Companies combine and break apart for a lot of different reasons and in a lot of different ways. On April 4, the spinoff of Lands’ End from Sears Holdings was completed – a specific kind of separation that we think will prove best for Shop Your Way members and other customers, both companies, associates and other people who work with both companies, and investors.
John Buckingham: Busting the Myths & Seven “Valuable” Themes for 2021 [ValueWalk Webinar slides and video]
John Buckingham's presentation titled, 'Busting the Myths & Seven "Valuable" Themes for 2021'. The webinar for ValueWalk Premium members took place on 2/23/2021, and was followed by a Q&A. Stay tuned for our next webinar, Q4 2020 hedge fund letters, conferences and more John Buckingham Principal, Portfolio Manager, Kovitz Editor of The Prudent Speculator newsletter Read More
First, a bit of history. In 2002, Lands’ End’s founder, Gary Comer, and its board decided to sell the company to Sears, Roebuck and Co., although Lands’ End’s management continued to run it from Dodgeville, Wis., with a great degree of autonomy. Yet, Lands’ End wasn’t completely independent and able to make all of the decisions either. By the time Kmart announced its merger with Sears in 2004, it was already becoming clear that there were competing visions and priorities between Lands’ End’s leadership and the Sears apparel team.
Sears shoppers definitely liked having Lands’ End’s products in Sears and loved how easily they could return or exchange the products they bought from catalogs or online in Sears stores across the country. But this did not directly translate into higher earnings and the company and investors suffered: by 2004, Lands’ End’s earnings had hit their lowest level of the entire 12 year period (2002 to 2014) that Lands’ End was associated with Sears.
After Sears and Kmart merged in 2005, Lands’ End’s fortunes started to turn around. During each year from 2005 to 2010, earnings were significantly higher than they were in 2004, including several years of record profits. Dedicated shops were created inside Sears stores to bring the Lands’ End brand even more distinction, in contrast to the initial approach of having merchandise spread throughout the store.
However, in 2011 and 2012 the company stumbled for a variety of reasons that were described in its public filings. Just one example: in 2011, cotton prices hit heights unseen since supply and distribution were disrupted during the Civil War (impacting most other apparel retailers as well). Lands’ End’s performance improved significantly in 2013, but it was clear to us that bigger changes needed to be made to really unlock the potential of the business.
Sears Holdings opted for a spinoff – a legal split that allows each company to focus on managing its own business, yet still work together in some ways. Sears Holdings stockholders – I am one myself – were given approximately three shares of the new Lands’ End for every ten shares of Sears Holdings they own. This gives investors a choice, and the ability to continue to participate in the results of the Lands’ End business going forward.
Lands’ End and Sears Holdings can each focus on the management of their businesses separately and Lands’ End is able to optimize its capital structure and enter capital markets independently from Sears. Lands’ End will be able to invest its profits without having to distribute them to Sears Holdings. Meanwhile, Sears Holdings received $500 million in cash from Lands’ End (the equivalent of many years of after-tax profits), which increases Sears Holdings’ liquidity.
At the same time, the Lands’ End Shops at Sears will continue to serve customers, which gives Lands’ End a footprint in many malls in America at attractive rents (Sears operates stores in many of the top fashion malls in the U.S.). It also benefits customers, as a majority of Lands’ End’s catalog and online returns today are done in Lands’ End Shops at Sears. Lands’ End and Sears also offer customers free home shipping on eligible items purchased online through their respective kiosks in Sears stores.
Lands’ End will still be able to tap into Shop Your Way members and other Sears shoppers. It matters a lot that members will still be able to earn and redeem Shop Your Way points at Lands’ End, because Shop Your Way is one of the nation’s largest membership rewards programs, with nearly 70 percent of Sears and Kmart sales now part of Shop Your Way.
Both Lands’ End and Sears Holdings are now better positioned to focus on growing their own independent businesses while maintaining the benefits of the relationship – including rewards and returns – that members and customers love.