It's finally happening. After months of speculation on the timing, Sears Holdings (NASDAQ: SHLD ) says it will spin off its clothing retailer Lands' End next month, allowing it to exist on its own as a publicly traded company that will reside on the Nasdaq exchange under the ticker symbol LE.
Acquired in 2002 for $1.9 billion, Lands' End has been lost in the rubble of what its holding company parent has become, and its spinoff will mark yet another step in the dismantling of the once-iconic retailer. Also jettisoned from the Sears stable over the past few years were Orchard Supply Hardware (which was bought out of bankruptcy by Lowe's), Sears Hometown & Outlet Stores, and Sears Canada.
The Lands' End business is largely online and catalog-based, featuring a mix of clothing, footwear, and home products, but there are several stand-alone stores and several hundred store-within-a-store shops inside Sears. Although the business is profitable, its image has been tarnished by its association with the retailer, which has seen losses widen exponentially as shoppers abandon it in droves. When Sears Chairman and CEO Eddie Lampert recently tried to shop the retailer, there were apparently no takers.
Lampert is under pressure from investors in his hedge fund who've tired of waiting for a turnaround that's always around the next corner. Recently they pulled money out of his ESL Partners, necessitating he distribute some 7 million shares to them, which dropped his ownership stake in Sears to 48.4% from 55.4%. It's still a sizable position and he says the distribution doesn't reflect his confidence in the retailer's eventual recovery, but it suggests even the staunchest of believers are growing weary.
The dwindling department store chain reported earnings last month that, as Lampert admits, didn't offer much new: mounting losses, dwindling cash, and diminished sales. Yet he continued to defend his decision to not invest in his stores, believing that customers don't want "decor and fixtures," just a means of shopping when they want, how they want. In short, since they're shopping online more anyway, why waste money fixing things up?
Contrast that strategy with fellow troubled retailer J.C. Penney, which is also pursuing an omnichannel approach to sales, but is investing in its stores (it will soon unveil its "store of the future") as well as in new product. It's by no means out of the woods, but there's a noticeable uptick in sales and even market share.
But why do that when you can just spin off assets for a payday while saddling the new company with debt? Lands' End will pay Sears a cash dividend of $500 million before the spinoff that will be financed with a new term loan. It may also borrow up to $175 million for working capital. Investors will receive 0.3 shares of Lands' End stock for every share of Sears Holdings they own. The new shares will begin trading on April 7.
I keep waiting for something to emerge from Sears that shows it's serious about the turnaround it says it wants to happen, but instead we get superficial changes that do nothing to restore the fundamental value it could have. I disagree with those analysts who say Sears Holdings' store of value is in its real estate, since to me that is a defeatist attitude calculated for companies that are otherwise stripped naked. Then again, with another vestige of the old retailer being taken away with the Lands' End spinoff and the possibility the automotive center business will soon follow, perhaps they have a point.
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