Sears weighs hiving off Lands' End and auto center units

By Dhanya Skariachan

Oct 29 (Reuters) - Struggling U.S. retailer Sears Holdings Corp, led by hedge fund manager Edward Lampert, sold some Canadian real estate assets for $383 million and said it is considering separating its Lands' End clothing and auto center businesses to raise cash.

The news overshadowed weak preliminary results for the third quarter and boosted shares of the operator of Sears department stores and the Kmart discount chain by more than 12 percent as some investors bet that the retailer's individual assets are undervalued and could be valuable if the company is dismantled.

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

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

"Anytime that they sell their best assets off, it is not done from a position of strength or from the position of a retailer that will endure or be around for a long period of time," said ISI analyst Matt McGinley, who believes the retailer's overall value is "significantly overstated."

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

The operator of Sears department stores and the Kmart discount chain is trying to engineer a turnaround after suffering from declining sales since 2005, when Lampert merged the 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 still struggles to boost sales or generate cash from its operations.

CUTTING MUSCLE

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

"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 the retailer's stores could be improved, but partly blamed higher pension obligations in recent years for taking resources away from its stores.

The company said on Tuesday that it is focusing on long-term value and has ample liquidity and resources to support this transformation.

"As we move through this process we are continuously evaluating our asset structure and whether specific assets and/or businesses are better managed within the current Sears Holdings asset configuration or outside it," said Sears Holdings spokesman Chris Brathwaite.

Sears spun off its Orchard Supply Hardware Stores unit in 2011 and announced plans to spin off its Sears Hometown and Outlet businesses and certain hardware stores last year.

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

Any separation of Lands' End would not be structured as a sale, but would be through a deal that would benefit current shareholders, 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 the largest shareholder of the Hoffman Estates, Illinois-based company, according to Thomson Reuters data.

Sears stock, which has risen more than 34 percent year to date, 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. 26 fell 3.7 percent. It forecast a net loss of $532 million to $582 million for the third quarter, wider than the $498 million loss reported a year earlier. At least three analysts said the forecast missed their expectations.

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

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