Another Sears Spin-Off Primed For Investors

One of the giant holding company's strongest performers, Lands' End, is officially its own business. With a great operating model and comfortable pricing, investors should take notice.

Michael Lewis
Michael Lewis
Apr 7, 2014 at 4:25PM
Consumer Goods

A polarizing strategy to say the least, Sears Holdings (NASDAQOTH:SHLDQ) is spinning its top performers into their own companies. CEO Eddie Lampert is doing this for a few reasons. For one, Sears Holdings was an extremely bloated business, drowning under the weight of its own assets. Its core -- the namesake department store as well as Kmart -- is still hemorrhaging cash and instilling fear deep in the hearts of the company's perennial bulls.

An early spin-off, Sears Canada, seems destined to go quietly into the night. But last week, the company exited one of its most appealing businesses: Lands' End (NASDAQ:LE). The largely catalog-based retailer is a cash cow, and now offers investors an opportunity to own a piece without being tied to the anchor weight of Sears Holdings.

A winning asset
Buried underneath the billions-per-year cash burner that is Sears Holdings, it was hard for many to realize the resilience of the iconic, embroidery-happy clothing retailer that is Lands' End. In fiscal 2013, the company posted lower year-over-year sales ($1.56 billion versus $1.58 billion in 2012), following suit with a whole heap of clothing companies. Behind the sales drop was weakness in the company's international business: unfavorable exchange rates in Japan and weakened demand in Germany.

Luckily, that was the bulk of the bad news.

Gross margin improved more than one percentage point, and operating income leapt up from $82 million to $128 million as a result of the operating efficiency. Net income followed suit, gaining nearly $30 million from 2012's $49.8 million.

The direct segment performed about on par with the year-ago figures, though the retail took a big hit. Lands' End has stand-alone locations, as well as sales centers within Sears department stores. Same-store sales decreased 7% for the year.

Operating advantages
When Sears spins off assets, it isn't a cold goodbye. Take, for example, Sears Hometown and Outlets, which can sell back its damaged or defective appliances back to Sears Holdings at cost.

Lands' End has favorable conditions as well. At the company's Lands' End Shops at Sears, the former parent was always responsible for staffing. Under the spin-off agreement, that will remain the case. Retail isn't Lands' End's strongest segment, but its payroll cost will be next to nothing. Whatever does sell at these locations will flow quickly to the bottom line.

The company is already built to succeed in today's cutthroat retailing environment. Being a direct-to-consumer business since day one, Lands' End isn't bogged down with expensive square footage of selling space and legacy real estate. The company pushes product through its website, catalog (it still exists!), and partnerships.

With an EV/EBITDA of less than 7 times, this is an affordable company to own. It won't be a lightning-fast grower, but it's a lean-operating, perennially preppy retailer. This is one Sears asset that could delight investors.