Sears goes to Lands' End in search of brand appeal - Statistical Data Included

DSN Retailing Today, June 10, 2002 by Laura Heller

HOFFMAN ESTATES, ILL. -- Sears' purchase of Lands' End gives the company a real shot at actually hitting the elusive target of improving soft lines sales, and many in the industry believe it will be a bull's eye. The company announced in mid-May its intent to purchase Lands' End for a cash offer of $62 per Lands' End share, a 22% premium over the per-share price at the time. But high purchase price or not, the deal is viewed as a win for the retailer and the timing couldn't be better.

Sears has spent the past year implementing much-needed operational initiatives and the cost savings already have significantly impacted the bottom line. But top-line growth is next on chairman and ceo Alan Lacy's list of accomplishments, something that can't be done without a successful soft lines strategy. The acquisition is anticipated to accomplish this goal.

Lands' End represents the "best" selection in Lacy's stated "good, better, best" apparel strategy. The "better" component consists of the company's new private-label line called Covington, which will be rolled out this fall.

Lands' End apparel will hit stores at the same time and the consolidated effort to bolster apparel dovetails nicely with both the retailers' apparel dovetails nicely with both the retailers' in-store remodeling efforts and operational efforts, which will see store associate roles change from a department store model to more closely mirror a self-service environment. Lacy expects the disruption to be minimal.

"The merchandise presentation aspects in the store really don't change that much other than there will be a rack topper that says Lands' End as opposed to a rack topper that said something else," he said. "So we think that it's just another brand being added to our assortment in stores and mostly [in] key item fashion this year."

A selection of Lands' End products will be introduced into many of Sears' 870 full-line stores by fall 2002 and the rollout is expected to be complete by fall 2003. The assortment will be carried through men's, women's and children's apparel, as well as a selection of footwear, accessories and home fashions, and be culled from existing Lands' End apparel lines.

"That's a little over 5,000 selling square feet that will be devoted to Lands' End products when we're fully rolled out [by] fall 2003," said Lacy, comprising 10% to 20% of total square footage for apparel. "We expect several hundred million dollars of incremental sales of apparel beyond what we would otherwise be able to do by having a brand of Lands' End quality and draw and differentiation within our store. Those incremental sales come largely from finally connecting with our hard lines shoppers with our apparel offerings."

"The Lands' End customer is typically in a higher income bracket than the average Sears soft lines customer," said UBS Warburg analyst Jeffrey Edelman. "This has the potential to bring in a customer to Sears that would not normally shop it for apparel, thereby exposing all of the apparel brands included in Sears' soft lines assortment to incremental demand."

Among analysts, there's nary a naysayer in the lot. Merrill Lynch's Dan Barry lists among the long-term positives is Lands' Ends' ability to lend strong brand name recognition in apparel similar to that of Sears' hard lines brands Craftsman, Kenmore and Diehard. Prudential's Wayne Hood likes, among other things, the possibility for brand extensions into home and seasonal categories and the high incremental sales the line will bring from new customers and a higher percentage of apparel sales from existing Sears shoppers. In fact, the only negatives seem to be short-term risks, such as minimal store disruption and the transactions "slightly dilutive" effect in 2002 and 2003.

Acquiring Lands' End is a strategy that Sears has contemplated before. As revealed in recent SEC filings, Sears entered into negotiations to purchase Lands' End in May 2000 and in June, Morgan Stanley was hired to serve as financial advisor with respect to a possible acquisition. But the deal was squashed on July 16, 2000, when Lands' End management indicated it would be "unable to meet its forecasts for both the second quarter and full year of fiscal 2001."

However, in August 2001, Sears' board of directors recommended an alliance between the two companies be revisited and the following February Sears was once again contacted by Lands' End, according to the filing, and the rest is a matter of public record.

Timing is everything and had Sears gone ahead with the deal in 2000, it would have been buying a much weaker company, albeit a strong and recognized brand. The purchase price could have been as much as one-third cheaper than the retailer is paying today, but Sears was itself a much weaker company, having not yet implemented the operational changes now contributing to profitability. The Lands' End per-share purchase price may be at a premium, but the deal is now a marriage of two strong brands complementing each other's operations, rather than the pairing of two weaker units looking to prop each other up.