No Love for Lands' End

Its days at Sears could be numbered following a top executive's departure.
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Despite repeated assurances from

Sears Holdings

(SHLD)

that it has no plans to sell high-end apparel brand Lands' End, a number of observers are pointing to the abrupt departure of the unit's chief as evidence to the contrary.

Last week, the president and chief executive of Lands' End, Mindy Meads, left her post. Speculation ensued that she was forced out by the company's parent, having failed to rejuvenate the brand under the Sears umbrella.

"Lands' End has been a complete debacle for Sears ever since they bought it," says Howard Davidowitz, chairman of Davidowitz & Associates. "Sears overpaid for Lands' End by a fortune, and they destroyed the brand by putting it in their stores."

Sears spokesman Chris Brathwaite refused to comment on the circumstances surrounding Meads' departure, except to confirm that "she left." A former Sears finance executive requesting anonymity said he believes Meads concluded that Lands' End eventually would be sold off and decided to leave.

"Mindy probably saw the writing on the wall," said the source. "She was never fully engaged after Sears brought her over after they bought the brand, and she probably figured that she had already made her money in the acquisition and now is probably a good time to get out of there."

Meads joined Lands' End in 1991, and she was made head of apparel merchandising for Sears after it bought the brand for $2 billion in 2002. When Sears acquired Lands' End, it predicted the leading specialty catalogue and Internet retailer would increase its merchandise revenue by $750 million annually in its full line stores. However, the more upscale brand did not mix well with Sears' middle-income core customer and its performance lagged.

Apparel has been a weak spot in general at Sears in recent years with the rise of tough competitors like

Wal-Mart

(WMT) - Get Report

,

Target

(TGT) - Get Report

,

Kohl's

(KSS) - Get Report

and

J.C. Penney

(JCP) - Get Report

. Lands' End position was viewed as particularly precarious because many observers felt its brand was being weakened.

Just 18 months ago, Meads, a 53-year-old retailing veteran, was tapped by Sears chief executive Alan Lacy to run Lands' End in a effort to fix the situation. Meads is reported to have opposed management's plan to expand its Lands' End offerings in Sears stores.

"Meads is a top-drawer retail executive, and her departure is emblematic of the missteps that Sears has made with Lands' End all along," Davidowitz says. "They need to get the brand out of their stores and focus on its online business. The Internet is a fast-growing industry right now, while retailing is a mature industry."

Lands' End has been a focus of attention recently on Wall Street, where many of the models used to justify Sears' high valuation incorporate asset sales. Real estate speculation was a key driver for shares of Kmart and Sears before they merged, and analysts are still expecting the new company to sell off a slew of stores. Sears has already indicated it will sell off its Orchard Supply chain, and the company also could choose to monetize its accounts receivable in Canada.

Such a strategy would be consistent with widespread predictions that the hedge fund guru who orchestrated the Kmart-Sears merger, Ed Lampert of ESL Investments, is more interested in extracting cash where he can from Sears than he is in stealing market share from Wal-Mart and Target. The Lands' End brand easily could be considered the crown jewel of any asset sales he may have in mind.

Last March, however, Lampert indicated publicly that a sale of Lands' End was not in the cards. He called it a "great American brand that we could run very well," and said it was not for sale.

Morningstar analyst Kim Picciola says those remarks did not mean that Lands' End wouldn't be sold sometime down the road.

"Maybe they're not interested in selling it now, and it's really a timing factor for them," Picciola says. "I've been surprised that they haven't sold off any stores yet as everyone was predicting, but these things take time. We expect that any asset sales that take place at Sears Holdings will be part of a gradual process."

In the meantime, Lands' End executive vice president of merchandising, David McCreight, will replace Meads as interim chief executive.

Kurt Barnard, president of Barnard's Retail Consulting Group, said he thinks the new team, under Lampert, still could turn Lands' End into a success at Sears.

"I see the departure of Meads as a sign that Eddie Lampert is asserting his own vision at Sears Holdings," says Barnard. "He's very smart, and he's obviously got financial acumen. However, he's also had a lot of success in retailing and I see no reason why his team couldn't run Lands' End effectively."

If Sears should decide to divest the brand, there are many exit options available. Private-equity buyers have been aggressive in the retailing sector lately, particularly at the high end with companies like

Neiman Marcus

(NMG.A)

and

Saks

(SKS)

garnering interest. Also, Lands' End could go public on its own. Such moves have done well in the past, an example being

Limited's

(LTD)

spinoff of

Abercrombie & Fitch

(ANF) - Get Report

.

Sears is expected to report its second-quarter results in mid-September and is expected to earn $1.36 a share, according to Thomson First Call. The retailer does not break out results for Lands' End.

Towering price targets for Sears keep emanating from Wall Street as analysts show their faith in Lampert, last year's highest-paid hedge fund manager.

Bill Dreher, a research analyst with Deutsche Bank, has a $186 price target on the retailer (his firm has a position in shares of Sears). But while he believes the stock will soar, he doesn't expect Lands' End to be with Sears forever.

"We believe it is likely that Sears could eventually divest its Land's End brand, particularly if preferential sales terms could be secured," Dreher said in a recent research note.