Spinning Off the Canadian Version

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Sears Holdings (NASDAQ: SHLD), the parent company of iconic retailers Kmart and Sears, has completed its partial spin-off of struggling Sears Canada (TSX: SCC). The transaction was finalized on November 13, 2012. The transaction leaves Chicago-based Sears Holdings in control of about 51 percent of Toronto-based Sears Canada.

The deal involved the distribution of 44.5 percent of Sears Canada's outstanding shares to all Sears Holdings shareholders of record as of November 1, 2012. The shares were distributed on a proportional basis: Each Sears Holdings shareholder received 4.283 shares of Sears Canada common stock for every 10 Sears Holdings shares that he or she owned.

To avoid issuing fractional shares to individual shareholders, the company combined the fractional shares "left over" after the November 13 distribution and sold them on the open market. The cash proceeds from this sale were distributed to Sears Holdings shareholders on a proportional basis. The entire transaction was judged to be a taxable event by American and Canadian revenue authorities.

Sears Canada’s performance 

Since the partial spin-off, new Sears Canada shareholders have seen the value of their holdings decline slightly from a November 13 closing price of $11.76 to a January 18 closing price of $9.62. This represents a negative return of 18%.

Sears already spun off two other pieces of its company recently.  Sears Hometown and Outlets (NASDAQ: SHOS) has done a lot better than Sears Canada with a 12% gain since mid-October.  Sears Hometown was one of the more profitable parts of Sears with earnings growing 28% yoy.  Sears Hometown is made up of hardware stores in smaller municipalities and many of these stores are licensed, but not owned, by Sears Hometown.  On the other side of the spectrum, Sears also spun-off Orchard Supply Hardware Stores (NASDAQOTH: OSHWQ) which has had a terrible return of -68% since December 2011!  Orchard is losing $92 million annually and has decreasing revenue.  Sears offloaded Orchard to save money and is looking a lot better without it.

The spin-off of Sears Canada has already produced one tangible benefit for Sears shareholders. In early December of 2012, Sears Canada announced plans to distribute a special dividend of $1 per share on December 31, 2012. The dividend will be paid out to all December 24, 2012 shareholders of record. Sears Canada expects this outlay to result in a $102 million charge on its fourth-quarter income statement.

For years, Sears Holdings has been locked in an existential turnaround struggle. In addition to its Canadian holdings, the company operates about 2,400 Sears and Kmart stores in the United States. It also produces a number of proprietary lines of brand-name products, including Craftsman and Kenmore. Its stores sell a wide range of products, including home appliances, apparel, hardware, automotive parts and landscaping products.

About Sears and the Canadian version

Across all of its divisions, Sears Holdings currently employs nearly 300,000 full-time and part-time employees. In the past decade, this number has decreased significantly as the company closed unprofitable locations, decreased the scope of its mail-order operations, and consolidated its corporate operations in the United States and Canada. The company has posted losses in five of the past seven quarters and lost about $248 million in cash during 2011. It struggles to compete with other major American retailers on price, selection and perceived value. Its principal competitors are Bentonville, Arkansas-based discount behemoth Walmart and upmarket Minneapolis-based retailer Target.

Sears Canada has had plenty of problems as well. The company has suffered quarterly sales declines for four straight years and seen its stock price decline from a high near $30 in April of 2010 to a multi-year low near $10 in July of 2012. Its weak performance can be attributed to a number of factors, including low rates of customer retention and a heavy reliance on unprofitable promotions. In addition, its pricing is seen as uncompetitive relative to the discount retailers that have recently been gaining market share in Canada.

Like its American parent, Sears Canada is a diverse organization. In addition to operating about 200 corporate retail outlets, it also runs 275 smaller hardware-store affiliates and a 100-outlet travel agency. It still issues a mail-order catalog and operates an e-store to boot. For mail-order and e-store customers, it runs a network of about 1,500 small merchandise pick-up locations throughout the country. Sears Canada employs about 30,000 full-time workers across Canada.

There are some early indications that both retailers' turnaround plans may finally be bearing fruit. Like some of its smaller competitors, Sears Canada has announced plans to use its credit card database to issue targeted promotions to previous customers based on their purchasing histories. Coupled with continued cost-saving measures, the company predicts that this move will make it profitable by 2014.

Meanwhile, Sears Holdings may benefit from secular economic trends in the United States market. The strengthening residential construction market should benefit its home-improvement and appliance divisions. A concurrent rise in consumer sentiment is likely to increase its sales of home goods and gardening equipment as well. Sears Holdings is also trying to position itself as an alternative to high-priced appliance-repair services with its growing cadre of "Blue Team" appliance-repair specialists.


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