Lampert's Move Is All About Brands

Eddie Lampert's move at Sears Holdings (SHLD) on Friday is a big one in unlocking value at the retailer. In November I stressed that Sears was not so much of a retailer story, but a brand one. The general idea of that post and several others was that Lampert would eventually leverage the quality brands he has. The Wall St. Journal reported Saturday that Lampert is doing just that.
Said the Journal,

A Sears spokesman confirmed the moves late Friday, saying the new structure will provide operating businesses with "greater control, authority and autonomy.

The contemplated restructuring would create separate units to manage Sears' real-estate holdings and run brands such as Kenmore, Diehard and Craftsman. It isn't clear how the units would be divided or which unit would run the stores themselves.

The structure would allow Mr. Lampert to spin off or close business units more easily, said a person knowledgeable about his thinking. "He warmed to the idea of a spin-off strategy," this person said. The company also is willing to be flexible about how each unit will be set up, based on the skills of its operating executive. One practical effect of that could be to reduce costs.

He is essentially setting up Sears like Warren Buffett's Berkshire Hathaway (BRK.A). This is probably the single best thing Lampert could have done. Why? Let's say I am the newly minted head of the Kenmore line. What is my first move? Pick up the phone and call Home Depot (HD) and Lowe's (LOW) and see who wants to sell some of the best appliances out there. When I hang up, I tell them they can expect a call from the Craftsmen guy next. Will they license the brands to GE (GE) to expand sales even more?

Will we see Diehard batteries in Wal-Mart's (WMT) or Targets' (TGT) automotive sections soon? How about AutoZone's (AZ)?

With Wal-Mart consistently trying to upgrade its apparel options, could we see either Lands End, Joe Boxer, Covington, Structure or Canyon River Blues on the shelves? With Target looking for refreshed options after a very disappointing holiday season, might they take a stab at it?

The main issue with Sears in its present set up is that the closing of questionable locations now dramatically impacts sales. If the brands are being sold through other locations, closing and selling stores can have a more positive effect on the bottom line as the sales impact is not nearly as great but the expense reduction is the same.

We know Target has been begging Lampert to sell them hundreds of locations. Could the newly separated real estate management arm, rather than selling them, become a landlord to Target? Rather than just closing a Kmart location, rent it to Target. In that respect, that division becomes a REIT to the holding company. With 3,500 locations under it, the options are incredible.

The point is if the main brands that account for the majority of the profits are currently licensed and sold through other outlets, the importance of the physical stores are diminished. It also means that Sears now has more options for the marginal stores it may be carrying now. Sears could keep the best and most profitable locations while disposing of the lesser ones through leases or outright sales and keep merchandise sales and profits going through other retailers.
This is exciting...

Sears Advertising Now Featuring Brands

Did anyone else catch the NFL network Sunday? All season the shows have been sponsored by Sears (SLHD), the store. Today, the pre-game show is being sponsored by "Craftsmen, available at Sears". The Craftsmen logo is all over everything... The commercials, once the "Sears Book" variety are now Kenmore commercials, "available at Sears".

This would lead one to believe Friday's announcement about breaking up Sears into a Berkshire Hathaway (BRK.A) like holding company has been in the works for some time and Sears Holdings is farther ahead of this than many believe.

Ad campaigns are not altered on a dime.

Disclosure ("none" means no position): Long Sears, Long Wal-Mart, None in others.

Comments

[granger]

Good stuff, thank you!

[KSTHANE]

It will still take this strategy some time to play out. Let's say that they do start selling their better known brands through places like Target, HD, Lowe's Autozone, etc and they start closing marginal stores, what are the remaining reasons to go to the good Sears stores? If you can go to Target to pick up your favorite brand of boxer shorts, what reason do you have to go to Sears? Over time, I think this strategy could work but in the interim they're going to be left with a lot of stores that don't sell very much stuff.

[freddiemertz]

Shockingly ill-informed and naive commentary yet again from Mr. Sullivan. For starters, these are divisions within a company, not completely independent units working under a holding company like Berkshire Hathaway's divisions. Second, TGT has not been begging SHLD to sell them stores for three years. They (and other potential buyers like HD & LOW) have been building stores in the same trade areas as the desirable SHLD locations because SHLD has been unwilling/unreasonable in negotiations. So although many of those locations are great, the opportunity has passed as potential buyers have built out nearby locations. And why exactly is a REIT a good thing? Please give me one example (other than Alexanders which held a single location in the heart of midtown Manhattan that is now the Bloomberg tower) of a retailer becoming a REIT and creating value. RVI, which many had been valuing on real estate value just had TO PAY someone to take their Value City locations off their hands. Third, the day you can buy Craftsman, Kenmore and Diehard in non-SHLD retail outlets is the day that SHLD packs it in and stops being a retailer, because without those brands there is simply no reason to shop at Sears. Fourthly, Covington, Structure and Canyon River Blues (Canyon River Blues?? -- you can not be serious) are worthless brands that Wal-Mart or any other retailer would not stock in their stores if they were paid to do it. And Joe Boxer is not owned by SHLD -- it is owned by ICON -- do your research. SHLD bought the failed Structure brand from LTD for less than $10mm.