Sears: Eddie Lampert Has a Master Plan

by Marc Bastow | August 13, 2012 1:08 pm

Sears: Eddie Lampert Has a Master Plan

Sears 3 150x150 Sears: Eddie Lampert Has a Master PlanIt’s been an interesting ride for Eddie Lampert and shareholders of Sears (NASDAQ:SHLD[1]) over the past several years. Things got a little bit more interesting this morning as the company announced it’s moving forward with a spin-off of the Sears Hometown and Outlet store franchises[2].

Lampert’s ESL Investments, which owns 62% of SHLD common stock, will put the 1,100+ sites out on the block, and when all is said and done the new company will sell some Sears products, including its Kenmore line. More important, it will generate between $400 million to $500 million for Sears Holdings.

All of which has helped shares of Sears rise over 3% this morning and gain nearly 70% year-to-date, despite being down 12% over the past year.

Be quiet, please … genius at work.

Consider this yet another step, in a process whose total number of steps are known only to a select few, on the way toward, well, I’m not exactly sure what. But whatever the end game, it will surely benefit Lampert, and it appears shareholders who paid to see the last act.

Step One was Lampert purchasing shares in the company starting in 2008, and while lots of “stuff” happened since that point, Step Two was bringing on Louis D’Ambrosio, an ex-Avaya executive schooled in the ways of taking companies private. D’Ambrosio and Lampert make a very nice team.

Step Three was renegotiating older Canadian-store leases, closing smaller outlets and stores both in the U.S. and Canada, and putting the word out that the Hometown and Outlet stores were somehow going to be used to generate cash down the road.

Which brings us to today, when that vision gets to an SEC preliminary prospectus filing.

The move is brilliant: According to The Wall Street Journal[3], Hometown stores accounted for $2.6 billion in sales, but make up 25% of Sears EBITDA, according to Credit Suisse (NYSE:CS[4]) analyst Gary Balter. Since Lampert’s group will maintain a majority interest in the the new company, it gets the benefit of the cash and the cash flow. Sweet.

Now comes Step Four: Kenmore, Craftsman, and DieHard are the premium brands associated with the Sears franchise, and KCD is actually the acronym for a unit where Lampert & Co. have put the company’s premium names, according to StreetInsider[5].

In addition, Sears holds properties and lease arrangements throughout the U.S., and it’s entirely possible they have great value because many are older locations sitting on appreciated land. Similarly, long-term leases in shopping centers at what might be underpriced lease rates are potential gold mines for landlords, and early buy-outs are expense savers and cash generators.

Put it all together: cash for the spin-off, plus cash flow from the Hometown entities, plus cash savings from older leases, plus premium-branded but scaled-back-for-efficiency Sears stores, and what do you have?

A profitable, downsized, decently capitalized and cash-flow-positive stock holding in your portfolio, and a smaller, more focused American icon of retailing still on the landscape.

I’m not sure how many steps are left in the master plan, but I’m willing to bet they lead to a pretty happy ending.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he does not hold a position in the aforementioned security.

Endnotes:
  1. SHLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=SHLD
  2. spin-off of the Sears Hometown and Outlet store franchises: http://investorplace.com/2012/08/sears-plans-to-spin-off-specialty-stores/
  3. According to The Wall Street Journal: http://online.wsj.com/article/BT-CO-20120813-707636.html
  4. CS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CS
  5. according to StreetInsider: http://www.streetinsider.com/Hedge+Funds/Sears+%28SHLD%29+Could+be+a+Near+Double+-+Barrons/7652520.html

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