Shares of Sears Holdings Corp. (NASDAQ:SHLD) jumped 20% on Thursday morning, adding $200 million to the company’s market capitalization, after Sears announced a deal with Amazon.com, Inc. (NASDAQ:AMZN). The move has put SHLD stock at highs last seen a couple months ago.
The deal covers Kenmore, the Sears appliance brand. Sears will create new versions of its Kenmore appliances for sale on Amazon, supporting the Amazon Alexa voice interface.
CEO Eddie Lampert said this will not only benefit Kenmore — a brand Sears had been rumored to be ready to sell as it has sold other old store brands — but its repair unit, Sears Home Services, and its Innovel Solutions logistics unit, which theoretically would deliver and install the products.
The investment thesis for SHLD stock is that there suddenly is a long-term solution for Sears in its brands and parts, even if the stores continue to deteriorate.
This has long been Lampert’s strategy, as it has become clear the big department stores were circling the drain.
For instance, Sears sold its Craftsman tool brand to Stanley Black & Decker Inc. (NYSE:SWK) in March for an initial payment of $525 million. Future payments for the brand, however, are contingent on the survival of the stores. If they live for three years, Sears gets another $250 million. There are also provisions for future royalty payments down the line. But if the stores disappear before the deal closes, Stanley can walk away.
Sears has also spun out a number of its other operations over the last several years, from its Lands’ End, Inc. (NASDAQ:LE) clothing line to its Sears Canada operations to its real estate unit, now Seritage Growth Properties (NYSE:SRG). Seritage looked good enough for Warren Buffett to buy into.
Sears also has licensed the Kenmore name for outdoor grills, turned its DieHard battery brand into an auto center, and created a rural spinoff called Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS), which exists to extend the mail order and appliance business into underserved poor towns like Weslaco, near McAllen, Texas. Most of the equity in its Mexican operation was sold to local investors for $103 million in 2015.
The point, for Lampert, is that while people may laugh at Sears the company, or mourn Sears the department store, value can still be extracted from the parts like soup from marrow bones.
How Much Value in SHLD Stock?
The question for investors is how much of this value is coming to them, and how much of the deal-making is just Eddie Lampert’s way of trying to make himself whole.
Lampert was accused of self-dealing in creating Seritage, shifting 266 Sears properties supposedly worth $2.7 billion to a company of which he controlled 60%. Because the company remains in operation, however, two years after it was spun off, the statutes on self-dealing have expired.
It’s because of clauses within contracts like the one with Craftsman, and laws like the one impacting Seritage, that the closing of Sears and Kmart stores has gone so slowly, with just 43 stores on the latest list of closures scheduled for October.
By spinning out its parts, selling itself in pieces and keeping itself on life support, SHLD stock is making those who invested with Lampert back in 2004 — in what was then an $11 billion deal — some money back on their investment. Those investors would have been best served getting out in 2007, when the combination was worth closer to $20 billion, but the fact is neither Lampert nor those who believed in him are walking away broke.
They’re just doing it slowly.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.