Monday, May 14, 2007

Land's End: Expand It, Don't Sell It

There was a blog post out there this past week that said Sears Holdings (SHLD) should spin off it's Land's End line in order to create value for shareholders. It was a well written and thought out piece and I could not disagree with it's author more. I cannot find where I read it but if the author reads this and wants, they can drop me a line and I will link to it. Here are the reasons for my disagreement:

The future of Sears retail:
In February I wrote, "I am rapidly becoming convinced that the future of Sears Holdings retail clothing operations will be predominantly Land's End merchandise." This thought was further bolstered when in his annual shareholder letter, CEO Eddie Lampert said that the Land's Ends division had a record year in 2006 for both sales and profits. If this was not enough to convince people, at the annual meeting last week, Lampert said that the Land's end "store in a store" concept was being expanded from 100 to 200 locations in 2007. If you have not been to one of these yet, go (here me Maggie?). The layout is enticing, the merchandise is wonderful and the pricing is good. In short, there isn't anything not to like and based on this years results, I am not the only one who thinks this way. As these locations expand, watch as the retail metrics for Sears improve at an increasing rate. There has been some concern out there that the stores would just cannibalize the online operations. Results to date have proved just the opposite. People seem to be more willing to buy online if they are able to return merchandise to a store for an exchange rather than going through the annoying mail return procedure.

Selling Land's End now would actually destroy long term shareholder value. Each of these locations, as they open increases the value of the retail operations. It would no doubt give us a short term boost, but it would come at a far too heavy long term price.

Brand Value
Recently Lampert created $1.8 billion dollars essentially out of thin air. What he did was to create a bond out of the Craftsman, Kenmore and DieHard brands. He found a way to quantify the value of these brands. As Land's End becomes more prevalent and profitable for him, he can do the same for it. I have come to realize that Lampert is smarter than most people out there and sees things that most do not. If you look at it, he has created billions of dollars in shareholder value from two names, Kmart and Sears, both of whom were left for dead by the investing world. Land's End will eventually have a value to him as a brand that is far in excess of the simple annual sales and profits from the division. Rather than selling this increasingly valuable asset, I would love to see it's expansion grow at a faster pace. Lampert, however, is a far more patient and wealthier person than I so I will defer to him on it's pace (that and the fact he has yet to ask my advice). Now, how much value could it have? It is hard to tell since Sears does not breakout individual results in their 10K, making quantifying it guesswork. My opinion is that since Lampert has repeatedly given Land's End the lions share of credit for margins improving from 24% in 2004, to 27% in 2005 to almost 29% in 2006, its value is substantial and will continue to increase as more locations open.

Future Investments :
Now that Lampert has said he will begin to "look for investments" for Sears Holdings, between the cash on he has on hand and the value of the bonds he created he is sitting on almost $6 billion and multiples of that in borrowing power. The guessing games will begin. If Lampert's, recent activity within Sears is any indication of his plans, any acquisition will have "Brand Appeal". What is Dr. Phil's saying? "The most accurate predictor of future behavior is past behavior". He is the first retailer out there to quantify the value of a brand name in addition to it's immediate effect on the profit and loss column. Expect the acquisition(s) to be of strong, respected brand names as for Lampert, it provides him value few seem to be easily able to see..

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