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Shares of Sears Holdings Corp. jumped nearly 11.8 percent as investors liked the idea of the company spinning off its Lands’ End business, even as Sears projected a third-quarter loss as high as $582 million.
This story first appeared in the October 30, 2013 issue of WWD. Subscribe Today.
The stock closed at $62.09 in Nasdaq trading.
The company said Tuesday that it is considering the separation of the Lands’ End and Sears Auto Center businesses.
Sears said Lands’ End has the potential to be a “global business” and that a separation would allow the operation to pursue its own strategic opportunities, optimize its capital structure and allocate capital in a more focused manner.
“This will allow us to focus more on Lands’ End and continue our hard work,” said Edgar Huber, the president and chief executive officer of Lands’ End.
Sources said Lands’ End generates about $2 billion in volume and is profitable, and that there isn’t any set timing for when Sears would want to spin off the brand. Lands’ End would also have to work through various service contracts it has with Sears.
Lands’ End could grow faster under a different ownership structure that could allow for more investment back in the company than what Sears has been willing to do.
Sears Holdings, which also owns the Sears and Kmart chains, last year tried to find a buyer for Lands’ End. Sources said the asking price was initially $2 billion, but offers that came in from private equity firms were shy of $1 billion. Sears acquired Lands’ End in 2002 for $2 billion when it was still Sears, Roebuck and Co. That was before chairman Edward Lampert’s Kmart Holdings Corp., which he acquired out of bankruptcy through his hedge fund ESL Investments in 2003, bought Sears in 2005 for $11 billion.
Sears said Tuesday if it did decide to separate out Lands’ End, it would not entail a sale of the business. Rather, the move would be structured to “allow existing shareholders the opportunity to benefit” from the potential for value creation over the longer term. That suggests a spin-off, while giving existing shareholders an equity stake in a separated Lands’ End business.
As for opportunities, Huber cited ongoing efforts to further “digitalize” the business, particularly overseas, where 60 percent of the business is through the catalogue and 40 percent is online. By contrast, Huber said, 80 percent of the ordering in the U.S. is online, and 20 percent is through the catalogue.
Huber also mentioned the possibility of rolling out freestanding stores, of which there are only about 13, and developing additional in-store shops, possibly at stores other than Sears. Over the last seven years, nearly 300 Lands’ End shops have been planted inside Sears, ranging from 5,000 to 10,000 square feet, with a handful as big as 20,000 square feet.
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Separately, the retailer is set to post third-quarter earnings on Nov. 21 for the period ended Nov. 2.
It provided an update of its business, stating that comparable-store sales fell 3.7 percent, with declines of 4.8 percent at Sears domestic stores and 2.6 percent at Kmart stores.
On an operating basis, adjusted earnings before interest, taxes, depreciation and amortization widened to a loss of between $250 million and $300 million for the quarter, compared with an adjusted EBITDA loss of $156 million in the same year-ago quarter. The net loss is projected at between $532 million and $582 million, compared with a loss of $498 million a year ago.