Billionaire Eddie Lampert Dumps Some of This Sears Spinoff

ESL INVESTMENTSIn an amended 13D filing last week, Eddie Lampert and ESL Investments announced they were downsizing their Sears Hometown and Outlet Stores, the Sears Holdings Corporation (NASDAQ:SHLD) spinoff. Lampert previously owned around 62.1% of Sears Hometown’s outstanding shares, but now owns less than 60%, coming in at 59.7% per the 13D filing.

The spin-off of the Hometown and Outlet segment is expected to unlock hidden value for Sears Holdings shareholders.The plans for the spinoff was announced in late February, with the intention of spinning off the stores by selling subscription rights that should raise around $450 million for the company.

The subscription rights were distributed to Sears Holdings shareholders on September 11th. The details of the spin-off include a subscription right for Sears Hometown for Sears Holdings shareholders as of September 7th. The exercise price is $15 and the rights to be listed on the NASDAQ under the symbol SHOSR—with Sears Hometown listed as SHOS.

Given Sears Holdings’ cash issues—having spent over $5 billion on share buybacks from 2005-2010 at an average price of $97, versus the stock’s current price around $60—the spinoff is a positive for the company to generate much-needed cash. As well, the company has seen its cash on hand decline by over 50% during the past two years.

The new company—Sears Hometown and Outlet Stores—at the listed 23.1M shares outstanding, had 1Q profits of $0.89 a share on $621M in sales during. The earnings were nearly triple that of 1Q 2011, where the company only earned $1.43 for the full year. 2Q earnings put net sales for Sears Hometown at $645 million, compared to approximately $630 million for the second quarter of fiscal 2011. The company has seen a decline in lawn and garden due to drought conditions, which have put pressure on same store sales—down 1.2%—a decrease of 0.7% from the prior quarter.

The company has high-quality brands, including Kenmore, Craftsman, DieHard and Lands’ End. However, Sears Hometown will face the same stiff competition that Sears Holdings faces—with various retailers looking to step up their appliance offering—including Lowe’s Companies, Inc. (NYSE:LOW) and The Home Depot, Inc. (NYSE:HD)see which of these two home improvement stores we like best.

Lowe’s is expected to increase 2013 sales by only 0.2%, with a net ten new store openings. Home Depot is expected to increase retail sales by 4.6% in 2013 amid an increase in same store sales by 3-4%. Both of these companies have seen downward pressure from the housing market, and as bank lending standards remain tight, the market for new homes, as well as big ticket remodeling, should remain weak for the near future.

Best Buy Co., Inc. (NYSE:BBY) is also looking to gain market share in appliances, as it sees its consumer electronics market attacked by online retailers. This is in conjunction with their initiative to close some of their larger stores and open smaller mobile-focused stores. The company is in turnaround mode—and a possible takeover candidate—but is still a formidable opponent. The company expects to close 50 of its big-box stores, with a narrowing of its operating margins as it tries to increase its product mix. Revenue is expected to only be down 3% for 2013, which reflects a 3-4% decrease in comp-store sales.

As far as other competition, Target Corporation (NYSE:TGT) is now competing with some of the mall-based Sears stores. Target has opened its own stores in many markets where there had been a Sears store, but not a Target. Same store sales are expected to be up 3.6% in 2013—see if Target can keep beating the market—with margins contracting slightly as the company turns to lower-margin products to stay competitive.

Overall, the Sears’ spinoff should be positive for Sears Holdings, but the real question is how will the new Sears Hometown stores fare. Lampert and ESL dumped a small stake, but the fund manager is expected to partake in the subscription if the price is favorable. This could be the reason for his recent sale, making an effort to plan accordingly. The Sears Hometown stores will still have strong ties to Sears Holdings, since its top brands are the likes of Craftsman and DieHard.

This is a positive for Sears Holdings, who will still be able to receive revenue from Sears Hometown; however, the worry for Sears Hometown shareholders is how the stock will trade. If investors see that too much of a tie remains between the companies they may trade in lock-step, which could drag Sears Hometown down for the interim as Sears Holdings works through its operational and financial issues.

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