Wednesday, November 28, 2007

Restore Sears First

Five years ago, when Sears was buying Lands’ End—the Wisconsin-based catalogue company whose high quality wares uniquely suited the wealth-building baby boomer generation that was abandoning Sears left and right—I wrote a letter to Lands’ End founder Gary Comer.

Having met Mr. Comer—who was as straight and genuine as they come—a few times over the course of Lands’ End tenure as a public company, I congratulated him on the $1.9 billion price and also expressed condolences that he was selling such a franchise to Sears.

At the risk of coming across like a wise-guy, I also suggested he keep some of that well-earned money for the day when Sears decided they’d ruined a good thing and wanted to get Lands’ End off their hands, and he could get it back for pennies on the dollar, or at least nickels.

It took a few years, but, sure enough, rumors of just such an event began to fly when it had become increasingly apparent that Sears’ original notion wasn’t happening.

Sears, it might be recalled, had expected Lands’ End to pull into Sears’ stores precisely those up-and-coming boomers who otherwise would not be caught dead in a Sears store—no offense to Sears or its own particular franchise, which was once mighty and is now slowly withering to what may eventually be a large footnote in retailing history.

We're acquiring a great brand, [and] introducing it into our will attract new shoppers...who will connect with our apparel departments better than they would have in the past…

That’s what then-CEO Alan Lacy said at the time of the deal, and he couldn’t have been more wrong.

Lands’ End today, as far as I can see when I visit a Sears, has become nothing more than yet another private label in the pantheon of Sears private labels, barely distinguished from any other Sears brand.

Yet now, apparently, the company wants to repeat the mistake on a slightly smaller scale by buying Restoration Hardware, the upscale and snooty vendor of whatever anybody needs to make their McMansion look, well, upscale and snooty, for $269 million.

Sears Holdings, which operates the Kmart and Sears, Roebuck chains, disclosed last week that it owned a 13.7 percent stake in Restoration and had initially proposed a $4-a-share bid after being informed in late October that Restoration was weighing a management buyout.

Sears, based in Hoffman Estates, Ill., asked a special committee of Restoration’s board for confidential information to submit a binding proposal, but the request was denied, according to the letter to a special panel of Restoration’s board attached to the S.E.C. filing.—The New York Times

Now, who’s to say Eddie Lampert, the genius who created billions of value by buying the cast-offs of American retailing—Sears and K-Mart—and shmooshing them together, can’t do the same with Restoration Hardware?

Well, I will.

I can’t imagine a Sears customer, who’d normally pay $79.99 for a Carrington comforter set “where America shops”, consider for a nanosecond buying the Restoration Hardware “European Goose-Down Comforter” for 389 smackers.

And I would bet money that the Restoration Hardware customer who’d otherwise have thought nothing about paying $389 for a European Goose-Down Comforter at that cute little wood-paneled store on Greenwich Avenue or in the Stanford Mall would, once they learned Sears owned the joint, think twice or three times before eventually not buying there altogether.

Seems to me Sears might instead take that $269 million—which is almost exactly half the company’s annual capital expenditures—and make its own aging store base at least presentable before stuffing it with brands its own customers can’t afford.

Still, that’s what makes a market.

Gary Comer—who gave much of his fortune to help the less fortunate in the South Side of Chicago, where he grew up—is no longer with us.

But I’d love to know what he’d say about this deal.

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.


buckeye1 said...

Hey Jeff, I don't understand why Lampert is pursuing this type of deal and trying to revamp the Sears concept. If the bulls on Sears are right, they should be doing the opposite; shutting down stores so they can rent out their real estate to stores that can still earn good returns - ie Target. Yet Sears continues to signal they are trying to turnaround a retailer that lost relevance in the 1950s. I agree wholeheartedly on your take on Restoration Hardware. If you have any thoughts on the Sears is going to become a REIT bs that is being spun by some pretty smart people it would be interesting to hear.

Dutch Tender said...

isn't mr market amazing? it thinks it knows more than mr lampert and thus shaves billions off the market cap of shld because it has the audacity to think to spend $270m on a very small acquisition, IF it even does.Of course mr lampert might be trying to pocket a few pennies by forcing the lbo group to actually pay a fair price. With thinking like that, Is it any wonder that year after year mr lampert trims 20pts of excess return from Mr. Market?

Chad Brand said...

Hi Jeff,

I'm not sure if I would agree that Land's End would fetch pennies on the dollar if sold today. Lampert has pointed out that LE is making more money now than it ever has, so I think it would be safe to assume that it is worth more today than when it was purchased by Sears (unless of course, one thinks the multiple they paid was so high back then, that even higher profits couldn't make up the difference in multiple compression).

As for RSTO, do you really think SHLD would put a $400 comforter in a Sears store? I suspect only the cheaper SKUs would be sold, with the higher ones reserved for existing RSTO stores and any future concept store that Lampert might try out geared towards a higher end consumer.

Just my 2 cents...

don said...

I would think that the reason Lampert wants ResH is for the brandname and intellectual property. He has already securitized the intellectual property of Kenmore, Craftsman and Die Hard. (See

I would like to know the ownership of these insurance subsidiaries and what interest Lampert has in them.

Anonymous said...

Jeff: I think the better question is, Can Sears even be restored? Lampert has done a marvelous job turning around retailers like AZO and AZN. But I think he's bit off more than he can chew with SHLD. Operating margins have declined over the last 36 weeks due to slow sales growth according to SHLD's latest 10-Q. Most retailers do not have "total return swaps" as their one of their core operational strategies. I think SHLD's problems boil down not to ROIC (return on invested capital) but ROCE (return on customer experience). For additional insight on this and how it relates to my opinion on SHLD, here's an article from Knowledge @ Wharton on why women shop and men buy.

invstmnt said...