Investors Ignore the Benefits of the Lands End Spinoff. Here's Why You Shouldn't

Reinvigorating store growth, international expansion, and brand identity are some of the prime benefits of spinning off Lands' End which have been ignored by the market.

Apr 24, 2014 at 2:00PM

The recent negative reaction to the Lands' End (NASDAQ:LE) spin-off from Sears Holdings Corporation (NASDAQ:SHLD) has unfolded similarly to traditional spin-offs in the past. The market continues to focus on the past results of Lands' End to justify its current valuation while at the same time it has overly focused on the company's connection to Sears Holdings.

Lands' End is a specialty retailer that mainly focuses on web and catalog sales. Sears bought the company back in 2002 for $1.9 billion in cash. Over the years Sears started placing Lands' End stores within its department stores, but this hasn't helped stop the recent slides in revenue for either retailer.

The real question is whether the tie to Sears will hold the stock back or will the unleashing of a now laser-focused, spun-off brand reignite growth.

Lost identity
The bull case is that the identity of Lands' End had been lost over the last several years with the retailer operating under the large umbrella of Sears. While Lands' End will still utilize space at Sears' headquarters and the successful Shop Your Way customer-loyalty program, it has limited connections to the actual Sears stores.

The big misconception is that Lands' End's sales depend on Sears Holdings. The retailer actually only obtains 16% of revenues from the Lands' End Shops within Sears store locations. Currently, it operates 275 stores, though this is down from 292 in 2010.

With only 16 Lands' End Inlet stores that are not connected to those of Sears, the retailer now has the opportunity to focus its store growth on better locations that don't depend on Sears. In addition, the international sales of Lands' End have not expanded lately because of the lack of focus from the domestically aligned parent. Lands' End's international locations in the United Kingdom, Germany, France, Austria, and Japan only account for 16% of its revenue. Expectations call for the company to expand in its existing international markets and develop presences in other locations such as Switzerland, Russia, Scandinavia, and China.

The lack of store development and international expansion provide solid growth opportunities which had not been previously explored under Sears' umbrella.

Intriguing valuation
With the sell-off following the distribution of its shares on April 4, Lands' End provides an intriguing valuation. The stock is now only worth $830 million while the company generated $1.56 billion in revenue during 2013. The company's past earnings numbers aren't nearly as meaningful considering the split, but the company did improve its net income to nearly $80 million because of an 110 basis-point gross margin improvement and a substantial decrease in operating expenses.

As with any spin-off, the company will now incur additional operating costs from incremental expenses related to its headquarters and the fees related to the customer-loyalty program. On top of that, the $500 million loan that Lands' End has taken out to pay the dividend to Sears will cost the company around $22 million per year. According to Matt McGinley, an analyst at ISI Group, Lands' End would've earned $1.63 per share in 2013 based on the increased interest costs and operating expenses.

Bottom line
Lands' End currently has an attractive valuation, especially considering the retailer's potential return to growth mode via new stores and international expansion. Investors need to be ready for a few volatile quarters ahead as the company implements new strategies. Lands' End won't be able to enter new markets overnight, but the current valuation offers plenty of incentives and upside for the stock.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, the 8-track tape player, and even Sears as we used to know it. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Mark Holder and Stone Fox Capital clients own shares of Lands' End and Sears Holdings. The Motley Fool has no position in any of the stocks mentioned. 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

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, 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

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