession. So we still think that again, given that there's been some enthusiasm and tenantities rips in some of these market sectors, it has been equal in offsetting with the drugging that's taken

place in some of these bond sectors. There's a lot of opportunity, almost like the dogs of the Dow theory, and fixed income, particularly in tax exempts or tax exmps, have have kind of been a double whammy insomuch as people say, Okay, rates are going up, so we gotta get out of our current bonds as well as any bonds surrogates and taxes are going lower, so the benefit tangibly or quantitatively of that exemption is going to fall.

So if you see that back up multiplied in the muni space, we still think that it's there's some very good value in there. Thanks very much. Doug Sioca is the chief executive and partner at cav Our Capital Partners. Joining us from Leewood, Kansas. Thanks for listening to the Bloomberg pian L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox.

I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.