No End in Sight for Land's End, Inc.'s Decline

Source: Land's End.

Well, this isn't going as planned at all. Fresh from being spun off from Sears Holdings , outdoors apparel retailer Land's End  ended its first day of trading on Monday down more than 7.5% from its offering price and followed that up with another 7% drop yesterday. That might not be the kind of value investors had in mind when they heard Sears chairman Eddie Lampert say the separation of the retailers was his way of returning value to shareholders.

Sears has spun off several divisions over the years and other than its Canadian retail unit all have crashed and burned, including Orchard Supply that eventually went bankrupt. And though its outlet stores trade 60% below their 52-week high, I don't necessarily anticipate that fate for Land's End, but investors shouldn't look for a runaway hit, either.

Profits have been widening for Land's End, with net income rising 58% in 2013 to $78.8 million, but sales have been on the downward path right along with the rest of Sears. Sales are down for four years straight, which is likely why its market value is less than half what it was when Sears paid $1.9 billion for it in 2002. That valuation can go even lower as it struggles to pay off the debt it was saddled with so that Sears could get a $500 million dividend.

As part of the spinoff, Land's End had to take out a new term loan to finance the dividend along with getting the ability to borrow up to $175 million more to pay for working capital. In the 10-K filed with the SEC ahead of the spinoff, Land's End notes that if it ends up being unable to pay its creditors or, like Orchard Supply, goes bankrupt, the whole spinoff could be considered a "fraudulent conveyance" and the shareholders would have the possibility of claims from Sears' creditors being opened against them. 

Of course, Sears anticipates Land's End will remain solvent, and got letters from its accountants attesting to as much, but even if that is boilerplate, the retailer's future relies heavily upon its former parent. Land's End's retail division accounts for 17% of revenues, and because 90% of its retail sales come from Sears' store-within-a-store concept, its continued viability depends on Sears success at attracting customers. Foot traffic within Sears stores, it notes, will "have a major impact on the sales of our Retail segment."

Sears has been closing hundreds of stores and foot traffic generally at brick-and-mortar stores is down, with analysts at ShopperTrak finding holiday traffic off nearly 15% in November and December, which even Lampert alludes to during Sears fourth-quarter conference call when he explains why he's bulking up his online offerings. Fortunately, the vast bulk of Land's End's sales come from its website and catalog sales, but total revenues are down almost 10% from their peak in 2011.

I'm not seeing how Land's End turns things around right now. While some of its stock-price weakness may be a result of some Sears shareholders dumping their stock to realize some of that value they were promised, a future of growing sales and even bigger profits doesn't appear to be on the horizon.

Not alone at death's door
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