Sears’s Lampert Broadens Breakup Plans as Sales Slump
Eddie Lampert, who has been slicing off pieces of his Sears Holdings Corp. (SHLD) for years, is poised to break off even bigger chunks of the business as he seeks to generate cash to revive the ailing retailer.
Lampert, Sears’s chairman, chief executive officer and largest shareholder, said yesterday that the company is considering separating the Lands’ End apparel business as well as Sears’s line of automotive-service centers. The retailer’s statement hinted at a spinoff for Lands’ End and a possible sale of the auto business, according to analysts.
The moves may raise as much as $2.5 billion in cash to help Lampert make the changes needed to snap a string of five straight quarterly losses and 26 consecutive quarterly sales declines. Yet those new funds won’t be enough to turn Sears around unless Lampert devises a better strategy to repair the department-store business, which saw same-store sales slide 4.8 percent in the third quarter, said Matt McGinley, a managing director at International Strategy & Investment Group in New York.
“They’re continuing to burn the furniture to stay warm,” McGinley said yesterday in a telephone interview.
McGinley estimated spinning off Lands’ End and selling the auto centers may provide Hoffman Estates, Illinois-based Sears with $2.1 billion to $2.5 billion in additional liquidity. That’s more than double the $671 million in cash the company had on hand as of Aug. 3.
Mary Ross-Gilbert, an analyst at Imperial Capital LLC in Los Angeles, valued the Lands’ End business at as much as $1.7 billion. The auto center business should be valued at about $660 million, she said.
Sears has been struggling since Lampert, 51, engineered the merger of Kmart Holding Corp. and Sears, Roebuck & Co. about eight years ago. He divided the company into more than 30 units, each with their own presidents, chief marketing officers, boards of directors and profit-and-loss statements, which former executives say has caused infighting among units that need to work together.
Lampert, who took over as chief executive officer in February with a $1 annual salary, said earlier this year that such a decentralized structure provides better information over time, which helps decision-making and accountability.
Even so, his approach has failed to revive the retailer. Included in yesterday’s release was a forecast that Sears’s third-quarter adjusted loss before interest, taxes, depreciation and amortization will widen to as much as $300 million from $156 million a year earlier.
Last year, he split off Sears’s smaller-format Hometown and Outlet stores to raise about $446.5 million. He also spun off a portion of Sears’s stake in Sears Canada as well as its investment in the Orchard Supply hardware stores.
Lampert has been active with Sears’s real estate, too. He sold 11 locations to General Growth Properties for about $270 million in cash proceeds last year. The company said yesterday in a statement that Sears Canada is selling five store leases to Cadillac Fairview Corp. for C$400 million ($383 million). Sears said it is continuing to evaluate its U.S. stores, including leased locations that are set to expire.
The asset sales have cheered equity investors, sending the stock up 12 percent yesterday and bringing its gain this year through yesterday to 50 percent, compared with a 24 percent advance for the Standard & Poor’s 500 Index. Sears fell 3.3 percent to $60.03 at 11:24 a.m. in New York.
Five-year credit-default swaps tied to the debt of Sears Roebuck Acceptance Corp., the holding unit of Sears, rose 51.7 basis points yesterday to 967.5 basis points, according to data provider CMA, which is owned by McGraw-Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s the biggest increase for the contracts since Aug. 22, when the swaps increased 103.1 basis points. Credit swaps typically rise as investor confidence deteriorates.
The contracts indicate that investors’ perceived risk of Sears debt is fourth-highest among retail discretionary companies with actively traded swaps. Only RadioShack Corp., J.C. Penney Co. and Toys “R” Us Inc. are seen as more risky by derivatives traders.
Sears’ swaps are three times as high as Avis Budget Group Inc., the car-rental company whose debt is perceived as fifth-riskiest among the same retail companies. Avis’ five year swaps closed at 281 basis points yesterday, according to CMA prices.
The department-store chain’s performance also has weighed on the assets Sears is looking to sell. The retailer bought Lands’ End for $1.9 billion in 2002, about $200 million more than it currently would be valued at, Ross-Gilbert said.
“When you start stripping out Lands’ End, it just goes to show you how unprofitable the core Sears business is,” she said in a telephone interview.
The decline stems in part from a lack of investment that has made Sears’s stores become outdated, McGinley said. Last year, Sears spent about $1.51 a square foot on its Sears stores and $1.04 on its Kmart stores, compared with $5.56 at Home Depot Inc. (HD), and $6.25 at Macy’s Inc. (M), McGinley said in an e-mail. Money to update them is becoming more scarce, with Sears’s operations consuming cash for five of the past six quarters.
The retailer’s investments have been focused on creating long-term value by transforming Sears from a traditional brick-and-mortar retailer to a member-focused organization that makes smart use of technology, Chris Brathwaite, a spokesman, said yesterday in an interview.
A centerpiece of that revamp has been the Shop Your Way loyalty program, which offers members discounts. More than 60 percent of Sears’s sales now come from Shop Your Way participants, Lampert said during a May 23 teleconference.
“Retailing is about more than the aesthetics of the box,” Brathwaite said. “We’re investing in technology, we’re investing in Shop Your Way, which are significant investments. The retail landscape is littered with the carcasses of retailers who didn’t skate to where the puck was going.”
McGinley said he thinks it’s “very unlikely” that Sears can turn around its retail business quickly after years of underinvestment. He estimates that the company will use $900 million to $1 billion in cash this year.
“It makes sense to sell assets, it makes sense to cut costs, but I just don’t see a way out at this point,” he said. “There’s no clear path to better profitability.”
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