In what seems an admission that the Sears shopping experience continues to have about as much appeal as getting a root canal, Sears Holding Corporation has moved to expand partnerships over the last few months that allow competitors to sell its most storied brands. Craftsman tools and DieHard batteries have already escaped the big-box retail behemoth, and it's probably only a matter of time before Kenmore makes a break for freedom as well.
The move is an ingenious elixir for near-term earnings, providing incremental cash flow to the struggling corporate mash-up that Eddie Lampert built, and is a delightful added discomfort to Sears' high-interest-paying shorts, who have watched the company's float vanish thanks to Lampert's aggressive stock buybacks. But critics worry that it could, in the end, just be digging the once omnipresent retailer a deeper grave.
"It will have a short-term benefit, but long-term it will be a disaster," predicts Howard Davidowitz, Chairman of Davidowitz & Associates, Inc., a national retail consulting and investment banking firm. "Sears is in total collapse -- earnings, sales, everything is tanking -- so they embark on this strategy with their brands that fundamentally goes against what every retailer in the United States is doing, what every retailer is trying to accomplish, which is to differentiate themselves from their competitors."
Macy's (M) keeps expanding exclusive sales arrangements with brands like Tommy Hilfiger, and J.C. Penney (JCP) recently went from an exclusive license of Liz Claiborne to an outright purchase of Liz Claiborne brands. Davidowitz says these are the types of deals that allow retailers to survive in a time with moribund consumers, rising bankruptcies and over-capacity in the retail industry, which still provides a whopping 43.6 square feet of retail selling space per capita in the country.
Sears obviously sees the move differently, talking up the ability to extend brand reach by moving its products outside of Sears' stores. Some shoppers have been able to buy Craftsman tools at Ace Hardware since last year, a deal that has now expanded from about ten hardware stores to almost 1,000.
But over the last month, Sears has also inked deals with Costco (COST) to sell the Craftsman brand and is allowing Meijer Inc., a Michigan-based retailer, to offer its well-known DieHard car batteries. In June, Sears reached an agreement with Dorcy International to sell DieHard-branded alkaline and rechargeable batteries.
Last week, new reports suggested that Sears is planning to hire an agent who can license Craftsman, DieHard, and the Kenmore appliance brands to a host of other retailers. According to Bloomberg, any agreement would differ from some previous deals by being a pure licensing play; in some incarnations, Sears (SHLD) has sold its own products within competitors' stores, collecting a percentage of the profit from sales.
"To grow the value of our proprietary brands, we evaluate all avenues including extending the brands into new markets and categories," says Larry Costello, a Sears Holdings spokesman, in a prepared statement. "As part of that evaluation, we consider a variety of partnership structures and consider both agency based and direct licensing relationships. The DieHard announcements with Dorcy and Meijer are both examples of direct licensing relationships."
Sears proper already has a curious relationship with its most profitable brands. In 2006, Sears Holdings securitized Kenmore, Crasftsman and DieHard, putting them into a separate special-purpose entity called KCD IP, which acts as a bankruptcy remote subsidiary. Sears pays a royalty fee to KCD, which uses the money to pay the interest on about $1 billion in bonds stuffed into a Sears insurance subsidiary. Theoretically, the move could protect these profitable brands from certain Sears' bondholders. It also helps KCD gain better ratings and cheaper financing.
It's unclear how the move to license the brands outside Sears fits within the strategy for KCD, which has been a busy trademarker of late. Even Professor David Stowell, an expert in financial engineering at Northwestern University's Kellogg School of Management, admits that, more generally, he's "not sure what the endgame is."
