Continuing a spate of troubling announcements, Sears Holding Corp. just disclosed that it is exploring the possibility of cutting loose its Lands’ End brand.
Historically, Lands’ End has been a reliable performer, known for its comfortable, affordable clothing, competing directly with comparable apparel brands like L.L. Bean. It operates on a business model similar to L.L. Bean, moving merchandise through multiple channels: catalogue sales, internet purchases and over 300 stores across the US. Sears bought the retailer in 2002 for $1.9 billion.
Sears is considering the sale of Lands’ End not because of its flagging performance, but precisely because it has been revenue rich and therefore will likely fetch a good price. This is an extension of Sears’ controversial strategy to sell off some its best performing stores for the purpose of raising as much capital as possible. Sears is crunched for cash and may be expecting a need for more after what many anticipate will be a disappointing holiday shopping season. Sears’ financials have been anemic, reporting a second quarter net loss of $194 million, compared to $132 million at the same time last year. Revenues plunged 6.3% to $8.87 billion from $9.47 billion.
Sears also recently announced it is seeking a secured term loan of $1 billion in order to refinance already existing debt.The loan will replace Sears’ existing $3.275 billion asset-based credit line. A spokesperson from the ailing retailer said that the loan will be secured by the same collateral already in place.
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At least at the moment, Sears is entertaining the possibility that it can “spin off” Lands’ End to its own shareholders rather than simply cut all ties through a simple sale. Speaking to the Wall Street Journal, a company spokesperson said, “We believe that Lands’ End is an iconic brand with the potential to become a more global brand.”
Still, some see the maneuver as a way to wind Sears down rather than revive it, selling of its best assets while they still retain marquee value. Over the last eighteen months, Sears has sold almost a dozen stores, some of them admittedly among their best money makers. Some have noted that this an unconventional strategy since retailers typically invest more money into their top performing locations, rather than unload them. Robert Futterman, chief executive of RFK, a realtor which specializes in leases to retailers, said, “Retailers invest in their best stores and refurbish them, they don’t sell them.”
The store closings are part of nationwide trend for Sears, which has been shuttering locations quietly in both the US and Canada. Over the last eighteen months, Sears has sold almost a dozen stores, some of them admittedly among their best money makers. Some have noted that this an unconventional strategy since retailers typically invest more money into their top performing locations, rather than unload them. Robert Futterman, chief executive of RFK, a realtor which specializes in leases to retailers, said, “Retailers invest in their best stores and refurbish them, they don’t sell them.”
Of course, a dozen locations comprise a miniscule fraction of Sears’ massive holdings, with more than 2,000 stores in the US and another 148 scattered about Canada. Still, the sale of profit-generating stores is evidence of its straitened circumstances; while the better locations are more lucrative pieces of realty to move, such a strategy obviously diminishes the company’s ability to make more money by moving product. Also, worried investors are left wondering why other avenues for further capitalization are foreclosed to Sears. Even in its harrowed state, JC Penny managed to raise a billion dollars without cutting itself off from future centers of profit.
Some industry experts have speculated that Eddie Lampert was originally attracted to Sears precisely because of the value of its real estate. One of Sears’ investors, Baker Street Capital, issued a report recently that the retailer’s 350 remaining locations were collectively worth $7.3 billion. Consider that Sears’ total market capitalization is approximately $600 million.
Gary Balter, analyst at Credit Suisse, observes that the principal problem with Sears’ strategy is that its best priced realty is also its most profitable. What would happen if Sears sold off sold off the majority of its top performers? “We highly doubt there would be a profitable chain left. What we are likely to see n the future is that too many pieces have been removed, which in turn is reducing the strength of the core,” he said.
Sears expects to post a net loss of $582 million for the quarter ending on November 2. This quarter last year, it reported a loss of $498 million.