Sears Holdings Corp. put its ailing Canadian arm up for sale last week, but the retailer’s crown jewel may lie in a more unlikely place: its appliance and tools aisles.
Its iconic Kenmore home appliances and Craftsman tools generate an estimated $6-billion (U.S.) annually in sales in the United States and, in Canada, an estimated $700-million (Canadian).
Edward Lampert, the U.S. hedge fund manager who heads Sears Holdings, parent of Sears Canada Inc., has been struggling with a decline in business on both sides of the border, and has been spinning off real estate and other assets. He could sell the private-label brands for $2-billion (U.S.) or more, industry insiders say – a move that could reduce the appeal of Sears Canada since it would no longer be able to rely on the popular brands to draw in customers.
“Once he sells off his real estate and he’s left with these brands, then there’s an opportunity to sell those brands and get value,” said Jamie Salter, chief executive officer of Authentic Brands Group LLC in New York, which buys rights to well-known brands in order to bolster, expand and license them to other businesses. He would consider purchasing the Sears trademarks if they went on the block.
Amid the general decline in Sears’ fortunes, Kenmore and Craftsman have stood out as two relatively bright spots, analysts say. “The draw to the Sears stores are its private-label brands, Kenmore and Craftsman,” said Gary Balter, retail analyst at Credit Suisse in New York and an ex-Montrealer. “Losing those brands would eliminate the majority of reasons people want to visit Sears, at least in the U.S.”
Even so, industry estimates suggest that the brands generate almost 20 per cent fewer sales in the U.S. today than four years earlier. That suggests Mr. Lampert might be eager to cash in on their appeal, either with a sale or through expanded licensing agreements, before they lose more ground.
“The longer that Sears and Sears Canada deteriorate, I would think that the value of those brands deteriorates along with them,” said David Tawil, president of hedge fund Maglan Capital in New York, which follows distressed companies. “It might be a way for the company to cut its losses a little bit by going ahead and beginning to distribute those [brands] widely.”
Sears Holdings spokesman Larry Costello would not comment on the company’s plans for the brands.
Mr. Balter has estimated that the brands (including the smaller DieHard label) rang up $6.45-billion in U.S. sales last year, down from almost $8-billion four years earlier. Kenmore merchandise represents by far the biggest portion of that revenue, accounting for an estimated $4-billion in annual U.S. sales. However, its revenues also likely shrunk the most, he said.
“You could see the potential for a licensing initiative in Canada once Sears U.S. divests itself of the Sears Canada holdings,” Mr. Tawil said. Sears already supplies the Costco chain and others with Craftsman products to sell in U.S. stores.
In 2006, Sears Holdings created a separate business unit called KCD for Kenmore, Craftsman and DieHard. In 2012, it hired a marketing firm to license and extend the brands globally beyond its U.S. Sears and Kmart chains and current product categories.
Sears Holdings currently owns 51 per cent of Sears Canada. If the U.S. company reduced its stake in its Canadian arm to less than 25 per cent, it could end Sears Canada’s right to use the brands as well as the Sears name, according to company filings. During a transition period of up to seven years, Sears Canada would have to pay the parent a royalty for using the brands, something it doesn’t do now.
Despite its troubles, Sears remains a top appliance seller, with Kenmore its key line. In Canada last year, Sears’ major appliances’ sales fell 6 per cent to $823-million from 2012, according to its filings. Sears’s share of the U.S. appliance market has dropped as low as 23 per cent from 29 per cent in early 2013 and 34.6 per cent in 2008, Mr. Balter estimates.
Mark Cohen, a professor at the Columbia Business School in New York and a former Sears Canada CEO, said the brands are “damaged assets” that keep losing value and might struggle to find a buyer. He said home retailers such as Home Depot or Lowe’s may be interested in picking up the Kenmore products, but would have to be willing to invest in developing the brand.Report Typo/Error