Selling your parachute to pay for a future skydiving trip doesn't really solve a problem so much as create a different one down the road.
That's describes the dilemma Sears (NASDAQ:SHLD) created for itself when it sold its Craftsman brand. The popular tool line, which had been mostly exclusive to the retailer, gave people a reason to visit Sears stores -- even as the chain's overall business slipped and its store count shrank.
That's no longer true. When Sears sold Craftsman to Stanley Black & Decker for what the company called $900 million ($525 million up front, $250 million over three years, and royalty payments for 15 years) it opened the door for the line to be sold everywhere.
Sears had to do it
Sears sold Craftsman for decidedly non-strategic reasons. It needed cash to pay its bills, meet pension obligations, and keep its vendors willing to send merchandise. CEO Edward Lampert said as much at the time in the press release announcing the deal.
"The successful closing of the Craftsman transaction provides immediate liquidity to Sears Holdings, while enabling us to participate in the future growth of the Craftsman brand," he said. "In addition, the related agreement with the Pension Benefit Guaranty Corporation (the "PBGC") will continue to secure our pension obligations, while helping us maintain financial flexibility."
What's happening now?
Sears can still make Craftsman tools for sale in its own stores. Unfortunately, its version of the line -- which it largely manufactures in China and Mexico -- may prove inferior to the Stanley variants. When Stanley debuts its Craftsman line, 40% of the 1,200 tools will be made in the U.S., and it plans to boost that to 70% over the next few years, according to RetailWire.
Even if consumers don't recognize that there are different versions, they will certainly notice that they can now buy the brand at Lowe's and on Amazon, among other places.
"For Sears, the sale of assets and brands like Craftsman is a necessary evil needed to fund the company and give it short-term solvency," GlobalData Managing Director Neil Saunders commented on the RetailWire story. "However, it causes immense long-term damage, especially if new brand owners manage to pull shoppers away from Sears stores — which in the case of Stanley Black & Decker they will probably succeed in doing."
A death blow?
To continue the analogy from above, Sears is now the skydiver standing at the open door of a plane in mid-flight, with no parachute. We've seen action heroes come out of that situation successfully, but the retailer has put itself in a position where it would need to pull off some cinematic heroics to survive.
The company's range of exclusive brands used to be a key part of what gave it an identity -- and Craftsman was a pillar of that strategy. Now, many of those tool sales will go to some of the retailers driving Sears out of business.
Sears may have done what it had to do when it sold Craftsman, but it did nothing to change how its story ends. The company didn't use the cash from the sale to improve its business model or adapt to the new realities in retail. It simply spent it to push its problems down the road -- and there doesn't appear to be much pavement left in front of it.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline 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.