With news last week that Sears Holdings (SHLD) would be selling Craftsman tools in Costco (COST) stores, Eddie Lampert has hopefully ushered in the era of breaking away from a retail store based operation. Ever since Lampert bought Sears and Kmart, investors have been looking forward to the day that the company would focus more on selling the brands worldwide and monetizing the massive real estate assets versus focusing on a dying retail operation that seems utterly lost.
Just looking at associate of mine, nobody goes to Sears or even thinks about visiting a store when tool needs arise. It's just too easy to visit a Home Depot (HD) or Lowe's (LOW) store and acquire the best option available. In fact, I'm amazed that Craftsman holds a dominating 33% market share in the hand tool market and a respectable 14% share in the power tool market.
The recent Stanley Black & Decker (SWK) earnings report was eye opening though. Note that SWK has a $10B+ sales operation compared to only $3B for Craftsman. This is partly due to SWK having a more professional and industrial focus. Why couldn't Craftsman migrate to a more professional brand? The previous limiting factor was that professional contractors weren't going to walk into a Sears store, and definitely not a Kmart store, to buy a power tool.
The historical mindset at SHLD was that brands like Craftsman, Diehard, and Kenmore drove traffic to the stores, therefore selling them at other retail outlets would greatly reduce foot traffic. Anybody shopping at a Sears store ought to know the fallacy to that mindset. Have you actually seen anybody at a Sears store lately?
Kenmore might be the one brand along with Crafstman mowers that do actually drive traffic to Sears stores. Not many people, however, are going to drive an extra 5 miles to a Sears store for wrenches or a battery. A $1,000 fridge is worth the extra time, though I've never made such a trip.
A company trading at a $6B market cap doesn't need to look much farther than the SWK example to obtain a vision of the future. If Black & Decker can be worth $10B by mainly selling tools through retail outlets, what would an unleashed Craftsman or Kenmore or Die-hard brand be worth?
The expansion of the Ace Hardware deal to 1,000 stores is a good sign. The rollout last weekend to Costco's 430 US stores is even better. A lot more work needs to be done in order to revitalize these brands and externalize them from SHLD. Inevitably this could dramatically increase the value of SHLD stock. The ability to expand the brands without worrying about killing them if it shuts down stores will be huge.
The externalizing of brands potentially opens the door for the REIT setup, especially for Sears' mall locations, which just don't fit in the current market. Who goes to buy a shirt and a wrench these days?
Lots of value can be unlocked with the current assets of SHLD, especially considering the anemic valuation. Does anybody really doubt that Craftsman couldn't approach the value of SWK? That doesn't even count the real estate, Kenmore, Lands End, Diehard, plus numerous other assets.
Below is just a broad look at what the three main brands could achieve if brands were allowed to unlock value. Surely Kenmore could compete well with Whirlpool (WHR) on a global basis. Diehard might have the hardest time catching Energizer (ENR), but why hasn't Sears moved beyond just automotive batteries? The brands are too stale and opening them up beyond Sears would allow them to prosper. If SHLD wants to be like a Macy's (M) or Home Depot (HD) and create a private portfolio, then it should be done with a new no-name lower-end brand versus these already nationally established brands. Innovation and expansion is the key!
Brand potential / market value:
- Stanley Black & Decker: $9.9B
- Whirlpool: $4.3B
- Energizer: $5.0B
- Total: $19.2B
Of course, these brands are not worth anything close to their valuations currently, but does anybody doubt that Craftsman, Kenmore, and DieHard brands have the same brand recognition as the above companies? SHLD just needs to release them on the world. If Sears stores die in the process, so be it. The real estate would be worth more to somebody else, including shareholders.
Disclosure: I am long SHLD.
