Sears Holdings Clings to Life by Selling Craftsman
Every quarter seems to bring new tidings of woe from US-based Sears Holdings Corp, the company that owns Sears department stores and the Kmart chain of mass merchandisers. Disappointing earnings statements, store closures, and liquidity crises have become the norm, as the company has continued to lose market share to competitors like Walmart, Target, Home Depot, Lowe’s, Best Buy, and – most recently – Amazon.
On 5 January 2016, in a move that reflected the company’s increasingly uncertain future, SearsHoldings announced that it had agreed to sell its well-respected brand of Craftsman tools and equipment to US-based tools giant Stanley Black & Decker Inc, while also revealing the closure of an additional 150 Sears and Kmart stores.
The impact on Sears Holdings
In many ways, the Craftsman deal was forced upon Sears Holdings. The company’s US retail sales by value have declined precipitously by 47% between 2007 and 2016. As the company’s financial situation has become increasingly grim, predictions of the company’s imminent bankruptcy have become commonplace. Indeed, on the day the Craftsman sale was announced, Sears Holdingsreported that same-store sales at its Sears and Kmart outlets had experienced a year-over-year decline of 12-13% for the combined two-month period of November and December 2016.
Thus, in the short-term, selling off Craftsman makes sense. Under the terms of the deal, Stanley Black & Decker is reportedly set to pay $775 million to Sears Holdings outright, plus a percentage of all sales of Craftsmen products for the next fifteen years. The deal came on the heels of reports that ESL Investments, a hedge fund, had agreed to loan the company up to USD500 million. (ESL Investments is managed by Edward Lampert, the CEO and chairman of Sears Holdings.) The combination of the profit from the Craftsman sale, the cost savings from the store closures, and the loan from ESL should provide Sears Holdings with the liquidity it desperately needs to survive through the end of 2017.
Taking a longer view, however, the sale of Craftsman is a bad deal for Sears Holdings. As recently as October 2016, Bloomberg reported the Craftsman brand, which still has cachet in the US with older consumers in particular, could be valued as highly as USD2.0 billion. That the company failed to secure less than half that amount must come as a disappointment. Furthermore, up until now, SearsHoldings has sold Craftsman products almost exclusively through channels owned or affiliated with the company, such as Sears and Kmart stores and their associated websites, with only about 10% of sales coming through other select retailers. Once the acquisition is complete, Stanley Black & Decker will be able to sell Craftsman tools through any retailer it likes, including those to which SearsHoldings has historically refused to sell. The ability to sell Craftsman products is one of the primary competitive differentiators that Sears and Kmart outlets currently possess; when Craftsman tools can be purchased at Home Depot, Lowe’s, or Walmart, there will be even less of a reason for shoppers to patronise Sears Holdings stores.
The Future of Kenmore
Now that Craftsman has been sold off, speculation surrounding the fate of other Sears Holdingsproprietary brands has become intense. Kenmore, the company’s popular and valuable brand of household appliances, is likely to be the next asset put on the block. One company that could be a potential buyer is US-based department store chain JC Penney Co Inc. Whereas Sears Holdings has struggled recently, JC Penney has been more successful; in 2016, the company’s US retail sales byvalue increased 5% year-over-year, while those of Sears Holdings declined 10%. In May 2016, JC Penney returned to selling major appliances across most of it stores for the first time in over 30 years. Acquiring Kenmore may be an attractive option for JC Penney, as it would give the retailer its own proprietary appliance brand while striking a finishing blow against its erstwhile competitor. If JC Penney is not interested in Kenmore, an international manufacturer might be; Chinese consumer electronics firm Haier’s recent acquisition of US-based General Electric’s appliance portfolio suggests that some other Asian manufacturer might look to enter the US market by purchasing the Kenmore brand.
A win for Stanley Black & Decker
Although the sale of Craftsmen is likely to eventually hurt Sears Holdings, Stanley Black & Decker obviously benefits from the deal. In October 2016, the company announced an agreement to purchase Irwin and Lenox, two popular brands of hand tools, from US-based conglomerate Newell Brands. Assuming that Stanley Black & Decker’s acquisitions of Craftsman and Newell’s tool brands clear all regulatory hurdles, the company – already the leader in hand tools sales in the US – is on track to dominate the category, controlling well over half the US consumer hand tools market byretail sales value. Additionally, the Craftsman acquisition gives Stanley Black & Decker control of three of the four leading consumer power tool brands in the US – Craftsman, Black & Decker, and DeWalt – and over 30% of the overall US consumer power tools market by retail sales value. Stanley Black & Decker’s purchase of Craftsman also gives the company a foothold in totally new product categories, such as garage door openers and lawnmowers. Overall, the Craftsman acquisition looks like a smart deal at a great price for Stanley Black & Decker.