Sears Turnaround Prospects Still Not Convincing
Struggling retailer Sears (NASDAQ:SHLD) announced on Tuesday that it was mulling over spinning off its Lands’ End Catalogue business and the Auto Center business from the rest of the company. It said that it wants to redirect its focus on its core Sears and Kmart stores. It also iterates that its top priority is the long-term benefit of the shareholder, pointing out that it will not separate Land End’s through a sale, but rather a transaction that allows existing shareholders to reap long-term benefits from its heightened value.
This comes after Sears’ Canadian unit announced that it would sell five of its store leases for $383 million to Cadillac Fairview Corporation, including the flagship downtown Toronto store. Three of the stores will be vacated in February 2014, while the other two will be cleaned up in February 2015.
Sears’ spate of asset sales in Canada, paired with its deliberation to spin off the Lands’ End line and the Auto Center, signal its undisguised attempt to reverse its fortunes. Indeed, the company has warned that it expects third quarter sales to slip even further than its second quarter sales, projecting a loss of $582 million.
While Sears wants to remain as bullish as possible about its turnaround prospects, investors remain in the dark on how to play the turnaround. Will it pan out or is it time to sell?
Asset Sales And Cost Cutting Are Delay Timers — Real Solution Needed
As we reported earlier in the year, Sears’ key shareholder, Eddie Lampert, took over the reigns as CEO from Louis D’Ambrosio. Lampert’s rallying call at the time was cost reduction as signaled by his swift follow through on 2012’s plans to cut costs, reduce inventory and sell off or spin off assets. Indeed, the cost cutting program has helped Sears to not only cut its debt load by $400 million, but to also generate $1.8 billion in cash from asset sales in fiscal 2012.
Admittedly, the success that Sears has had with asset sales and cost cutbacks is remarkable. However, it is merely a delay timer and not an assurance to any shareholder that the company will reverse its fortunes. Hedge fund Baker Street Capital Management, which owns 1.4 percent of Sears, argues that Sears’s real estate is conservatively worth over $8.6 billion. This is significantly higher than the company’s current market value of $5.9 billion. As engaging as this prospect sounds, its accuracy can’t be ascertained. Not only does Baker Street have a vested interest, but the value of real estate is highly arbitrary.
Asset sales and spinoffs offer some reprieve for Sears. However, in order to convince investors that its turnaround will pan out, it will have to place more emphasis on restoring sales momentum. Over the past years, Sears has lost business to Wal-Mart (NYSE:WMT) and Home Depot (NYSE:HD). Spinning off the Lands’ End and the Auto Center in order to focus on the core business is a step in the right direction. Redirecting efforts to the core could increase momentum for its loyalty program, Shop Your Way, which currently contributes to 65 percent of sales.
For now, the stock is still a hold.
Disclosure: The author has no position in the stocks mentioned in this article, and does not intend to initiate any position in the next 48 hours