Sears: Spinning Off Lands’ End for a Better Tomorrow
On Friday, department-store chain Sears Holdings (NASDAQ:SHLD) announced that it will spin off its Lands’ End clothing business as a separate company through the pro rata distribution of Lands’ End shares to all shareholders, the retail operator said in a regulatory filing made Friday.
The retailer — the operator of Sears department stores and the discount chain Kmart — has been struggling amidst growing operating losses and decreasing sales. Sears was the largest retailer in the United States until 1989 when its annual domestic revenue was surpassed by Wal-Mart’s (NYSE:WMT) sales, a key moment in the retailer’s decades-long decline.
Ever since Chair Eddie Lampert created Sears Holding in 2005 by merging Sears and Kmart in an $11 million deal, sales have been declining. But still, in early 2013, Lampert was named chief executive officer despite the fact sales losses have been piling up and he had no background in retail. He has been criticized for failing to adequately invest in the chains 2,000 stores and for turning away customers with the department store’s dowdy merchandise. The department store’s merchandise selection and quality of service look very poor when compared to Target (NYSE:TGT) or Wal-Mart.
To combat its ever-worsening financial position, the company has been divesting key assets for the past several years; Lands’ End is only the most recent business to go. “Sears is in a steady state of decline,” Belus Capital Advisors analyst Brian Sozzi told Reuters. “They’re essentially selling their body parts so they stay alive today.” Sears is rapidly losing market share to Wal-Mart and Target, and online competitors.
Still, shares of Sears have risen more than 16 percent this year to date. ”The spinoff announcement essentially points to a number of negatives, including an inability to find a buyer, as previously Lands’ End was listed as an asset that the company would monetize,” Credit Suisse analyst Gary Balter wrote in a note to clients acquired by Reuters. Early last year, the New York Post reported that Lampert was exploring the possibility of selling Lands’ End. He later told investors that even though he was not actively looking for a buyer, the business might still be “separated.”
When the Lands’ End spinoff was announced, that course of action seemed to suggest the company was unable to find a buyer. However, as Sears spokesperson told Reuters, referring to an October statement, that was always a possibility. That October 29 statement said the holding company was “evaluating separating” both the Lands’ End business and Sears Auto Center business, meaning any separation would not be structured as a sale but rather as a transaction that would allow “existing shareholders the opportunity to benefit from the significant potential for value creation over the long term.”
While the spinoff will not raise any cash for Sears, it will allow Lampert to focus on the remaining business — the department store chains and Kmart, both of which compete for management time and capital within the holding company. Sears spun off Orchard Supply Hardware (OSHWQ.PK) in 2011 and its Sears Hometown and Outlet business last year. However, this spinoff is “another wooden block being pulled out in our Jenga scenario, with Lands’ End likely the most profitable piece that was left in the company,” Balter wrote.
Balter may have described Lands’ End as the most profitable piece of the Sears Holding company, but the fifty-year-old company has lost some of its brand prestige since Sears purchased the business in 2002. Sales have declined in recent years, with revenue falling to $1.59 billion in 2012 from $1.73 billion in 2011. In 2012, approximately 16 percent of the brand’s sales came from the Land’s End shops located inside Sears stores. Sears has “been slowly destroying it,” Balter told Reuters, and so the separation could give both Lands’ End and Sears additional operating flexibility. Similarly, Sozzi of Belus Capital described Lands’ End as a brand “going down the drain.”
Lands’ End will be listed under the Nasdaq under the symbol “LE,” but no date has been set for the share listing. Yet, Sozzi told Reuters that Sears problems would be far from solved by spinning of Lands’ End. Wal-Mart and Target are strong competitors. “They’re getting all the traffic. Sears and Kmart have not done enough to stay competitive,” he said.
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