The Real Reason Lampert Wants Restoration?

Perhaps this little nugget is the reason for Sears Holdings (SHLD) interest in Restoration (RSTO). Let's ignore the store traffic and start with the mail order division (think Lands End).

Third quarter net revenues increased $16.6 million compared to the year ago period, primarily driven by growth in the Company's Direct-to-Customer segment. Direct-to-Customer revenues were $97.2 million and accounted for 56% of total revenues, up from 36% of total revenues in the third quarter of last year. The increase reflects growth in catalog and page circulation, and a continuing shift in revenues from the Stores segment to the Direct-to-Customer segment resulting from management's multi-channel merchandising and marketing strategies and operational changes implemented in the second quarter of 2007. Revenues in the Stores segment were $76.5 million in the third quarter of 2007.

So, Lampert is offering about $262 million for a company with more than $150 million in owned inventory, $1.7 million in cash, $8.5 million in receivables and a mail order division with profits of about $32 million a year that grew 71% over last year. If we take those numbers alone, Lampert will receive $192 million back for his purchase price almost immediately.

By merging Restoration's back end operations with Land's End, profitability at the segment will jump. One also has to consider the added benefits to both catalogues by cross selling merchandise in them. Perhaps a combined Land's End / Restoration issue?

Of Monday's results, Gary Friedman, President and Chief Executive Officer, stated, "Weakening consumer spending and traffic levels continued to affect our business in the third quarter, particularly higher ticket durable categories. Revenue did not achieve our expectations, driving substantially all of our larger than anticipated operating loss in the quarter. While we are encouraged by some of the early holiday trends in our business, we remain cautious due to the macro economic environment, which has proven highly challenging for the home furnishings sector this year."

The same song has been sung by all housing related retailers this fall like home Depot (HD), Lowes (LOW) and Sears itself. Lampert will end up getting Restoration for essentially nothing. Sound familiar? Is restoration a huge deal that will make a huge difference in the $53 billion in annual sales Sears generates? No. But Lampert is picking up a quality brand name at a song that will generate positive results and will add to the current brand base Lampert has .

True, Restoration's results sucked and well, that is why Lampert can get it so cheap. It is called "value" investing for a reason.

Interesting Tidbit in the 13-D Filed by Sears Holdings Regarding its Bid for Restoration Hardware

Above my thesis explains that Lampert wants Restoration's mail order business. The success of that part of Restoration despite the current retail environment in the last quarter underscored its strength and the possibilities for it. I further stated that I thought a Lands End and Restoration combination was the likely reason for his interest.

Now we find out that in October Lampert had Lands End's President accompany him to see Restoration's CEO. It would appear as though Lampert was thinking along the same lines, a Restoration / Lands End combination.

The filing also states that Sears may at any time take any action it deems appropriate regarding the acquisition or disposition of shares in Restoration. Simply put, Lampert got the confidential information he wanted without giving up his ability to seek other channels to acquire more control of the company.

Comments

[jud:]

hey todd,
SHLD is killing my personal portfolio. are you still long? i like to think i'm long for life in SHLD, but how long can we stomach this? in my blog updates, it noted you had recently written an article about Sears vs Competition, mentioning Greenberg's criticism of ESL. where can i find this article?

2007 Dec 16 04:07 PM