Lampert and Berkowitz, who control 84.6% of Sears shares, have treated the company as their own cash cow, stripping it of valuable assets through sale-leaseback transactions and related party loans. This has diverted billions of cash flows to themselves while driving down the stock price. Sears is already losing money at an accelerating rate, and bankruptcy is inevitable as suppliers may stop providing inventory on credit due to deteriorating business. Shorting SHLD stock is recommended due to the near certainty that its price will continue to decline.

1. 1 Neelam Desai
Sears Holding Corporation (SHLD):
When Controlling Shareholders Pillage Minority
Shareholders
Position Type: SHORT
Current Share Price: $ 10.83
Fair Value Estimate: $ 0.00
VALUATION METRICS
Note: SHLD is losing money and is doingso at an accelerating rate. As a result, all of its valuation metrics are
negative.
Metric Value Explanatory Note
Price/Earnings (0.52) Earnings (loss) per common share over the past 12
months was($20.78)
Price/Book (0.30) Book value (deficit)pershare was(35.77)
Enterprise Value (EV) /EBITDA (9.80) EV/share = 130.50; EBITDA/share = (13.31)
Cash fromOperations/Share Yr 2016: (12.97)
Yr 2015: (20.27)
Yr 2014: (12.92)
BACKGROUND
SearsHoldingCorporation, hereinafterreferred toas“Sears”, istheholdingcompany forSears(U.S), SearsCanada,
andKmart. Oncea storiedAmericancompany, theSearsstory hasessentially becomethestory oftwo men:Eddie
Lampert, a former investment banker and current managing partner at the hedge fund ESL Investments, and
Bruce Berkowitz, theportfoliomanagerof theonce high-flyingFairholmeFund. Together, LampertandBerkowitz
control 84.6% ofSears’ stock.1
Over the past few years, Lampert and Berkowitz have treated Sears as their own person cash cow and begunto
slowly strip the company of its most valuableassets. This process, however, cannotgo on indefinitely. At some
point, we believe, Sears will be either forced to declare bankruptcy, or will be taken private by Lampert and
Berkowitz at a price thatis muchlower thanits current share price. Over the next few pages, we will detail some
1
As of March 13, 2017.

2. 2 Neelam Desai
of the ways that Lampert and Berkowitz have diverted Sears’ cashflows and assets to themselves and provide
somecontextfor thegrim outlook forSearsasa goingconcern. Tosimplify thisdiscussion, wewill refer toentities
thatare controlled by or affiliated with Lampertand Berkowitz otherthan Sears as“Lampert and Berkowitz”.
SALE-LEASEBACK TRANSACTIONS AND RELATED-PARTY LOANS
The use of sale-leaseback transactions hasbeenthemostsignificanttacticLampertandBerkowitzhavedeployed
in their schemetostrip Searsof its mostvaluableassets. Usingthistactic, LampertandBerkowitzhaveused cash,
sometimesfinancedwithdebt, topurchasevaluablerealestate fromSearsandthenlease muchofthatreal estate
back toSears. Because Lampert andBerkowitz control Sears, they are incentivized to compel Searsto:
 sell these propertiesto Lampert andBerkowitz at below market prices
 agree topay Lampert andBerkowitz abovemarketrents
 agree to lease terms that are favorable to Lampert and Berkowitz but potentially disadvantageous to
Sears, and thus to its minority shareholders, such as the right for Lampert and Berkowitz to reclaim or
recapture these properties in whole or in part.
Inthe simplesttermspossible, thesetransactionscreate a situationinwhich Lampert andBerkowitz haveworked
large payments to themselves into Sears’ operating and capital structure: whenever customers do business at
Sears, a significant portionof the cash generated by their spendingis collected by Lampert andBerkowitz, in the
form of rental payments, beforeminority shareholders receive any of it. And, shoulda specific Searsstore notbe
able to pay its rent, Lampert andBerkowitz can take control of the store andsell or rent it to someoneelse.
Indeed, although Lampert and, later, both Lampert and Berkowitz have compelled Sears to sell hundreds of its
stores and numerousotherproperties over the pastdecade, nomoney whatsoeverhas been returnedto Sears’
minority shareholdersin the form of share buybacksordividends. In the meantime, the price of Sears’ common
stock has fallen from a pre-recession high of $120 to $10.83 while Lampert and Berkowitz have likely collected
billions of dollars in rental paymentsor from resales of Sears properties.2
Finally, nearly all of Sears’ borrowings were financed by Lampert and Berkowitz. As a result, Lampert and
Berkowitzcollect hundredsofmillionsof dollarsin interest payments fromSearsevery year. Moreover, aslessors
and lenders to Sears, Lampert and Berkowitz have positionedthemselves to take control of whatever intangible
assetsSears may have left, suchas its Kenmoreand DieHard brands, shouldSearsbe forced intobankruptcy.
POTENTIAL CATALYST – ASUPPLIER SQUEEZE
Many retailers, and especially Sears, with its increasingly large same-storesalesdeclines, simply cannotafford to
pay for their inventory upfront. As a result, such retailers rely on suppliers to provide them with inventory on
credit.
However, many of thesesuppliers, asignificant numberofwhomare basedin underdevelopedcountries, operate
onrazor thinmargins. If Searswere unableto settle its accountswithits suppliers, many ofthose suppliersmight
2 Lampert was able to gain control of Kmart in 2002-2003 while Kmart was in bankruptcy. He did so by purchasing a
significant amount of its debt for pennies on the dollar. Then, in 2004, with the economy in recovery, Kmart acquired Sears
and took the latter’s name for the newly merged company. Considering how little he paid for Kmart and how much he has
been able wrest from the company, Lampert’s investments in Kmart and Sears have likely been very profitable for him
despite the dramatic decline in Sears’ stock price.

3. 3 Neelam Desai
be forced to go out of business. As a result, Sears’ suppliers are incentivized to stop supplying Sears with
merchandise, supply it with fewer products, ordemandmore favorable termsshouldSears’ businesscontinueto
deteriorate.
There are already signsthatthis is beginningtohappen. Initsmostrecent annualreport, Searsexpressed doubts
about its ability to continue as a going concern. A number of news reports have quoted suppliers who have
discussedreducingthe size of their shipmentstoSearsor demandingshorterpaymentperiods. Finally, according
to Reuters, insurance companies that once insured Sears’ vendors against nonpayment for their goods are no
longer willing to providesuch coverage.3
CONCLUSION
While many commentatorshaveproclaimedthatbecauseoftheriseofAmazon, brick-and-mortarretailis“dead”,
the Searsstory is morethanjustthe story of internetdisruption. Instead, itisthestory of financial engineers who
havetaken controlof a brick and mortarcompany inthe hopesof exploiting its real estate assets for themselves-
nottoincrease itssales, please its customers, orturnaprofit for itsminority shareholders. SearsandKmartstores
are habitually understaffed, understocked,anddirty. Theresulthasbeencomparablestoresalesthatareat levels
youwould expect to see duringa deep recession.
2012 2013 2014 2015 2016
Domestic comparable store sales % -2.5% -3.8% -1.8% -9.2% -7.4%
Sears is already hemorrhaging cash and will continue to do so. Bankruptcy is only a matter of time. In the
meantime, it is a near certainty thatits stock price will continueto decline and, thus, SHLDshouldbe shorted.
3
http://www.reuters.com/article/us-sears-restructuring-vendors-idUSKBN16T31S, Retrieved4/26/2017

4. 4 Neelam Desai
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