Sears weighs spinning off Lands' End to shareholders

Move would be good for Dodgeville apparel business, analysts say

By Paul Gores of the Journal Sentinel

Oct. 29, 2013

Lands' End, long known for its classic clothing styles, may be reviving a classic look at the corporate level as well — a stand-alone Wisconsin company instead of a unit of mega-retailer Sears Holdings Inc.
Sears, which purchased the Dodgeville catalog and online apparel business in 2002 for $1.9 billion in cash, said in a statement Tuesday it is considering separating Lands' End and Sears auto centers from its holdings — part of a strategy to focus on its other businesses. Sears runs 2,500 Sears and Kmart retail stores.
"We are evaluating separating both our Lands' End business and Sears Auto Center business," Hoffman Estates, Ill.-based Sears Holdings said. "We believe separating the management of these two businesses from Sears Holdings would allow them to pursue their own strategic opportunities, optimize their capital structures, attract talent, and allocate capital in a more focused manner while bringing our business unit structure to life outside of the Sears Holdings portfolio."

Sears continued: "Regarding Lands' End, we believe that Lands' End is an iconic brand with the potential to become a more global brand, and we presently anticipate that any separation, if pursued, would not be structured as a sale but rather through a transaction that would allow existing shareholders the opportunity to benefit from the significant potential for value creation over the long term."Analysts said that however the separation is structured — as a spinoff, partial spinoff or another method — it looks like good news for Lands' End. "The bottom line is that it is still a very powerful brand name," said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking firm in New York City. He added: "I think as a separate company — any way they can get out of the Sears orbit — will be good for Lands' End and good for their future."Lands' End has about 4,500 employees in the United States, most of them at its Dodgeville headquarters.

'Survival mode'

When Sears bought Lands' End 11 years ago, Sears executives said they were looking at the acquisition as a way to lure its upper middle-class hardlines customers — the people who come to the store for a hammer or a refrigerator — into the apparel department. Sears said its lower-income shoppers had been buying in all departments of the store, but the wealthier ones came in only for tools and appliances. Sears opened Lands' End shops inside its stores, giving Lands' End a distribution point besides catalogs, online and outlet stores. About 300 Sears stores have Lands' End shops.

But Sears has struggled financially amid tougher competition from brick-and-mortar stores such as Walmart and Home Depot, along with online retailers. Sears has had declining sales since 2005, when hedge fund billionare Edward Lampert merged Kmart and Sears. Lampert still controls Sears Holdings. Last year, Sears announced plans to restore profitability by cutting costs, reducing inventory, selling off some assets and spinning off others. Among stores set to close: Kmarts in Brookfield and Fort Atkinson and a Sears location in Racine.
Sears reduced net debt by $400 million and generated $1.8 billion in cash from the asset sales in the latest fiscal year. Sears also has been building a loyalty program called Shop Your Way, which accounts for 65% of its sales and has tens of millions of active customers. However, it continues to lose money. Sears Holdings lost $930 million in its 2012 fiscal year. Sears said Tuesday that comparable store sales — sales at stores open at least a year — dropped 3.7% in the 12-week period ending Oct. 26 at its Sears and Kmart stores in the U.S. Sears is set to release its third-quarter financial results on Nov. 21. "Sears is a train wreck, and I think they're in survival mode," Davidowitz said.

'A decent brand'

Morningstar Inc. research analyst Paul Swinand said Lands' End is thought to be one of the best parts of Sears Holdings. "It's still a decent brand. It's still fairly separate from Sears," Swinand said.
Swinand said it isn't clear whether Sears is planning a straight spinoff to shareholders or some other type of separation. Bob Berglin, executive director of the Dodgeville Area Chamber of Commerce, is among those who would be happy to see Lands' End as a stand-alone company again. "I think it will be positive news if it does happen," he said.

Sears spokesman Howard Riefs said Tuesday there is no timetable for a potential split-off for Lands' End.
Two years ago, Sears spun off its Orchard Supply Hardware business, but, loaded with debt, Orchard filed for Chapter 11 bankruptcy this year and was taken over by Lowe's Companies Inc. Sears also announced Tuesday that Sears Canada, in which it holds a 51% stake, would sell five store leases, including its flagship downtown Toronto store, to Cadillac Fairview Corp. for about $383 million.
After the news Tuesday, shares of Sears closed up $6.53 at $62.09.