Saturday, January 19, 2008

Lampert's Move: Yes, Its About Brands

Eddie Lampert's move at Sears Holdings (SHLD) on Friday is a big one in unlocking value at the retailer.

In November I stressed that Sears was not so much of a retailer story but a brand one. The general idea was that post and several others was that Lampert would eventually leverage the quality brands he has.

The Wall St. Journal reported Saturday that Lampert is doing just that.

Said the Journal, "A Sears spokesman confirmed the moves late Friday, saying the new structure will provide operating businesses with "greater control, authority and autonomy."

It continued, "The contemplated restructuring would create separate units to manage Sears's real-estate holdings and run brands such as Kenmore, Diehard and Craftsman. It isn't clear how the units would be divided or which unit would run the stores themselves.

The structure would allow Mr. Lampert to spin off or close business units more easily, said a person knowledgeable about his thinking. "He warmed to the idea of a spin-off strategy," this person said. The company also is willing to be flexible about how each unit will be set up, based on the skills of its operating executive. One practical effect of that could be to reduce costs."

He is essentially setting up Sears like Warren Buffett's Berkshire Hathaway (BRK.A).

This is probably the single best thing Lampert could have done. Why? Let's say I am the newly minted head of the Kenmore line. What is my first move? Pick up the phone and call Home Depot (HD) and Lowe's (LOW) and see who want to sell some of the best appliances out there. When I hang up, I tell them they can expect a call from the Craftsmen guy next. Will they license the brands to GE (GE) to expand sales even more?

Will we see Diehard batteries in Wal-Mart's (WMT) or Targets's (TGT) automotive sections soon? How about AutoZone's (AZ)?

With Wal-Mart consistently trying to upgrade it apparel options, could we see either Lands End, Joe Boxer, Covington, Structure or Canyon River Blues on the shelves? With Target looking for refreshed options after a very disappointing holiday season, might they take a stab at it?

The main issue with Sears as it is set up now is that the closing of questionable locations now dramatically impacts sales. If the brands are being sold through other locations, closing and selling stores can have a more positive effect on the bottom line as the sales impact is not nearly as great but the expense reduction is the same.

We know Target has been begging Lampert to sell them hundreds of locations. Could the newly separated real estate management arm rather than selling them become a landlord to Target? Rather than just closing a Kmart location, rent it to Target. In that respect, that division becomes a REIT to the holding company. With 3,500 locations under it, the options are incredible.

The point is that if the main brands that account for the majority of the profits currently are licensed and sold through other outlets, the importance of the physical stores are diminished. It also means that Sears now has more options for the marginal stores it may be carrying now. Sears could keep the best and most profitable locations while disposing of the lesser ones through leases or outright sales and keep merchandise sales and profits going through other retailers.

This is exciting..

Disclosure ("none" means no position): Long Sears, Long Wal-Mart, None in others

Todd Sullivan's- ValuePlays

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