Lands' End is No Bargain in Trading Debut

NEW YORK (The Deal) -- Lands' End  (LE) began trading on Monday, but not to cheers from investors, as the retailer's stock price closed down 3% at $29.55 per share, with the slide continuing Tuesday, as the outdoor apparel retailer's shares closed down another 7% at $27.34.

Market participants are likely to take notice that though adjusted Ebitda and net income for the Dodgeville, Wisc.-based company has increased, its sales are declining. In fiscal 2013 ended Jan. 31, Lands' End had about $1.56 billion in revenue, while in fiscal 2012 sales were nearly $1.59 billion, according to a regulatory filing. Net income, however, was nearly $79 million in fiscal 2013, while in fiscal 2012 it was almost $50 million. Meanwhile, adjusted Ebitda was about $150 million in fiscal 2013 and almost $108 million for the same period a year prior.

Its market cap of about $864 million, based on the nearly 32 million shares distributed to shareholders last Friday, April 4, by Sears Holdings (SHLD), plus a $515 million term loan on the balance sheet used to pay a $500 million dividend to Sears, gives Lands' End an enterprise value of $1.38 billion.

That enterprise value is less than the roughly $1.8 billion Sears paid for Lands' End back in 2002, but it is about 9.2 times trailing adjusted Ebitda, hardly a discount for an apparel retailer with exposure to a declining department store chain.

Sears shares took a hit at the separation, falling 24% Monday to close at $38.10, on the notion that it had spun off its best performing asset. (Tuesday, it closed down again at $36.99 per share.) Sears no longer has a stake in the apparel company, but besides the dividend payment, it will begin collecting rent from Lands' End for the store-within-a-store formats it operates in some Sears' locations.

Investor fears mirror the concerns about Lands' End former parent, which has been struggling for some time with outdated stores and shrinking customer base.


Sears has not only seen its revenue decline as it has shed assets - almost $36.2 billion fiscal 2013, compared to nearly $39.9 billion for the same period a year prior - but also its adjusted Ebitda plummet: negative $337 million in fiscal 2013 as compared to $536 million to the positive in 2012.

And Sears' drive to monetize assets is based, in part, on its cash burn. This year it said it plans to raise total liquidity of $1 billion, half of which came from the Lands' End dividend, to cover cash interest expense, pension obligations and capital expenditures.

Yet, despite investor fears about the separation, Sears still has significant assets. Among assets Sears has left to monetize if it needs to is a real estate portfolio conservatively estimated at over $2 billion; Sears Auto Center; its warranty business; the 51% stake in Sears Canada that has a market cap of C$1.7 billion ($1.5 billion); as well as the Craftsman, Diehard and Kenmore brands.

The Kenmore, Craftsman and Diehard brands would generously be valued at about $1.1 billion after paying off the debt backed by those assets, according to analyst Mary Ross Gilbert of Imperial Capital.

The warranty business, on the other hand, might be worth about $800 million. But Gilbert said Sears Holdings has not mentioned the warranty business as an option recently, so there may no longer be plans to monetize it. And Sears Auto Center has a valuation of approximately $666 million, the analyst said in a June report.

Gilbert said, however, she doubts Sears Holdings will spin off Kmart, as it does not make money. "I can't see that scenario," she added.


Those assets added up have a total valuation of about $5.3 billion, which could more than meet the $500 million remaining on the fund raising program Sears CEO Edward Lampert set out, now that the company received its $500 million dividend from the Lands' End spin off. Besides that, CFO Rob Schriesheim said in a March 24 blog post that Sears Holdings had $885 million in availability on its revolver, and is allowed to raise up to $760 million in second lien debt.

As of Feb. 1, Sears Holdings had nearly $580 million in cash and cash equivalents, while Sears Canada had cash and cash equivalents of about $450 million.

Secured short-term borrowings were about $1.3 billion, while the retailer had only $9 million of unsecured commercial paper, also as of Feb. 1.

Sears has total debt of about $4.2 billion. Long-term debt was nearly $2.6 billion, and capitalized lease obligations were nearly $350 million. Sears also has about $1.6 billion in total pension obligations.

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