Seeking Alpha
Value, CFA, dividend investing, ETF investing
Profile| Send Message|
( followers)  

Sears (NASDAQ:SHLD) confirmed recently what has been rumored to take place for a while by officially announcing intentions to spin off its Land's End business. The company claims that this move will create additional capital in the short term and shareholder value in the long term, but spinning off Land's End seems more like a last ditch effort to keep a sinking ship above water.

The depressing state of Sears has been well documented; the company has experienced 27 straight months of sales declines. A rudimentary search of the internet yields a laundry list of customer shopping experience complaints, Belus Capital Advisors' Brian Sozzi recently posted a disheartening photo album from a recent shopping trip to Sears demonstrating just how disorganized the company is while offering statements such as "there's no reason to go to Sears" and "it offers a depressing shopping experience and uncompetitive prices". Not exactly a rousing endorsement for the company.

While the company is touting this spinoff as a solid move, here's why the move is more discouraging than encouraging.

Sears is selling profitable units at the expense of its own bottom line

Land's End is one of Sears few profitable ventures thanks to its appeal to a more affluent customer. It's estimated that a Land's End spinoff could net Sears somewhere around $2.5 billion. While I can understand Sears wanting to strike while the iron's hot (relatively speaking), getting rid of one of your more profitable ventures leaves the parent company in worse shape.

Sears current strategy appears to be sell of whatever they have of value in order to stay alive for a few more months. Land's End will be the first to go. Sears Auto Service also does fairly well so it could very well be the next to go as has already been rumored. Sears has already shuttered hundreds of stores and sold assets like General Growth Properties. For a company that is burning through cash and is forecast to lose over a half billion dollars a year for the foreseeable future, this seems like a plug in the dam instead of a long term strategy.

Which brings up to the next point…

A spinoff doesn't address the main issue of how to increase sales

As mentioned above, Sears has seen over two straight years of monthly sales declines and it's this issue that needs to be addressed if Sears has any chance of surviving long term. Unfortunately for shareholders, it doesn't look like it's happening.

Capital expenditures have been steadily declining. The company spent $570 million in CapEx in 2007. In 2012, that number dropped to $378 million. CapEx as a percentage of revenue in 2012 was a pitiful 0.9%. That compares to a 3.4% figure for Macy's (NYSE:M). Even if the company wanted to invest in the business it may not have the means anyway; Sears is down to a cash position of roughly half a billion dollars. Perhaps that's why the Land's End spinoff is important.

A spinoff will negatively affect credit rating

This dovetails on the first point that was made. Selling of profitable assets leaves Sears in a worse financial shape. Moody's hasn't dropped its "stable" credit rating outlook on Sears just yet, but says it's ready to drop it to "negative" if the company can't turn its operating performance around.

Moody's also notes that a Land's End spinoff would provide Sears with only "limited cash proceeds" which further enforces this notion that a spinoff would be nothing more than a short term stopgap.

CEO Eddie Lampert is selling his shares

It's never a good sign when the guy in charge is pulling his chips off the table.

In a recent SEC filing, it was revealed that Lampert's stake in Sears dropped from 55% to 48%. Lampert said that the sale had to do with needing to reimburse investors in his hedge who had made withdrawals and that the sale had nothing to do with his confidence in the company. I suppose we can take him at his word, but the CEO selling some 7 million shares usually can't be considered a positive.

Conclusion

I'd like to believe that an iconic brand like Sears will find a way to rebound and survive but I'm just not seeing a lot to like here.

The evidence suggests that even after 27 straight months of sales declines, Lampert and company have no real strategy to turn things around. Sears is running out of cash and they're not investing in the company at all to improve sales or the customer experience; what they're left with is selling off any asset the company has in order to stay alive just a little longer. You can only do that for so long before you run out of assets.

What surprises me even more than the lack of a strategy is the performance of the stock. Despite all of the company's issue, the stock price has held up remarkably well. Up until a couple of weeks ago, the stock had held steady around $60 but recently dropped into the mid-40s once the news of the Land's End spinoff began to settle in.

Perhaps investors are starting to realize that it might be time to head for the door.

Source: Sears: Land's End Spinoff Feels Like A Desperate Hail Mary