Every time Sears Holdings Inc. (SHLD) discloses another move to sell or spin off a piece of the company, folks from the retail set pipe up with the same tired criticisms of chairman and lead shareholder Edward Lampert: He's made the stores a forlorn mess, he's a wheeler-dealer and not a merchant, and he has little hope of halting years-long sales declines at Sears and Kmart.
It's all true – and this is exactly why Sears investors should be glad Lampert has spent the past several years structuring the company to maximize the value to be reaped from the assets that remain, rather than throwing energy and money at a futile effort to stand toe-to-toe with the likes of Walmart Stores Inc. (WMT) and Home Depot Inc. (HD), not to mention Amazon.com (AMZN).
The latest maneuver to turn spare parts into cash is the newly announced hiring of investment bankers to explore the possible sale of Sears Holdings’ 51% stake in Sears Canada (SCC.TO) — a 449-store chain with some well-situated real estate and many more struggling stores that trades publicly in Toronto.
With shares of Sears Canada up nearly 4%, the parent’s 51% piece is now valued near $800 million, or almost 20% of Sears Holdings’ current stock-market value of $4.7 billion.
The Sears Canada move comes on the heels of Holdings’ spinoff of Lands’ End Inc. (LE), which trades at a $825 million public value and sent a $500 million dividend to its parent upon the separation.
Lampert had earlier distributed Sears Hometown and Outlet Stores Inc. (SHOS), worth $500 million, and Orchard Supply (which filed for bankruptcy), while opportunistically marketing some valuable store buildings and leases among the 2,000 remaining Sears and Kmart branches. The company has been open about the prospect of further harvesting value from the Sears auto-service operations and its product-warranty business.
An admission of decline
It is a rare leader of a public company that admits his business is in secular decline and must shrink in order to survive and generate value for its owners. Lampert, a hedge fund manager by trade and mindset, is one of them — a mercenary capital allocator and financial engineer who, along with a handful of other large friendly investors, controls the company and operates it somewhat like a private enterprise.
The fact that Sears is so maligned for its strategy — strategic retreat and unsentimental salvage — shows how uncomfortable analysts and investors are with companies that don’t pretend they’re a growth business.
For sure, Sears has pushed a new retail strategy that focuses on its Shop Your Way customer-membership program, and its e-commerce efforts have gained some traction. But the message from the top has never rested on delusions that a heroic market-share comeback was on the come through some splashy merchandising effort.
JC Penney Co. (JCP) tried just such an expensive revamp with the hiring of Apple's Ron Johnson, and barely had the time and resources to abort the effort. Penney has since joined Sears in retrenchment mode, as midline, mall-based retail declines.
Beginning years ago, Lampert began shuffling prized assets into separate, protected legal structures. The trademark rights to Sears’ leading Kenmore, Craftsman and Die Hard brands are housed in an entity called KCD LLC, which licenses the use of those brands to other Sears subsidiaries. A cluster of 125 of the best real estate locations is similarly sheltered in a discrete unit.
As research and asset-management firm Horizon Kinetics describes it: “The net result of these complex transactions is that the three key brands and the 125 properties are considered bankruptcy remote” and are “part of the quiet restructuring of Sears in recent years into what looks like a holding company/portfolio company structure in which the stores are categorized and owned differently, depending on their tactical or strategic value, as are the real estate, brands and brand revenue.”
Just because Lampert has arranged Sears’ various operations and assets cleverly doesn’t, of course, mean he will ultimately be successful in substantially boosting the total value of the company. Core retail sales declines could accelerate, and it's possible no buyer will emerge for Sears Canada or other assets.
A widely circulated presentation from last year by Baker Street Capital argued the stock is worth more than $100 per share, versus the current $43 or so, based mostly on an aggressive sale and re-lease of the real estate. Such rosy estimates are countered by other observers who have taken a look at the store mix believe there are far too many marginal locations that wouldn’t be attractive to a buyer or another tenant for the net value of the company to be so impressive.
Yet at least Sears isn’t behaving like so many other aging retail companies, which proceed too long on the assumption that spiffy store redesigns or next season’s fashion trend will come to their rescue — until it’s too late and they are forced to scramble for a financial fix.
Lampert has been keeping inventory light, husbanding liquidity and maintaining enough collateral to appease bondholders while he effectively withdraws capital from a business in long-term decline. It isn’t pretty, but it’s refreshingly pragmatic, and just might work for investors in the end.