Sears Holdings: Don't Sell Land's End - Expand It

There was a blog post out there this past week that said Sears Holdings (SHLD) should spin off its Land's End line in order to create value for shareholders. It was a well written and thought out piece, and I could not disagree with its author more. I cannot find where I read it, but if the author reads this and would like, they can drop me a line and I will link to it. Here are the reasons for my disagreement:

The Future of Sears Retail
In February I wrote, "I am rapidly becoming convinced that the future of Sears Holdings retail clothing operations will be predominantly Land's End merchandise." This thought was further bolstered when in his annual shareholder letter, CEO Eddie Lampert said that the Land's Ends division had a record year in 2006 for both sales and profits. If this was not enough to convince people, at the annual meeting last week, Lampert said that the Land's end "store in a store" concept was being expanded from 100 to 200 locations in 2007. If you have not been to one of these yet, go (hear me, Maggie?). The layout is enticing, the merchandise is wonderful and the pricing is good. In short, there isn't anything not to like and based on this year's results, I am not the only one who thinks this way. As these locations expand, watch as the retail metrics for Sears improve at an increasing rate. There has been some concern out there that the stores would just cannibalize the online operations. Results to date have proved just the opposite. People seem to be more willing to buy online if they are able to return merchandise to a store for an exchange rather than going through the annoying mail return procedure.

Selling Land's End now would actually destroy long term shareholder value. Each of these locations, as they open, increases the value of the retail operations. It would no doubt give us a short term boost, but it would come at a far too heavy long term price.

Brand Value
Recently, Lampert created $1.8 billion dollars essentially out of thin air. What he did was to create a bond out of the Craftsman, Kenmore and DieHard brands. He found a way to quantify the value of these brands. As Land's End becomes more prevalent and profitable for him, he can do the same for it. I have come to realize that Lampert is smarter than most people out there and sees things that most do not. If you look at it, he has created billions of dollars in shareholder value from two names, Kmart and Sears, both of whom were left for dead by the investing world.

Land's End will eventually have a value to him as a brand that is far in excess of the simple annual sales and profits from the division. Rather than selling this increasingly valuable asset, I would love to see its expansion grow at a faster pace. Lampert, however, is a far more patient and wealthier person than I, so I will defer to him on its pace (that and the fact he has yet to ask my advice). Now, how much value could it have? It is hard to tell, since Sears does not breakout individual results in their 10K, making quantifying it guesswork. My opinion is that since Lampert has repeatedly given Land's End the lions share of credit for margins improving from 24% in 2004 to 27% in 2005 to almost 29% in 2006, its value is substantial and will continue to increase as more locations open.

Future Investments
Now that Lampert has said he will begin to "look for investments" for Sears Holdings, between the cash he has on hand and the value of the bonds he created, he is sitting on almost $6 billion and multiples of that in borrowing power. The guessing games will begin. If Lampert's recent activity within Sears is any indication of his plans, any acquisition will have "Brand Appeal."

What is Dr. Phil's saying? "The most accurate predictor of future behavior is past behavior." He is the first retailer out there to quantify the value of a brand name in addition to its immediate effect on the profit and loss column. Expect the acquisition(s) to be of strong, respected brand names. As for Lampert, it provides him with value few seem to be easily able to see.

Disclosure: Author is long SHLD.

SHLD 1-yr chart:

Comments

[bryanz:]

Just curious as to your thoughts on two things:

1) You say Lampert is ready to go shopping. What about Gap? They've been struggling lately, there's strong "brand appeal" there. He could leave Gap and Banana Republic as stand alone stores then incorporate the Old Navy brand into the fold similar to the way Land's End has been taken in. That would allow for the closing of sagging Old Navy stores which would in turn cut costs, or the Old Navy stores could be converted into Sear Essentials-type stores depending on their size.

2) Buffett has said that he's looking to go shopping. He's also stated that he's looking for a successor to take over BRK. What better way to kill two birds with one stone than to buy SHLD? Buffett is comfortable with retail purchases (Wal-Mart and Target are/have been holdings), and Lampert has already been pegged as "most likely to succeed in the Warren Buffett way." With a current market cap just south of $30B, and assuming a 30% premium, that puts SHLD right in that $40B that's burning a hole in his pocket. Buffett could sit back and let Lampert manage SHLD while prepping him for the eventual succession to BRK. I know there's no indication that Buffett will even buy a US company, but it just seems like it makes sense. Lampert has created long term value in SHLD, something that Buffett values. P/E may be a little lofty but it's right in line with WMT of which he's a percentage stakeholder.

2007 May 15 02:10 AM

[jbs:]

Lampert didn't create $1.8B out of thin air. I think it was BusinessWeek that had a slightly misleading article about this issue. The crux of the article was that Lampert COULD have sold the bonds to an outside party and raised $1.8B but instead used them as part of a self-insurance strategy. Therefore, no money was created from the brands, but the theory was proven that they could be securitized and may generate cash in the future.

2007 May 15 08:12 AM

[MSF:]

TODD YOU ARE LONG SHLD BUT DO YOU ACTUALLY OWN THE SHARES.I READ APOST WHERE IT SAID YOU DID NOT OWN ANY SHARES OF SEARS.
ANOTHER THING,DOING THIS ,THAT,MEANS NOTHING,,,,WHERE ARE THE EARNINGS.IF ANYTHING THEY ARE GOING DOWN.
LAMPERT WAS MAKING MONEY IN THE MARKET WHEN EVEN MY GRANDMOTHER WAS MAKING MONEY IN IT,,TODAY IT IS HARDER,THAT MORON CRAMER GAVE UP HIS HEDGE FUND TO RETIRE HE SAID,,,YEAH OK.(HIS BUDDY PAL EDDIE LAMPERT WAS NEVER ON HIS STUPID HALL OF SHAME,,,,,)HE ALSO SAID TO BUY SEARS ALL THE WAY UP TO $180.

2008 May 06 07:50 AM

[Todd Sullivan:]

msf,

i do....if you read that i did not, you read it wrong... have owned it for a few years

2008 May 06 05:41 PM

[Todd Sullivan:]

msf,

i do....if you read that i did not, you read it wrong... have owned it for a few years

2008 May 06 05:41 PM

[Todd Sullivan:]

bryan,

1- gap will cost too much

2- buffett will hire from within...sokol

2008 May 06 05:42 PM

[Todd Sullivan:]

bryan,

1- gap will cost too much

2- buffett will hire from within...sokol

2008 May 06 05:42 PM