Eddie Lampert-controlled Sears Holdings Corp (SHLD.O) said it would spin off its Lands' End clothing business, adding to the assets the company is shedding as it struggles with mounting operating losses and declining sales.
The company, operator of Sears department stores and the Kmart discount chain, has been selling or spinning off assets and closing stores for the past few years to try to turn around its business. Sales have been dropping since Lampert combined Sears and Kmart in an $11 billion deal in 2005.
The billionaire hedge fund manager, who took over as chief executive in February, has been criticized for not investing enough in the business, which has earned a reputation for dowdy merchandise and poor service compared to Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N).
Sears shares were slightly down on Friday afternoon after rising as much as 4 percent in early trading.
"... The spinoff announcement essentially points to a number of negatives, including an inability to find a buyer, as previously Lands' End was listed as an asset that the company would monetize," Credit Suisse analyst Gary Balter wrote in a note to clients.
The New York Post reported in March 2012 that Lampert was exploring a sale of Lands' End. Lampert later told investors that while he was not actively looking for a buyer, there was always a possibility the business could be "separated."
When asked if the spinoff pointed to its inability to find a buyer for the business, a Sears spokesman referred to a company statement in late October.
The company said then that any separation, if pursued, would not be structured as a sale but rather through a transaction that would allow shareholders to benefit from the significant potential for value creation.
The spinoff will not raise cash for Sears but will allow Lampert to more efficiently chart a course for the two businesses, which compete for management time and capital within the Sears group.
"Sears is in a steady state of decline," said Brian Sozzi, chief executive of Belus Capital Advisors. "They're essentially selling their body parts so they stay alive today."
Apart from losing market share to Wal-Mart and Target, Sears is facing increased competition from online retailers.
Sears spun off its Orchard Supply Hardware Stores unit in 2011 and its Sears Hometown and Outlet business last year.
In October, the company sold some Canadian real estate assets for $383 million and said it was considering separating Lands' End and its auto center business.
Sears had cash and cash equivalents of $599 million as of November 2, down from $671 million on August 3.
"... This spinoff is another wooden block being pulled out in our Jenga scenario, with Lands' End likely the most profitable piece that was left in the company," Balter said, referring to a game in which players pull blocks from a stack until the stack collapses.
LOSING SOME CACHET
Lands' End sells casual clothing, accessories, footwear, and home products online, through catalogs and in stores.
Competitors include Eddie Bauer LLC and L.L. Bean Inc as well as department stores such as J.C. Penney Co Inc (JCP.N).
The business, which was bought by Sears in 2002, generated sales of $1.59 billion in 2012, down from $1.73 billion in 2011. Sears' sales fell to $39.85 billion from $41.57 billion.
Founded in Chicago 50 years ago as a catalog business, Lands' End has lost some of its cachet since the brand started to be sold at Sears stores.
About 16 percent of the brand's sales came from Lands' End shops located in Sears stores in 2012.
"(Sears has) been slowly destroying it," Balter told Reuters.
Lands' End said the spinoff would give both it and Sears simplified focus and operational flexibility.
"The spinoff ... is expected to result in a more efficient allocation of capital for both Sears Holdings and Lands' End and mitigate the competition for capital that currently exists between Lands' End and other Sears Holdings business units," Lands' End said in a filing.
Belus Capital's Sozzi said Sears' troubles would not end with the spinoff of Lands' End, which he described as "a brand going down the drain."
"I see better things from Wal-Mart and Target. They're getting all the traffic. Sears and Kmart have not done enough to stay competitive," he said.
The spinoff will be through a pro rata distribution of Lands' End shares to Sears shareholders, Sears said in a regulatory filing on Friday.
Land's End said it expected to report net income of between $12.7 million and $14.2 million for the third quarter ended November 1, up from $8.8 million a year earlier.
Lampert's hedge fund, ESL Investments, owns about 48.4 percent of Sears and will own an identical stake in Lands' End following the spinoff.
ESL said this week it had cut its stake in Sears from 55.4 percent by distributing about 7.4 million shares to fund investors.
Lands' End plans to list on the Nasdaq under the symbol "LE." Sears and Lands' End provided no timetable for the selloff and share listing.
The business's current chief executive, Edgar Huber, is expected to remain the CEO when it goes public.
Sears shares have risen nearly 21 percent this year, giving the company a market value of about $5.3 billion.
(Additional reporting by Dhanya Skariachan in New York; Editing by Ted Kerr)