Sears Moves to Spin Off Lands’ End

(Chicago Tribune/MCT) -

The combination of Sears and Lands’ End wasn’t quite a fashion nightmare, but it wasn’t a good fit either.

That’s more apparent now, as Sears Holdings Corp. disclosed plans Friday to separate Lands’ End into its own publicly traded company, a little more than a decade after it acquired the preppy apparel retailer to spice up its clothing lines.

For the first time since the 2002 acquisition, the public got a look at Lands’ End’s financial performance, and the picture is not as pretty as one of the retailer’s catalogs.

The company reported $49.8 million in profit on $1.59 billion in revenue in its last fiscal year, down from $134.9 million in profit on $1.66 billion in sales in 2008. In particular, Lands’ End departments within Sears stores are unprofitable. Mary Ross Gilbert, a financial analyst who follows Sears, said the results were weaker than she expected.

“This was supposed to be one of the jewels of Sears’ portfolio,” said Gilbert, managing director of Imperial Capital, an investment bank in Los Angeles. “I would say it’s not that shiny of a jewel.”

While Lands’ End suffered under Sears Holdings’ ownership, stock analysts said the company has potential as an independent company. Sears stockholders who will receive shares in Lands’ End should take comfort that the retailer known for classically styled clothing still has a lot of loyal customers and a nationally known brand associated with high quality and good customer service.

“I don’t think it’s perfect, but it’s not beat up,” said Paul Swinand, an analyst at Morningstar in Chicago. “It should have improved prospects on its own.”

But Sears Holdings will still loom large over Lands’ End’s operations after the planned spinoff. Edward Lampert, Sears Holdings’ chairman and chief executive officer, is expected to own nearly 50 percent of Lands’ End’s stock following the separation. He owns a similar stake in Hoffman Estates, Ill.-based Sears Holdings.

Lampert created his retailing empire by merging Kmart with Sears, Roebuck and Co. in 2005. But the combination has not worked, as Sears and Kmart have each lost customers because of outdated stores and intense competition. Sears Holdings lost $3.1 billion in 2011, $930 million in fiscal 2012, and $1 billion in the first nine months of fiscal 2013, which ends in January.

Lampert has been selling stores and spinning off assets, such as Orchard Supply hardware stores and Sears Hometown and Outlets stores. In October, Sears Holdings said it was considering separating Lands’ End and its auto center unit.

Sears Holdings took the first steps to spinning off Lands’ End to shareholders by filing a registration statement Friday with the Securities and Exchange Commission.

In the filing, Lands’ End said Lampert and his hedge fund, ESL Investments, “are expected to exert substantial influence” over the company, and their interests may “diverge” from the interests of other stockholders.

Lands’ End also pointed out that a portion of its sales are tied to the success of Sears stores, a significant risk considering Sears’ deteriorating performance.

In paying $1.9 billion for Land’s End, Sears hoped to become the preferred shopping destination for suburban moms. The average annual household income of Lands’ End customers was $104,000, and nearly half of its customers were between 36 and 55 years old.

Sears’ strategy was to create a “store within a store” business model. In 2005, it opened its first “Lands’ End Shop” at Sears. As of August, there were 275 Lands’ End Shops. These “shops” accounted for 16 percent of Lands’ End revenue in 2012, or $253.7 million.

Sears has about 800 stores in the United States.

But the retail partnership with Sears is losing money. Lands’ End said the brick-and-mortar business, which includes a handful of outlet stores, had an operating loss of $10.2 million in 2012.

The poor performance continued in the first half of 2013. Revenues at Lands’ End’s brick-and-mortar business fell 12 percent.

What’s more disappointing to analysts is that Lands’ End’s online and catalog sales also are declining. In the first half of this year, direct sales fell 1 percent from the same period a year ago. In 2012, direct sales fell 9 percent.

“This is not a growth situation,” Gilbert said.

The funny thing – not so funny if you’re a Sears shareholder – is that Lands’ End is one of Sears Holdings’ best-performing assets, according to analysts. Without Lands’ End going forward, Sears Holdings’ prospects look even bleaker.

Before the spinoff, Swinand had estimated Sears Holdings’ 2014 earnings before interest, taxes, depreciation and amortization at less than $100 million. If you exclude Lands’ End, which generated about $100 million in EBITDA last year, Sears Holdings would have to continue to sell assets and shrink working capital, he said.

Sears Holdings shares fell $1.89, or 3.8 percent, to close Friday at $48.09.

Sears Holdings said it expects the Lands’ End spinoff to be a tax-free distribution to shareholders. The securities filing did not mention how much debt an independent Lands’ End will carry and whether it will pay a dividend to Sears Holdings.

Lands’ End’s headquarters will be in Dodgeville, Wis., where it maintains administrative offices and a large distribution center. Chief Executive Edgar Huber is expected to remain in charge after the spinoff.