The Deal: Sears' Liquidation Sale Continues

NEW YORK (The Deal) -- Sears Holdings Corp.  (SHLD), the troubled department store conglomerate, is looking to separate its Lands' End apparel business as well as its Sears Auto Center business, it said on Tuesday.

The process, said industry observers, continues the gradual liquidation of the retailer, with no plans to sink cash into store renovations to help revive Sears' fortunes.

While that's not good news for those who remember an iconic department store - fewer and fewer these days - plans to spin off a brand like Lands' End plays well with shareholders.

It's also a way for hedge fund manager and CEO Edward Lampert to salvage more of his investment.

Industry insiders said that while they expect Sears to eventually go out of business, it is a process that could take years, considering all of the company's assets.

A Sears spokesman said in an e-mail that the company continued to evaluate its "asset structure" and whether those assets or businesses better belong inside or outside of Sears Holdings, as it moves to a "less asset intensive business model."

In terms of reinvesting in Sears stores, the company noted that while competitors invested a great deal in store renovations, doing so didn't save some of those businesses. But the spokesman said Sears will continue to invest in the shopping experience, enabling associates with devices to help customers check available inventory, order products online and purchase products without having to leave the store aisle.

Lands' End will be spun off in a manner beneficial to shareholders over the long-term, Sears said. That indicated that the apparel brand will be a publicly listed entity with options for Sears' shareholders to receive stock in the new company.

From the most recent figure available, in January 2012 the Lands' End division was valued at $1.25 billion, or about 7.5 times Ebitda, according to Mary Ross Gilbert, managing director at Imperial Capital LLC.

But recent multiples for retail consumer brands able to support their own retail stores stretches into the double digits, and could equate to a higher valuation for Lands' End of around $1.5 billion or about 9 times Ebitda.

For instance, Rue21 Inc. was taken private by Apax Partners in a deal announced in May and valued at about $1.1 billion, or nearly 10.9 times the $101 million in EBITDA it generated for the past 12 months as of February 2. Hot Topic, acquired by Sycamore Partners in March for $600 million, was valued at nearly 8.6 times the $64 million in EBITDA it generated over the past 12 months as of Feb. 2.

Sears Holdings acquired Lands' End Inc. for $1.9 billion in cash in 2002.

For Sears Auto Centers, the parent said it would conduct a strategic review of the unit, implying a number of options, including a sale.

Sears Holdings also continues to review its real estate portfolio, with plans to close unprofitable stores. Its Sears Canada unit, of which Sears Holdings owns a 51% stake, announced that it is selling five store leases to Cadillac Fairview Corporation for about C$400 million. Sears Holdings' stake in Sears Canada is worth over $675 million, Lampert said in a statement.

Sears has yet to fully monetize its real estate portfolio in the U.S., which could be borrowed against to help fund operations, according to Moody's Investors Service analyst Scott Tuhy.

By Tuhy's estimation, Sears' real estate holdings, as measured by store count, are comparable to its competitors' so it should be able to raise at least another $2.5 billion, not unlike what happened over at another struggling retailer, J.C. Penney Co., which earlier this year arranged $2.25 billion in loans backed by its real estate.

Sears Holdings also has in its portfolio iconic brand names such as Kenmore, Craftsman and DieHard, which are owned by KCD IP. But because of a complicated financing structure, a sale or further monetization of those brands could be difficult.

Under the structure, KCD IP issued $1.8 billion in asset-backed securities, which are held by Sears Reinsurance Co. Ltd., in support of Sears' insurance programs. KCD IP collects royalties from the brand names it owns to service the debt, which is also backed by the rights to those names.

Cash generated from a sale of those assets would have to first be applied to paying down that debt, before it could be used for any other purposes. According to an industry source, the value of Kenmore, Craftsman and DieHard may well exceed the debt that the brands' intellectual property back.

Sears had already said, when it reported its first-quarter earnings in May, that it was considering selling its appliance warranty business. At that time, CFO Robert Schriesheim said he thought the business could fetch more than $500 million.

At the same time it said it was considering its unit spinoffs, Sears Holdings reported third-quarter results. Comparable store sales for the period ended Oct. 26 declined 3.7%, the company said in a statement.

Third-quarter adjusted Ebitda is expected to be between negative $250 million and $300 million. That compares to adjusted negative Ebitda of $156 million for the same period a year earlier, a figure that included positive adjusted Ebitda of $8 million for Sears Canada, which was spun off.

By Richard Collings

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