Since its October 12 spin-off from parent company Sears Holdings Corporation (NASDAQ:SHLD), shares of Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS) have performed roughly 7% better than the S&P 500 and NASDAQ stock indexes, but with a lot more volatility. In absolute terms, the company’s shares have increased by about 12 percent from a first-day closing price of $30.68 to a January 18 closing price of $34.50. The spun-off company is known interchangeably as “Sears Outlet” and “Sears Hometown.”
Sears Outlet shareholders who cashed out their holdings during late October or early November may have profited considerably from the deal. Shares of Sears Outlet rose rapidly after the spin-off to reach an all-time closing high of $37.14 on November 5. Initial investors who sold their holdings at this high point earned a 21-day return north of 21 percent. This translates to an annualized return of nearly 300 percent.
The Spin-off Deal
The terms of the deal involved a one-month rights offering to all Sears Holdings shareholders of record as of September 7, 2012. The rights offering expired as indicated on October 8, 2012. Each rights-holder was entitled to purchase 2.18091 shares of Sears Outlet stock for every 10 shares of Sears Holdings stock that he or she owned. No fractional shares were issued in the deal. According to Sears Holdings, more than 95 percent of the company’s shareholders had exercised their purchase rights by the October 8, 2012 expiration date.
The deal has proven to be lucrative for Chicago-based Sears Holdings. The company estimates that it has earned $446.5 million from the spin-off. The balance of these proceeds came from the initial shareholder-rights offering. The company also received $100 million in funding for a special cash dividend from a new secured line of credit. This dividend was paid out to Sears Holdings shareholders before the spin-off was completed.
The spin-off’s performance has special implications for the current chairman of Sears Holdings. As part of the deal, Edward Lampert’s investment firm ESL investments received a majority stake in the new company.
Sears Holdings is one of the largest North American retailers. It employs nearly 300,000 people in several thousand retail stores in the United States and Canada. The company also operates an e-store and runs a growing appliance-repair service known as the “Blue Team.” Specialty businesses under the ownership of Sears Holdings include a 108-branch travel agency, a mail-order catalog and e-store that collectively utilize over 1,700 pick-up locations in the United States, and a standalone flooring division.
Sears Holdings continues to struggle to turn around a sprawling and uncompetitive retail business. During the past several years, it has posted quarterly losses on a consistent basis and continues to shed stores and employees. Worse, it typically experiences weak sales figures during the all-important holiday shopping season. In addition to the Sears Hometown and Outlet spin-off, it recently spun off its struggling Sears Canada business.