Monday, May 07, 2007

The Hidden Gem of Sears: I'd be Walking Around in the Nude Without It

Sears Holdings Corporation (SHLD) has a proprietary branded merchandise division in its portfolio, which is a hidden gem. Most people think of Sears Holdings being just the Sears stores and the Kmart stores. However, one business that they own, through their Sears subsidiary, is Lands' End which is the leading direct merchant of traditionally-styled high quality casual clothing, accessories and footwear. Every catalog I've received always has separate sections for for men, women and children, no matter whether the cover shows a woman in a bathing suit or a man's dress shirt.

I admit it, I am a Lands' End junkie, and I would be walking around in the nude [on certain days] if it wasn't for them. Let's start with what I'm wearing from the feet up. Right now, I have on their outdoor moccasins, which are extremely comfortable, and which I try to wear as much as possible. I have also purchased Lands' End dress shoes and casual dress shoes. I've got their "Docker" style khaki trousers in three different colors, and their cargo pants and khaki shorts. I even bought a pair of grey flannels from them. I've got their Lands End undershorts and undershirts [not exclusively, as I have the Sears and Kmart brands also]. I have numerous dress shirts [white, blue] and casual dress shirts [plaid, checkered], and polo shirts [with and without banded sleeves, with and without pockets]. I even own a dark suit made by Lands' End. It may not be as good as Brooks Brothers [of which I've owned a few] but I think its better than Men's Wearhouse (MW) [of which I've also owned a few].

I hate to shop, at least at retail stores and shopping malls. If there is anything I can order online that I don't need today, whether it's a book or a shirt or some kind of gift, I will order it online. Lands' End appeals to me because I can order by phone through their printed catalog or I can order online. The quality of items I've bought is excellent and the customer service is outstanding. If this sounds like a sales pitch for Lands' End, it's not. It is a sales pitch for the company, which I'll explain in a minute.

My wife and I used to own Lands' End stock [one of the few stocks we owned together] before it was taken over by Sears, Roebuck in 2002. Sears, Roebuck was subsequently taken over by Kmart Holdings which then changed its name to Sears Holdings. We were sorry to give up the stock, first because it provided us with a decent return from a capital gains standpoint, and second, because we liked owning a piece of a company that we did a lot of business with.

Unfortunately, the Sears Holdings 10K does not have a breakdown showing the sales generated by the Lands' End business. But you don't have to read between the lines of the Message from the Chairman, Edward S. Lampert. Under the section called Successes, the very FIRST item he lists is Lands' End. He said "Lands’ End had a record year in profitability in its traditional business (i.e., catalog, online, and inlet stores). In addition, we saw a significant improvement in the profit performance of Lands’ End merchandise in our Sears stores." Lands' End was discussed in the 10K several times, referring to its improvement in it’s gross margin and stating that "Lands’ End businesses contributed to the overall improved gross margins [of Sears Holdings] during fiscal 2006." With comments like that, you know the numbers have to be good.

I think Sears Holdings should spin off Lands' End. Full value to the shareholders would be realized right away, and I think a Lands' End entity would do extremely well on its own. Right now, the business is practically lost in the overall Sears business. I've seen no marketing cross-pollination between Lands End and Sears [thank goodness, from a consumer standpoint]. In other words, when I get my weekly Lands' End specials emailed to me, there is nothing about specials that Sears may have on their washers and dryers. Although owning quality clothing company like Lands' End may seem like a perfect fit, I think it is a completely different audience and market. Yes, the store-within-a-store concept is working well, but is it really a fit? As an analogy, which may not be perfect but close, if SHLD took over Brooks Brothers and set up a store-within-a-store, would that work? I think not.

Getting back to LE getting lost in SHLD, have you been in a Sears or Kmart recently? I have on a few occasions and I have been able to get a parking space half way down the closest row to the entrance. Years ago, I would be lucky to park two or three rows away. I was in a Kmart a few weeks ago [it was one of those big Kmart stores] and the first thing I noticed was that there was only one checker. Then I noticed that there were only a couple people standing in line, so I thought that it was just a temporary lull. I needed to find an obscure office supply, and was able to find a worker right away who brought me right to the item. I went to check out, only one person in front of me, and still one checker [unheard of]. This was all great for me and the other consumers, what few there were, getting the personal service and fast checkout, but you can't increase the size of a business with fewer and fewer customers.

Kmart same store sales went down by 4.7% and Sears same store sales were off by 2.4%. I can certainly see it in their parking lots and inside the stores. Why this is happening, I'm not sure. Maybe they are losing some of their business to (AMZN) [I am writing only half facetiously]. After all, if I need a toaster or a blender, and I can hold out for a few days, I'm not going to waste my time and gas money driving the 25 minute distance to my nearest Sears. I'll just go to Amazon. Yes, I'll probably have to pay shipping, but with the gas savings and the price comparison savings, I might end up paying about the same price and maybe less. Plus I'll save a LOT of time which is more valuable to me.

The new marketing campaign, which SHLD just unveiled, better work. However, in the meantime, Lampert could do the investors a favor by spinning off Lands' End.

Author does not own any of the above.

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