FINANCE

Analysis: Sears is broken operationally and financially

The news that some lenders have urged Sears to file for Chapter 7 bankruptcy, which involves the liquidation rather than the restructuring of the business, confirms our view that Sears is a firm without any real inherent value.

The latest financials show that group liabilities outweigh assets by some $4.4 billion. Not only has this imbalance been present for many years, but it has progressively worsened over time. A restructuring involving further asset sales would do little to fill this hole. Certainly, the process may allow Sears to pay down some debt and reduce liabilities, but it would also further weaken the asset base of the company. Ultimately, this puts Sears in a dangerous catch 22 situation from which there is no real escape.

If the company was profitable at the operating level there may be some hope that after restructuring it could rebuild its assets and pay down further debt. However, this is not the case. The latest numbers show that in the half year to August, the company made a huge operating loss of $419 million. In our view, this is a company that is bro-ken operationally as well as financially.

All of this is underscored by the continued erosion of the brand image of both Sears and Kmart, which have suffered from years of underinvestment. From our data, this is still causing a severe erosion of customer numbers and the amount existing customers spend when they shop. A substantial investment would be required to reverse this position – something Sears is just not in a position to undertake.

The prognosis is gloomy, just as it has been for many years. Over this time Sears has been expert in restructuring and playing for time with various financial machinations. However, at some point, the music has to stop. We believe that time is now.

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FINANCE

DSW and Authentic Brands Group to acquire Camuto Group

BY Marianne Wilson

Footwear retailer DSW is expanding its portfolio.

The footwear retailer is partnering with brand development, marketing and entertainment company Authentic Brands Group to acquire Camuto Group in a deal valued at about $375 million. Under the terms of the agreement, DSW will acquire the operations of Camuto Group, which is best know for its namesake Vince Camuto brand and as the footwear licenses of Jessica Simpson, and Lucky Brand’s and Max Studio’s footwear and handbags.

DSW will contribute approximately $200 million to acquire all of Camuto Group’s global production, sourcing and design infrastructure, including operations in Brazil and China, a new, state-of-the-art distribution center in New Jersey, in addition to existing working capital of approximately $100 million. The company will also acquire the licensing rights for the Jessica Simpson footwear business, as well as the footwear and handbag licenses for Lucky Brand and Max Studio, and acquire joint venture participation in the ED Ellen DeGeneres and Mercedes Castillo brands currently managed by the Camuto Group.

“The acquisition of Camuto Group is an exciting new growth opportunity for our company,” said DSW CEO Roger Rawlins. “We recently expanded our customer reach in North America through our Canadian retail subsidiary, and this partnership transforms DSW Inc. into one of the largest footwear companies in North America with industry-leading capabilities in product design, development, sourcing, production and marketing. With our expertise and infrastructure, we’re confident this partnership will expand our platform to pursue new market share opportunities and become integral to more consumer purchase decisions.”

Additionally, DSW will team up with Authentic Brands to acquire the intellectual property rights of Camuto Group’s proprietary brands under a new partnership, with Authentic Brands taking the majority stake of 60% in the joint venture. DSW will acquire a 40% stake (for $56 million). The partnership will focus on licensing the brands across existing lines in footwear, handbags and jewelry, and new category development with a focus on building out each brand’s lifestyle offerings. Authentic Brands will be responsible for the development, growth and global marketing of the brands.

With the move, ABG takes a page from its acquisition playbook for Aéropostale and Nautica, creating a similar structure that secures a dedicated operating partner in footwear.

“This strategic arrangement preserves the Camuto Group operation, which will continue to service its current footwear partners, and provides a robust infrastructure for new brands and growth,” said Jamie Salter, chairman and CEO of ABG. “In addition, our partnership with DSW links ABG to a footwear authority whose sourcing and manufacturing expertise will extend across our portfolio.”

Under the terms of the transaction, Camuto will maintain its Connecticut headquarters and will manage its dedicated wholesale and third-party design relationships independently of DSW’s retail business. Camuto Group CEO Alex Del Cielo will continue to lead the company.

“The partnership with DSW and ABG creates an unmatched opportunity for the Camuto Group to expand the platform for our leading lifestyle brands,” said Del Cielo. “Having collaborated with DSW for many years, we respect their ability to grow a business through strategic leadership and innovation. By leveraging DSW Inc.’s resources, we will strengthen our wholesale business and bring to market an exciting and world-class direct-to-consumer experience that will grow our brand equity and customer demand across additional points of sale.”

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Analysis: Sears has failed on every facet of retailing

The news that Sears has hired advisors to prepare for a possible bankruptcy filing comes as no great surprise. In our view, this is the inevitable end game of an effective liquidation process that has been going on for many years. Throughout that time the sale of various assets along with injections of cash from Eddie Lampert have kept the ailing retailer from going under. However, the activity is akin to bailing out water from a holed ship: it keeps the vessel afloat for longer but does nothing to sort out the underlying problem.

The problem in Sears case is that it is a poor retailer. Put bluntly, it has failed on every facet of retailing from assortment to service to merchandise to basic shopkeeping standards. Under benign conditions, this would be problematic enough but in today’s hyper-competitive retail environment it is a recipe for failure on a grand scale. That failure has manifested itself in lost customers, lost market share, and a brand that has become tarnished and increasingly irrelevant.

Management’s consistent inability or unwillingness to address these issues is why we have never been confident about the long-term survival of Sears. It is all well and good to undertake financial engineering, but the company is in the business of retailing and without a clear retail plan, the firm simply has no reason to exist.

There is a slim chance that Sears may avoid the latest bankruptcy threat, especially if lenders and stakeholders quickly agree to the restructuring program put forward by Eddie Lampert. However, in our view, this is not a long-term solution; it is simply a way to prolong the life of a company that has long since lost the will to live.

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