Companies combine and break apart for a lot of different reasons and in a lot of different ways. On April 4, the spinoff of Lands’ End from Sears Holdings was completed – a specific kind of separation that we think will prove best for Shop Your Way members and other customers, both companies, associates and other people who work with both companies, and investors.
First, a bit of history. In 2002, Lands’ End’s founder, Gary Comer, and its board decided to sell the company to Sears, Roebuck and Co., although Lands’ End’s management continued to run it from Dodgeville, Wis., with a great degree of autonomy. Yet, Lands’ End wasn’t completely independent and able to make all of the decisions either. By the time Kmart announced its merger with Sears in 2004, it was already becoming clear that there were competing visions and priorities between Lands’ End’s leadership and the Sears apparel team.
Sears shoppers definitely liked having Lands’ End’s products in Sears and loved how easily they could return or exchange the products they bought from catalogs or online in Sears stores across the country. But this did not directly translate into higher earnings and the company and investors suffered: by 2004, Lands’ End’s earnings had hit their lowest level of the entire 12 year period (2002 to 2014) that Lands’ End was associated with Sears.
After Sears and Kmart merged in 2005, Lands’ End’s fortunes started to turn around. During each year from 2005 to 2010, earnings were significantly higher than they were in 2004, including several years of record profits. Dedicated shops were created inside Sears stores to bring the Lands’ End brand even more distinction, in contrast to the initial approach of having merchandise spread throughout the store.
However, in 2011 and 2012 the company stumbled for a variety of reasons that were described in its public filings. Just one example: in 2011, cotton prices hit heights unseen since supply and distribution were disrupted during the Civil War (impacting most other apparel retailers as well). Lands’ End’s performance improved significantly in 2013, but it was clear to us that bigger changes needed to be made to really unlock the potential of the business.
Sears Holdings opted for a spinoff – a legal split that allows each company to focus on managing its own business, yet still work together in some ways. Sears Holdings stockholders – I am one myself – were given approximately three shares of the new Lands’ End for every ten shares of Sears Holdings they own. This gives investors a choice, and the ability to continue to participate in the results of the Lands’ End business going forward.
Lands’ End and Sears Holdings can each focus on the management of their businesses separately and Lands’ End is able to optimize its capital structure and enter capital markets independently from Sears. Lands’ End will be able to invest its profits without having to distribute them to Sears Holdings. Meanwhile, Sears Holdings received $500 million in cash from Lands’ End (the equivalent of many years of after-tax profits), which increases Sears Holdings’ liquidity.
At the same time, the Lands’ End Shops at Sears will continue to serve customers, which gives Lands’ End a footprint in many malls in America at attractive rents (Sears operates stores in many of the top fashion malls in the U.S.). It also benefits customers, as a majority of Lands’ End’s catalog and online returns today are done in Lands’ End Shops at Sears. Lands’ End and Sears also offer customers free home shipping on eligible items purchased online through their respective kiosks in Sears stores.
Lands’ End will still be able to tap into Shop Your Way members and other Sears shoppers. It matters a lot that members will still be able to earn and redeem Shop Your Way points at Lands’ End, because Shop Your Way is one of the nation’s largest membership rewards programs, with nearly 70 percent of Sears and Kmart sales now part of Shop Your Way.
Both Lands’ End and Sears Holdings are now better positioned to focus on growing their own independent businesses while maintaining the benefits of the relationship – including rewards and returns – that members and customers love.
Cautionary Statement Regarding Forward-Looking Statements: Certain statements contained in this post are forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: our ability to offer merchandise and services that our customers want, including our proprietary brand products; our ability to successfully implement our integrated retail strategy to transform our business; our ability to successfully manage our inventory levels; initiatives to improve our liquidity through inventory management and other actions; competitive conditions in the retail and related services industries; worldwide economic conditions and business uncertainty, including the availability of consumer and commercial credit, changes in consumer confidence and spending, the impact of rising fuel prices, and changes in vendor relationships; vendors’ lack of willingness to provide acceptable payment terms or otherwise restricting financing to purchase inventory or services; possible limits on our access to our domestic credit facility, which is subject to a borrowing base limitation and a springing fixed charge coverage ratio covenant, capital markets and other financing sources, including additional second lien financings, with respect to which we do not have commitments from lenders; our ability to successfully achieve our plans to generate liquidity through potential transactions or otherwise; potential liabilities in connection with the separation of Lands’ End, Inc.; our extensive reliance on computer systems, including legacy systems, to implement our integrated retail strategy, process transactions, summarize results, maintain customer, member, associate and Company data, and otherwise manage our business, which may be subject to disruptions or security breaches; the impact of seasonal buying patterns, including seasonal fluctuations due to weather conditions, which are difficult to forecast with certainty; our dependence on sources outside the United States for significant amounts of our merchandise; our reliance on third parties to provide us with services in connection with the administration of certain aspects of our business and the transfer of significant internal historical knowledge to such parties; impairment charges for goodwill and intangible assets or fixed-asset impairment for long-lived assets; our ability to attract, motivate and retain key executives and other associates; our ability to protect or preserve the image of our brands; the outcome of pending and/or future legal proceedings, including product liability and qui tam claims and proceedings with respect to which the parties have reached a preliminary settlement; the timing and amount of required pension plan funding; and other risks, uncertainties and factors discussed in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available.