Journal of Case Studies

Sears’ Spinoff of Lands’ End

Shane Van Dalsem, Washburn University

This case was prepared by the author and is intended to be used as a basis for class discussion. The views represented here are those of the author and do not necessarily reflect the views of the Society for Case Research.

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Introduction

Following several years of declining revenues and profits, in late 2011 Sears Holding Inc.

(“Sears”) began to hive off its business divisions. As part of its series of divestitures Sears

announced its intention to spin off one of its clothing divisions, Lands’ End, in a stock

distribution to the existing Sears’ shareholders on December 6th, 2013 (Sears Holding Corp.,

2013b).

To explain why Sears was spinning off Lands’ End, along with Sears’ Auto Centers business,

Sears released the following statement:

We believe separating the management of these two businesses Writing Your Own Eulogy from Sears

Holdings would allow them to pursue their own strategic opportunities, optimize

their capital structures, attract talent, and allocate capital in a more focused

manner (Hammond, 2013).

With the spinoff Sears would receive a cash payment of $500 million dollars from Lands’ End

which would be funded from the proceeds of a $515 million term loan from Bank of America.

Each Sears shareholder received approximately 0.3 shares of Lands’ End stock for each share of

Sears stock that they owned and (Sears Holding Corp., 2014a). The spinoff of Lands’ End would

result in the same stockholders retaining their proportional ownership of the same basket of

assets.

In light of the terms of the spinoff the stockholders and other stakeholders of Sears and Lands’

End needed to evaluate their relationships with the firms. Should Lands’ End’s shareholders

keep their shares or sell them? What assets were transferred from Sears to Lands’ End as part of

the spinoff? Would the terms of the spinoff hurt the ability of Lands’ End to operate in the

future?

Background of Lands’ End

Lands’ End was a multi-channel retailer of apparel and home products. The firm’s channels of

distribution were: standalone stores, stores within Sears’ stores, internet, phone, and catalogs.

Lands’ End had operations in the US, Europe, and Asia. The firm was founded by Gary C.

Comer in 1963 as a catalog retailer selling sailboat hardware and equipment. In 1977, Lands’ http://www.sfcrjcs.org/

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Page 145

End began to focus its operations on clothing and luggage. In 1978, Lands’ End moved its

operations to Dodgeville, WI. The firm went public in 1986 and began its international

operations in 1991. Through the late 1990s, Lands’ End launched its website and developed

innovative methods to improve the customer experience such as tools that allowed customers to

create 3-D models of themselves and create custom pants.

Sears, Roebuck & Company Acquires Lands’ End

Sears, Roebuck & Co. (“SRC”) acquired Lands’ End for approximately $1.9 billion in cash in

2002. At the time of the announcement of the acquisition, the amount provided Lands’ End’s

shareholders with a 21.5% premium over the existing market value of the stock. The acquisition

provided Lands’ End the potential to grow their in-store retail sales by providing 870 new stores

for their products. For SRC, the acquisition provided the opportunity to improve the brand

image of its apparel and make the brand recognition for apparel more consistent with that of

SRC’s hardline categories (e.g. Craftsman, Diehard, and Kenmore) (CNNMoney, 2012).

Ultimately, SRC’s goal with the acquisition was to improve its waning sales and improve profit

margins in softlines by offering higher quality apparel with existing brand recognition.

K-Mart Acquires Sears, Roebuck & Co.

In November of 2004 K-Mart announced that it was acquiring SRC for a price of approximately

$11 billion, which existing SRC shareholders could receive in cash or in stock of the new Sears

Holding Corporation. At the time of the announcement K-Mart and SRC had approximately

3,500 locations between them. This expansion offered Lands’ End the opportunity to expand its

sales (Sears Holding Corp., 2005).

