Sears to Split Up Businesses, Adopt Holding Company Structure

Sears Holdings (SHLD) Chairman Eddie Lampert has decided to move the company one step closer to a Berkshire Hathaway model, according to a story by the Wall Street Journal yesterday. The new holding company structure will split up Sears into as many as three dozen separate businesses, each with its own operating executive. The move is seen as an admittance that the current structure was not working to boost the company's retailing operations, and therefore focusing on each aspect of the company's assets individually will allow for greater control and change. This is similar to the Buffett model, where he has someone running each business and has little say in day-to-day decision making.

Many followers of Lampert have been saying that his plan all along was to emulate Berkshire Hathaway, but initial moves after the Sears/Kmart merger were more focused on cost cutting (which has been successful) and introducing brands like Lands End, Kenmore, and Craftsman into both Sears and Kmart stores (which has done little to stop same store sales declines).

Separating Sears into various business units, each with an experienced executive, makes a lot of sense in terms of ultimately getting Sears to diversify its profit base, rather than simply relying on retail operations in this difficult economic environment. Possible business groupings (the plan has not been publicly announced) could include real estate management (bulls on the stock will be happy about that one), all of the company's individual brands, individual business lines, and the online divisions. That way, rather than just throwing every product they own into Sears and Kmart locations, they could strike distribution deals with other retailers for Lands End, Kenmore, Craftsman, and Diehard products, in addition to possibly opening smaller stores for each business line (Lands End clothing might not sell well in Kmart, but it might do very well in its own branded store, for instance).

This overhaul was probably a bit overdue, but I can understand Lampert not wanting to hurry into revamping the $50 billion company. However, given the retailing environemnt right now, he obviously could not afford to wait too much longer to make inevitable changes. This reorganization itself, although positive on its face, does not mean Sears is out of the woods. I don't expect a huge upward move in the stock on this news, or if there is an initial pop, it will likely be temporary.

This is because while a reorganization is nice, shareholders will need to see results before the stock rebounds meaningfully. Does the real estate management group do anything to monetize the real estate holdings? Do the individual brands outline a licensing, distribution, or expansion strategy and show progress? Are meaningful changes going to result from this new holding company structure? It is one thing to move people around (anybody can do that) but unless successful changes result from it, shareholders won't be any better off.



Bulls on the stock, myself included, have long expected that Lampert would use a holding company structure to maximize the value of the company's wide array (and often under appreciated) assets. After all, why would Lampert have named the company Sears Holdings? The speed of these changes has been less than I and many others had hoped for, but since Lampert owns 50% of this company (worth $6 billion), he has the incentive to make bold changes now that the stock has taken a huge hit. As you can see from the chart above, things were working well for a while, but now that the low hanging fruit has been picked, it is good to see he is willing to shake things up. Hopefully it produces positive results.

Full Disclosure: Long shares of Sears Holdings at the time of writing