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Moody’s Inspects Sears Spinoff of Lands’ End for “Negative Credit Implications”

Moody’s is closely scrutinizing Sears’ plan to spin off Lands’ End, raising the possibility that such a move might have “negative credit implications.” Moody’s also reported that the strategy is unlikely to have any “immediate rating impact.”

Just last week, Sears Holdings Corp. filed a registration statement with the Securities and Exchange Commission (SEC) officially announcing its intention to spin off its Lands’ End business, pending approval by the company’s board of directors.

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 that of L.L. Bean, moving merchandise through multiple channels: catalog sales, internet purchases and over 300 brick-and-mortar stores across the U.S. Sears bought the retailer in 2002 for $1.9 billion.

Sears is motivated to spin off 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’s 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.

Originally exploring multiple options regarding Lands’ End, Sears has now decided to spin off the retailer 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.”

Moody’s primary concern regarding the spinoff of Lands’ End is that “the loss of Lands’ End’s assets and earnings streams will result in further weakening for creditors at this critical juncture.” Among the many concerns regarding Sears’ financial future, Moody’s also cited the company’s “sizable negative cash flow,” its “weak operating performance” and the “lack of any visibility on an improvement in operations.”