Edward Lampert, the chairperson of Sears, founded ESL Investments (“ESL”) in 1988 (Berner,

2004). In 2002 ESL Investments purchased a significant amount of K-Mart’s debt during K-

Mart’s bankruptcy. When K-Mart emerged from bankruptcy in 2003, ESL owned a controlling

interest in K-Mart’s stock and Lampert was the new chairperson of K-Mart. In 2004 K-Mart

began its acquisition of SRC. The firm resulting from the merger was renamed Sears Holding

Corporation (Hays, 2004). At the time of the spinoff of Lands’ End, ESL Investments owned

approximately 48.5% of Sears’ stock (Sears Holding Corp., 2014b).

Sears’ Divestitures

The spinoff of Lands’ End was the fourth divestiture in three years for Sears.

Orchard Supply Hardware (“Orchard”) was spun off by Sears on December 30th, 2011. Similar

to what occurred with the Lands’ End spinoff, Sears’ stockholders received pro rata ownership of

Orchard. Specifically, Sears’ stockholders received one share of Orchard’s Class A Common

Stock and one share of Orchard’s Series A Preferred Stock for each 22.14 shares of Sears’ stock

that they owned. However, Orchard did not pay a dividend to Sears’ as part of the divestiture.

Orchard did have approximately $220 million in long-term debt at the time of the spinoff

(Orchard Supply Hardware, 2012). http://www.sfcrjcs.org/

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Page 146

Sears Canada Inc. was partially spun off by Sears on November 14th, 2012. Sears distributed

44.5% of Sears Canada to the Sears’ stockholders on a pro rata basis and retained approximately

51% of Sears Canada stock. Each Sears’ stockholder received 0.4283 shares for each share of

Sears’ stock that they owned (Sears Holding Corp., 2012).

Sears Hometown and Outlet Stores (“SHOS”) was divested from by Sears on October 11, 2012.

Sears created and sold shares of the new company for which Sears received $346.5 million

(Sears Holding Corp., 2012). Additionally, SHOS was required to pay Sears $100 million, a

continuing commission of its online sales, and fees for shared services with Sears. For the first

four months following the divestiture, SHOS reported that these costs were approximately $5

million. The dividend paid to Sears was financed with a long-term debt with a variable interest

rate which was 4.50% as of February 2nd, 2013 (Sears Hometown and Outlet Stores, 2013).

With each of the spinoffs, the newly created firms were required to maintain a business

relationship with Sears. For Lands’ End this relationship included maintaining a presence in

Sears’ retail locations and remaining a partner in Sears’ Shop Your Way® rewards program.

Lands’ End was required to pay for the expenses of maintaining a presence in Sears’ retail

locations, including the cost of personnel (Lands’ End Inc., 2014).

Table 1 provides a timeline of the history of Lands’ End and Sears.

Table 1. Timeline of the History of Lands’ End and Sears

Date Event

1963 Lands’ End was founded by Gary C. Corner as a sailboat hardware and

equipment retailer.

1977 Lands’ End changed its focus to clothing and luggage.

1986 Lands’ End became a publicly-traded corporation.

2002 Sears, Roebuck & Company purchased Lands’ End for $1.9 billion.

2002 ESL Investments purchased a large proportion of K-Mart’s debt during

K-mart’s bankruptcy.

2003 K-Mart emerged from bankruptcy with ESL Investments owning a

controlling interest of the stock. Edward Lampert was the new

chairperson.

November 2004 K-Mart announced the acquisition of Sears for approximately $11

billion.

December 30th, 2011 Orchard Supply Hardware was spun off from Sears.

October 11th, 2012 Sears Hometown and Outlet Stores was divested from Sears.

November 14th, 2012 Sears Canada Inc. was partially spun off from Sears. Sears retained

approximately 51% of the stock.

December 6th, 2013 Sears announced its intention to spinoff Lands’ End.

The spinoffs were seen as a Sears’ response to declining performance. Prior to and following the

merger of K-Mart and SRC, the combined firms faced declining sales and profitability. The

divestitures of its business divisions and sales of its brands had been seen as a slow liquidation of

the assets of a firm in distress. Tables 2 and 3 provide the annual income statements and balance

sheets, respectively, for the five fiscal years e