When Sears Holdings (NASDAQOTH:SHLDQ) sold the Craftsman tool brand to Stanley Black & Decker (NYSE:SWK) last year for $900 million, it was an attempt to shore up its balance sheet while paying down a portion of its unfunded pension liability. The brand wasn't sold from a position of strength, but rather weakness -- desperation, even -- to stave off Sears' collapse.
Now Stanley is relaunching Craftsman, looking to reposition the brand, which was once well-respected but has been neglected lately. While you will still be able to buy Craftsman tools at Sears stores -- and Sears will get a cut of Stanley's Craftsman-brand sales -- they will also be sold through other outlets. So Sears is now competing against a brand it once owned and losing out on revenue and profit.
A new day for Craftsman tools
Stanley Black & Decker says it is launching "the next generation" of Craftsman tools. Over the next year, it will bring some 1,200 new tools and accessories to market, including hand and power tools, lawn and garden equipment, and mechanics' and automotive tools.
My father always bought Craftsman hand tools because of their lifetime warranty. If one broke (which I don't ever recall happening), it would be repaired or replaced free of charge, a guarantee that Stanley is still honoring.
However, Craftsman tools have had virtually no distribution outside of Sears up until now. And they have carried a premium price compared to other quality brands, including DeWalt, Milwaukee, and Porter-Cable: all brands that Stanley Black & Decker now owns, and which are sold in any home improvement or big box store. So it has been both cheaper and easier for consumers to buy the competition.
Now, Stanley is selling Craftsman tools at Ace Hardware and Lowe's, and on Amazon.com: outlets that should increase the sales and value of the brand.
Stanley Black & Decker CEO James Loree told TheStreet: "We ended up simply buying the [Craftsman] brand because the products had been left to devolve over time to the point where they weren't the high quality, respectable products they once were -- they had migrated from made in America to virtually everything being made in China and Mexico."
Stanley is looking to make Craftsman a made-in-America brand once again. At the outset, 40% of its products will be made in one of Stanley's 30 U.S. factories, with the goal being to eventually raise that to 70%. While that will likely help sales, boosting Sears' royalty income, the failing department store chain won't really be better off for it.
A legacy anchor weighing Sears down
Although Sears will earn royalties of 2.5% to 3.5% for 15 years on all of Stanley's Craftsman sales, the proceeds will be used to pay down more of its legacy pension costs. At the end of 2017, Sears had pension obligations of $4 billion, but pension fund assets worth only $2.5 billion, leaving an unfunded liability of around $1.5 billion.
The federal Pension Benefit Guaranty Corporation (PBGC) had a lien on the Craftsman brand before its sale, and Sears had to get permission from the agency to sell it. In exchange for that, Sears contributed a portion of the sale proceeds to its pension plans and granted the agency a lien on all the royalties it will receive from Stanley for the full 15 years.
So Sears got a quick cash infusion and partially addressed its pension underfunding. But its competitive position has gotten even worse, because it is now competing for Craftsman sales. The availability of Craftsman tools at other major retailers will siphon even more customers away from Sears stores.
Craftsman's image has degraded over time, so reviving the brand won't be easy for Stanley. Reinvigorating sales, even by having the tools more widely available, will be a tall order unless they are priced right and marketed well. Sears might not realize all that much money to apply to its pension obligations.
Nevertheless, it seems a safe bet that a Craftsman brand under the care of Stanley Black & Decker will outlive Sears Holdings.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Lowe's. The Motley Fool has a disclosure policy.