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Analysts not sold on Sears’ plan to spin off Lands’ End

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Updated: January 8, 2014 6:08AM

Expect more of the same in a losing game plan — that’s how industry analysts greeted news Friday of the latest planned spin off by struggling retailer Sears Holdings Corp.

The Hoffman Estates based company said it is spinning off its Lands End clothing business, which generated $1.6 billion in sales last year.

“This has been an ongoing endless story, a continuing story of spinning things off and selling,” said Howard Davidowitz, chairman of national retail consulting and investment banking firm Davidowitz & Associates Inc. “At the end of the day, I think there’s not going to be much left.”

Sears Holdings said in October it was evaluating separating its Sears Auto Center and Lands End businesses. It said a sale of Wisconsin-based Lands End, which it bought in 2002, wasn’t planned.

“At the right price, they would sell it, so this whole thing means they weren’t finding the right price for it,” said Morningstar Inc. analyst Paul Swinand.

Under chairman and billionaire hedge fund manager Eddie Lampert’s leadership, Sears Holdings has been cutting costs and inventory and shedding assets — moves designed to help it return to profitability. That helped it reduce net debt by $400 million and generated $1.8 billion in cash from the asset sales in the latest fiscal year.

Sears, which operates Sears department and Kmart stores, spun off its Sears Hometown and Outlet business last year. That followed the spin off it its Orchard Supply Hardware stores in 2011. In October, Sears Canada announced the sale of five store leases.

Sears Holdings has watched losses mount and sales sink for years amid a loss of market share to Walmart, Target, Home Depot and other retailers. It had a fiscal third quarter loss of $534 million, worse than the $498 million loss in the year-earlier quarter. Revenues sank $585 million to $8.3 billion. Same store sales at Sears Domestic dropped 4 percent and fell 2.1 percent at Kmart.

“Its stores are falling apart because of lack of investment,” Davidowitz said. “The service is very poor… because they fired so many people. The prices are not competitive, and the assortments are not compelling. That’s the problem.”

Morningstar reiterated its extreme uncertainty rating on the company following the Lands End news, noting that implies it views an investment in Sears as appropriate only for speculative investors.

“We are concerned that Sears’ operating strategies are making a bad situation worse,” Swinand said in a research note. “Inventory is tight during the holiday period, which could further constrain already declining sales. The state of stores has not improved, and in our experience, even loyal Sears and Kmart customers may eventually turn away.”

In spinning off profitable Lands End, which is subject to board approval, Sears Holdings loses the positive cash flow Lands End was generating, Swinand said.

Asked given Sears continuing losses, how likely it is that it could go under, he said, “Tomorrow, very unlikely. December 31, very unlikely. But if the losses accelerate and you spin off all the things that were making you money, it’s not impossible in the next year or two … The trend is not good.”

Contributing: AP

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