Sears weighs hiving off Lands' End and auto center units

Reuters

By Dhanya Skariachan

Oct 29 (Reuters) - Struggling U.S. retailer Sears HoldingsCorp, led by hedge fund manager Edward Lampert, soldsome Canadian real estate assets for $383 million and said it isconsidering separating its Lands' End clothing and auto centerbusinesses to raise cash.

The news overshadowed weak preliminary results for the thirdquarter and boosted shares of the operator of Sears departmentstores and the Kmart discount chain by more than 12 percent assome investors bet that the retailer's individual assets areundervalued and could be valuable if the company is dismantled.

But many on Wall Street consider Tuesday's move an act ofdesperation by the retailer as it tries to cover its operatinglosses and inability to generate cash.

Struggling Sears Canada said it would close itsflagship Toronto store and four other locations in a deal worth$383 million.

"Anytime that they sell their best assets off, it is notdone from a position of strength or from the position of aretailer that will endure or be around for a long period oftime," said ISI analyst Matt McGinley, who believes theretailer's overall value is "significantly overstated."

McGinley pegs the value of the Lands' End clothing and homegoods unit along with the auto center assets at $2 billion to$2.5 billion.

The operator of Sears department stores and the Kmartdiscount chain is trying to engineer a turnaround aftersuffering from declining sales since 2005, when Lampert mergedthe two U.S. retail chains in an $11 billion deal.

Sears has been closing stores, tightly managing inventory,selling real estate and shedding assets, but the retailer stillstruggles to boost sales or generate cash from its operations.

CUTTING MUSCLE

Lampert, often criticized by Wall Street for not investingenough in stores and for relying on financial engineering toboost profits, had indicated in 2012 that assets such as Lands'End, which Sears bought for about $2 billion in 2002, could beseparated.

"They have cut the fat. Now they are cutting in the muscle,"Morningstar analyst Paul Swinand said, referring to Sears'latest plan for the businesses.

In a recent interview with Reuters, Lampert admitted theretailer's stores could be improved, but partly blamed higherpension obligations in recent years for taking resources awayfrom its stores.

The company said on Tuesday that it is focusing on long-termvalue and has ample liquidity and resources to support thistransformation.

"As we move through this process we are continuouslyevaluating our asset structure and whether specific assetsand/or businesses are better managed within the current SearsHoldings asset configuration or outside it," said Sears Holdingsspokesman Chris Brathwaite.

Sears spun off its Orchard Supply Hardware Stores unit in2011 and announced plans to spin off its Sears Hometown andOutlet businesses and certain hardware stores last year.

"The current playbook appears to be that they don't generatecash from operations and they have to sell assets to keep thisthing going. It's a matter of them burning the furniture andreally how much furniture they have to burn," McGinley said.

Any separation of Lands' End would not be structured as asale, but would be through a deal that would benefit currentshareholders, the company said.

On his own and through his ESL Investments hedge fund,Lampert held about 55.4 percent of Sears's stock, making him thelargest shareholder of the Hoffman Estates, Illinois-basedcompany, according to Thomson Reuters data.

Sears stock, which has risen more than 34 percent year todate, was up more than 12 percent at $62.54 before closing at$62.09 on the Nasdaq.

Sears said same-store sales for the 12 weeks ended Oct. 26fell 3.7 percent. It forecast a net loss of $532 million to $582million for the third quarter, wider than the $498 million lossreported a year earlier. At least three analysts said theforecast missed their expectations.

McGinley does not expect Sears to have a good holiday seasonand worries that Sears decision to buy less inventory for theholidays to save cash, might end up hurting it.

"If you don't have the inventory to sell, you place yourselfat risk that you just won't have the right stuff at the rightplace when the people want to come in and buy it," McGinleysaid.

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