Sears Holdings Corp. (SHLD) came into existence in early 2005 by way of a merger with Kmart. The $11 billion blockbuster deal brought together two of the oldest retailers in America in an attempt to overcome a technological culture shock that had left both companies treading water. The idea was to combine the many successful brands that each brought to the table, such as Kenmore, Craftsman, and Martha Stewart for greater convenience in both anchor and stand-alone locations. Stock prices improved greatly upon the announcement, with shareholders then confident that the move would improve its ability to compete with the likes of Wal-Mart (WMT), Best Buy (BBY), and Target (TGT). Indeed, for a time, the company experienced solid growth and enhanced its store count nationwide. However, over the past few years, this growth has slowed substantially and Sears Holdings reported its first loss ever (in its current configuration), in 2011.
Now the company stands at another pivotal point in its history. Similar to the environment it faced seven years ago, Sears Holdings has waited too long to take advantage of market trends, including the benefits of online synergies, leading to store closings across the U.S. and Canada. Moreover, at the beginning of 2012 the company’s share price dropped to its lowest point in three years.
But investors have been given a new opportunity, as Sears’ plan to move forward with the spinoff of its Hometown and Outlet stores, some of the only profitable portions of the business in recent history, has come to fruition. Sears Hometown Stores (formerly known as Sears Authorized Dealer Stores) were created in 1993 and are essentially a small-store version of Sears’ full-line department stores, featuring home appliances, consumer electronics, lawn and garden equipment, and hardware. There are currently more than 1,200 Hometown and specialty stores in operation across all 50 states, Puerto Rico, and Guam. These free-standing and anchor locations service mostly small communities.
On October 11th, under the ticker “SHOS”, Sears completed the spinoff, opening at a share price of $30.02 and generating $446.5 million through the rights offering, including a $100 million cash dividend that was paid by Sears Hometown prior to its separation. Chairman Edward Lampert maintained a majority stake in the new IPO, while Sears Holdings stockholders were entitled to transferrable subscription rights, allowing the owner to purchase 0.218091 of a share at a price of $15.00 per whole share. Holders of restricted stock that did not invest by the record date (October 8th) received cash awards in lieu of subscription rights. All told, Sears distributed a total of 23.1 million shares of common stock to these subscription holders.
This IPO will now allow upper management at Sears Holdings to employ a more focused strategy that will aid its core units. The proceeds of the transaction will provide a cushion for its future endeavors, as well as an opportunity to temper some of the $3.3 billion debt total that it recognized at the end of the second quarter. Indeed, this is a great opportunity for the retailer to harness market buzz and change its image as a hum-drum, old time, department store.
Meanwhile, Sears Hometown represents an interesting option for potential investors. As previously noted, the business was one of the most profitable aspects of Sears Holdings Corp. over the last five years. Too, notable enthusiasm by stockholders, as the vast majority took the opportunity to invest in the spinoff, speaks volumes to their confidence in the brand and its offerings. The transaction will keep SHOS under the umbrella of SHLD’s Shop YourWay membership program. This represents the first attempt at improving the consumer’s experience by offering the ability to surf from one store to another by way of online and mobile web connection to maximize convenience. Further initiatives will follow as the company expands. In the interim, we wait to see the impact this will have on Sears Holdings Corp. and its recently unfavorable outlook.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.