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Summary

  • Lands' End recently spun off from Sears Holdings.
  • Lands' End paid a $500m dividend to SHLD prior to the spin-off. This, among other factors, will handicap the company going forward.
  • CEO Eddie Lampert still controls Lands' End and has a less than promising retail track record.
  • Many nautical terms and metaphors such as "anchors" apply to this spin-off.

Recently, Sears Holdings (NASDAQ:SHLD) spun off Lands' End (NASDAQ:LE), the casual clothing and household goods company bought in 2002. This is one of many moves ESL Investments is making to capture value and try to "right the ship" at Sears. While long-term this is likely a good move for Lands' End customers, I disagree on the optimistic assessment made by New Capital in what is the first article on Lands' End here on Seeking Alpha, and one of the first analysis pieces on the stock at all. His assessment is factually accurate, however, the potential upside is rosy and understates some "anchors" to performance facing Lands' End.

First, Lands' End's quality and reputation took the expected hit from being part of Sears for over a decade. Prior to 2002, the company was an independent direct marketing company that sold quality clothing and furnishings at competitive prices via catalogs and the internet. For example, I own Lands' End shirts from this time period, and many have held up for years due to rotation and proper laundering. While many items are still of good quality, Sears lowered some standards, and the perception was even worse.

Additionally, even as an independent company, Lands' End disclosed in their 10-K many enduring purchasing, stocking and retail arrangements with Sears going forward multiple years. Retail outlets inside of Sears stores number near 300, and while this number will fall, I find these stores within a dying store an albatross around Lands' End's neck. I have never visited a Sears store to purchase a Lands' End product, nor can imagine others doing so, especially as news of the spin-off filters down to consumers instead of investors. According to some sites, only 17% of LE revenue comes from all retail sites-both the Sears stores and clearance outlets. This ongoing overhead will detract from earnings while likely generating lower and lower revenues.

Second, a $500M special dividend was paid by LE to SHLD prior to the spin-off. I have searched in vain to find the coupon on the debt LE incurred to support this payment. An article on the spin-off on Barrons sets the annual expense as $21M to $23M, implying a coupon of approximately 4%. This is a leverage and a debt burden placed on the new company, and is a sea anchor to future performance. What of value, if any, did Lands' End receive from the 12 years it was part of Sears? As already mentioned, the access to Sears retail establishments is not a positive, and LE is paying to participate in the "Shop Your Way" program under separate fees. The viable part of Lands' End's business model was pre-existing. While the dividend is a positive for SHLD owners, anyone purchasing LE stock (not receiving it as a distribution) should see this leverage as a glaring negative.

Third, and most importantly in my analysis, is the fact that while LE has been spun off from SHLD, it is still primarily owned and operated by ESL Investments. Edgar Huber joined the company in 2011, and three other directors (out of 6 total) are closely tied to ESL Investments or Sears. In my mind, this means a "business as usual" management team that has already demonstrated the inability to manage a retail business in a challenging environment, and a Board that is beholden to CEO Eddie Lampert. While they will likely attempt to sharpen Lands' End's focus and marketing, this seems like an "independent" company in name and reporting only.

Is there a safe haven in the storm?

Ok, that's the last nautical term used in an article on a company that Gary Comer started in a chandlery over 50 years ago (well, that was the last one). Due to the drop in the stock price since the spin-off, LE is trading close to its book value per share. I do not anticipate LE's price dropping much further unless significant negative news or unanticipated costs arise over the near term. With the current Board, building duplicate supply chains while contracts with Sears drawdown over the next few years is unlikely, so rapidly increasing costs due to this duplication are unlikely. Therefore, downside risk is minimal, but opportunity cost is great. With no dividend, little catalyst for appreciation in a very competitive environment and enduring negatives, I think it would be better to shop for clothes from Lands' End, and shop elsewhere for stocks. Of course, please do you own research to confirm or disprove my comments before making investment decisions.

Source: Lands' End: A Contrary View