Was It a Huge Mistake for Sears to Get Rid of Lands' End?

Following its divestiture of Lands' End, the picture at Sears looks slightly different from before. Does this present the Foolish investor with an amazing opportunity, or is there simply too much risk now that a profitable asset is out of Sears' control?

Apr 11, 2014 at 5:30PM


Source: Lands' End

A lot can change in 12 years. If you don't believe me, just look at Sears Holdings (NASDAQ:SHLD). In 2002, the company purchased Lands' End (NASDAQ:LE) in a transaction valued at $2 billion. This purchase was followed by the company's 2005 merger with Kmart, which created one of the largest retailers in the world. With revenue of $53 billion in its first year after Sears and Kmart combined, the company seemed to be heading nowhere but up.

How quickly things turn ugly!
However, the picture quickly turned ugly, with revenue sliding every year since. Today, the company's sales sit at about $36.2 billion, 32% below their all-time high. In an effort to salvage the once high-flying retailer, management has begun spinning off non-core businesses and attempting to stave off the outflow of customers.

Its latest deal, completed on April 4, involved divesting Lands' End. In its first two days of stand-alone trading, shares have fallen 10% from their opening price of $30.46 to $27.34. Sears shares have behaved likewise, likely leaving investors scratching their heads and wondering what value, if any, could be left in either of these retailers.


Source: Sears Holdings

Can Sears be salvaged?
No matter how you dice it, the picture at Sears is anything but pretty. Over the past three years, the company's revenue fell 13% from $41.6 billion to $36.2 billion. According to management, the drop in revenue came from a variety of factors. From 2011 through 2012, revenue fell by about $930 million because of fewer Sears and Kmart stores in operation. Another $740 million hit came about because of a 2.5% decline in comparable-store sales.

In 2013, the situation worsened. Compared to the prior year, revenue fell $1.1 billion from additional store closings, while a 3.8% drop in comparable-store sales negatively affected the business by $1 billion. In addition to these factors, management divested Sears Hometown and Outlet Stores (NASDAQ:SHOS). This transaction hit the company's top line by an additional $490 million.

(Sears) 2013 2012 2011
Revenue $36.2 billion $39.9 billion $41.6 billion
Net Income -$1.4 billion -$0.9 billion -$3.1 billion

Source: Sears Holdings

While revenue fell over this time frame, profits improved drastically; the company's net loss was narrowed from $3.1 billion to $1.4 billion. However, a reasonable portion of these losses came about because of non-cash impairment charges. Excluding these paper losses, Sears' bottom line was narrowed slightly less, from $2.7 billion to $1.2 billion. In addition to being hit by falling sales, the company booked annual (though shrinking) impairment charges.

Is Lands' End a good prospect?
Instead of investing in Sears, investors have the option to grab hold of an investment in Lands' End. Looking deeper into the company, however, investors might be more inclined to take a pass. In 2002, when Sears acquired the business, it reported revenue of $1.57 billion. At the end of its 2013 fiscal year, the company's top line came in at $1.56 billion, practically unchanged from 12 years earlier. On the other hand, net income has improved over this period, increasing 18% from $66.9 million to $78.8 million.

(Lands' End) 2013 2012 2011
Revenue $1.56 billion $1.59 billion $1.73 billion
Net Income $78.8 million $49.8 million $76.2 million

Source: Lands' End

This level of sales and income, however, is in an apparent downtrend. Since 2011, Lands' End's revenue fell 10% from a three-year high of $1.73 billion to $1.56 billion today; net income ticked up 3% from $76.2 million. Most of the company's sales decline during this period occurred between 2011 and 2012 and was attributed to a drop in orders both domestically and in international markets.

What does losing Lands' End mean for Sears?
Based on the data provided, losing Lands' End will have a significant impact on Sears. While it's possible that the divestiture will allow Lands' End to thrive without interference from Sears, its former parent will be hit even harder on both the top and bottom lines.

Keeping all else equal compared to its 2013 fiscal year, Sears will see its revenue drop by the $1.57 billion Lands' End generated for the business (on a pro-rata basis). This would imply revenue of $34.6 billion for Sears. In the event that Lands' End was losing the company money, it would probably make sense to go this route, but that's not the case. Instead, Sears is ridding itself of a profitable enterprise at a time when the company, in aggregate, is recording significant losses.

However, there is also another way to look at the picture. As part of the transaction, Lands' End is taking out a loan in the amount of $515 million. Once the deal was made official, the company remitted $500 million to Sears in the form of a dividend. So, one way to evaluate the situation is to assume that the $500 million is essentially the price at which Sears is "selling" Lands' End to its shareholders, which equates (pre-tax) to a little more than six times Lands' End's earnings.

Foolish takeaway
As we can see, Sears is continuing its long struggle. In an attempt to salvage profitable enterprises and break up the company in a way deemed most beneficial for shareholders, the company elected to spin off Lands' End. Whether or not the company can stand on its own two feet once again is something only time will tell, but what we do know is how the transaction will both reward and hinder its parent.

At first, the deal will grant Sears some much-needed cash that it hopes to use to make its core operations more attractive. But this comes at the cost of lower revenue and potentially larger losses down the road. However, if management can use its cash to eventually create a net benefit for the retailer, the company's decision might reward investors handsomely.

Boost your 2014 returns with The Motley Fool's top stock
Now that both Lands' End and Sears are separate entities, management has the flexibility needed to push each company forward individually. With the freedom comes risk but also comes the potential for higher returns if each company's strategy proves successful. Given this scenario, is it possible that Sears or Lands' End could be the best stock to hold for 2014? Or are there even more interesting prospects out there?

There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Daniel Jones has no position in any stocks mentioned. The Motley Fool owns shares of Sears Hometown and Outlet Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers