Sears Holdings Corp (NASDAQ:SHLD) has completed the spin-off of the Lands' End, Inc. (NASDAQ:LE) brand, the fourth in just 30 months, bringing in some very welcome cash, but the company doesn’t have a great track record of generating shareholder value from spin-offs and losing one of the most profitable parts of its business makes Sears's long-term prospects look even worse than they did before.
Orchard Supply Hardware Stores Corporation (OSH), spun-off at the end of 2011, is currently in Chapter 11 bankruptcy liquidating its assets. Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS) is down more than 20% since it was spun off in late 2012 while the market as a whole was rallying. Sears Canada Inc (TSE:SCC) is up 39% over roughly the same time frame, but even that has only kept pace with the market.
The total market value of Sears Holdings Corp (NASDAQ:SHLD) and all of its spun-off entities is 20% less than two months before OSH split off, so for all of the aggressive tactics, investors are still losing value.
Sears reduces its consolidated debt, but loses a high margin operation
Sears Holdings Corp (NASDAQ:SHLD) is getting $500 million out of the Lands' End, Inc. (NASDAQ:LE) deal, compared to the $1.9 billion that it paid for the company in 2002 and $3.7 billion in consolidated debt (down from $4.2 billion), and it is losing what may be the best part of its operation. LE has converted to online sales better than other Sears brands and is popular with more affluent customers, both of which make it resilient. It also has growing EBITDA and EBITDA margins, while Sears as a whole is in decline in both cases. Without LE, its earnings will look even worse.
Sears down 10% since LE spin-off was announced
That explains why Sears Holdings Corp (NASDAQ:SHLD)'s stock price has fallen 10% since the deal was confirmed late last year. Investors have no reason to expect the split to bring them value or to contribute to Sears’ turnaround efforts.
“This share price reaction probably reflects some concern over whether this particular divestment is in the best interests of the company if its strategy is to revive SHLD’s retail business,” writes Robert Sassoon, Director of Special Situations Research at R.F. Lafferty & Co. in an April 7 report, adding that “it may be easy to justify the separation of LE as a means to crystallize its value, which otherwise would have been lost among Sears Holdings Corp (NASDAQ:SHLD)’s struggling businesses.”
For people who owned Sears Holdings Corp (NASDAQ:SHLD) stock before the spin-off, knowing that Sears won’t be able to pull down the Lands' End, Inc. (NASDAQ:LE) brand might be good news, but it’s now that much harder to justify a position in Sears.