Sears' Nifty Purchase: Footstar Footwear

Footstar Inc. (FTAR) is selling its footwear license to Sears Holdings (SHLD) for $13 million in preparation for winding down its business at the end of the year. Footstar agreed to sell substantially all of its intellectual property to Sears, including the intellectual property related to Sears’ Kmart business.

Footstar operates roughly 1,300 licensed footwear departments at Kmart under a contract set to expire at the end of 2008. They also operate licensed footwear departments in 859 Rite Aid Corporation stores located on the West Coast. Brands under Footstar’s operations include Thom McAn, Cobbie Cuddlers and Texas Steer — which are company owned — and Route 66 and Basic Editions. Kmart-licensed footwear departments account for substantially all of its $630 million in sales and $53 million operating profit. Kmart has begun to hire several employees from Footstar and has promised employment to almost all current management.

So, for $13 million Lampert has saved Sears essentially $53 million annually (the profits Footstar received from Kmart). Not a bad return....

Disclosure: Long SHLD.

Comments

[FreddieMertz]

This makes no sense. How do they save $53mm? They are buying assets of a company that is disappearing.

[User 175234]

that is a steal for all the assets for just 13 million it is a shame footstar was a great company to work for and i have enjoyed my 12 years of service.

RIP FOOTSTAR

[tucker6553]

In Footstar's 10-K, they report that they pay "license fees to Kmart equal to 14.625% of gross sales of covered products of all licensed footwear departments"

Taking their sales of $637 million, this amounts to about $93 million in fees that SHLD would no longer be collecting. So, it would seem that SHLD now stands to take in the Footstar profit of $53 million and to lose $80 - 90 million in license fees.

Perhaps I am overstating the fees by a little bit if not all the sales are related to Kamrt stores, but I still believe there is little, if any profit to be made by Sears running the footwear business themselves.

[todd su]

tucker,

sears paid to foot $637 million (foot revs.)

they are going to run the operations. even if they run it at zero profit, they can sell the merchandise in kmart and save the $53 in profits they paid to foot.

the license fees would be removes from the profit equation. that make that # a wash for the comparison

[tucker6553]

I agree with you, guess I didn't do a very good job of thinking it through. Thanks for the correction. I still think it remains to be seen whether SHLD can operate the department as well as Footstar was able to.


GL

[MSF]

GREAT ANOTHER RETAIL PLAY,,,,,,,,,,,,,,WHAT IS THE USE OF CALLING IT SEARS HOLDINGS,,,CALL IT SEARS RETAIL STORES.

WE ARE DOOMED.

[123]

Does anyone know how people are coming up w 45B valuations for SHLD. Whitney Tilson, for ex, was on CNBC claiming that he is buying dollars for 30c when buying SHLD for $100.

The retail operation is pretty visible at 1.5B of FCF, but how are people coming up w these real estate/brand valuations, does anyone know? Todd, you have been hyping this stock for a long time, but beyond the Lampert factor what does this company have going for it?

Also Lampert is the man but as of yet he has not been able to deploy capital to grow the business. If the business is dying and all he can do is buyback stock or payback debt, this is not a very valuable operating business and probably isnt worth more than the 10X FCF its valued at right now. And you either run the business or sell the assets, you can't do both, and Lampert has been reluctant to do the latter, even for underperforming stores it seems.

Its just a bit frustrating bc all these value guys Pabrai, Tilson, not to mention Lampert love this co but it seems like a crap company.

You look at Penney for example and it is making about the same amount of money on about 20B of sales. Sears is just a real crap company, horribly run, the stores are in shambles, the merchandise hanging on the racks looks like it's already been worn. You'd be crazy to doubt Lampert but have you been in a Sears store? You would think they could at least pay someone to tidy up the racks and not have it look like a garage sale. I don't know why anyone shops there, the clothes are overpriced and the quality is just terrible. Lampert is reorganizing, etc, etc, but why do you need to reorganize to implement such fundamental changes in the stores?

SHLD is like a relic, 3000 stores back from the 60s when Americans had no choice at all, and shopped Sears bc there was no alternative. Now you look, almost any store is better than Sears.

As to the Kraftsman, Kenmore whatever-what is the big deal? A toolset is a toolset, a fridge is a fridge, whether its called Kenmore or Whirlpool or Maytag, I can get one in BBY, I can get one anywhere, I don't have to go to Sears because I need a Kenmore.

[MSF]

THIS STOCK AND COMPANY REALLY STINKS.
THINK ABOUT IT,WHEN LAMPERT WAS MAKING MONEY FOR GS EVERYONE INCLUDING MY GRANDMOTHER WAS MAKING MONEY.
THAT MORON CRAMER LEFT THE BUSINESS AND LAMPERT IS SUCKING WIND TODAY.HE DOES NOT HAVE HIM ON HIS STUPID CEO HALL OF SHAME,,OH THATS RIGHT IT'S HIS BUDDY PAL.

[MSF]

''LOSE MONEY'' WITH JIM CRAMER

[MSF]

GREAT CONFERENCE LAMPERT ON MAY 5 2008,

CONFIRMING WE ARE DOOMED,,,,,,,,,,GO TO YOUR MANSION AND COLLECT YOUR FEES.

BUFFET YOU AIN'T.

[RGS]

MC-

SHLD controls 266 million sqare feet of the best mall space in the US so if you apply an average cost of 185/sqare foot from 2007 you get a large margin of safety just on the real estate. Most people in the real estate business would quote a much higher number because of their prime locations in most cities but use the average to be conservative. (So you are still close to 50 Billion).

SHLD values their Brands like Kenmore, Craftsman, Land's End, Diehard among others at 3.8 Billion. So, assuming they sold at a big discount of say 40% you could apply a value of 2 Billion for the brands.

As you say their Retail Operations are miserable. I think Lampert would agree. There needs to be a new merchandising strategy for sure. But, as miserable as it is you still get 1.5 Billion of FcF out of it. If they can go from "miserable" to just "below average" you win. Plus they have done some pretty good things with the Sears/Kmart.com business. That is growing very nicely.

So, you have a recession/down cycle and a very poorly managed retail chain/s with no apparent strategy. Agreed. The investment thesis is based on Lampert either turning around the retail operations or monetizing the real estate so that he can start investing the excess cash (Lampert is very good at that over time).

One last thing.....there is a potential short squeeze that could be great fun. The hedge funds have leveraged up their positions so that you have 25 million shares on the short side. Of the 132 million shares outstanding there are about 100 million held by Value guys (they won't sell at these prices). Lampert won't say anything he just keeps buying back shares. There will be a quarter when SHLD surprises to the upside or announce a big deal (GE Appliances e.g.) and all of the shorts will try to cover at once and there will be no shares to buy....they will panic and you will get a big spike in price. If nothing else just buy a few shares here at 90-91/share and wait for it. The Fed is going to keep pumping money into the system and we will start growing and spending again and Consumer Descretionary stocks will all do much better even SHLD.

-RGS