Deal of the Century

Never mind that we’re just a few years into the 21st century: Sears, Roebuck & Co.’s acquisition of apparel and home goods cataloger Lands’ End is, at least so far, the catalog deal of the century.

Anatomy of the deal

On May 13, Hoffman Estates, IL-based Sears agreed to buy the $1.57 billion Lands’ End for $62 a share, or approximately $1.9 billion in a cash transaction. Also under the deal, which is expected to close by the end of June, the $41.1 billion Sears will offer to acquire all shares of Lands’ End stock. Lands’ End founder/chairman Gary Comer, vice chairman Dick Anderson, and related trusts have agreed to sell their shares, which represent approximately 55% of the outstanding shares of common stock.

“Acquiring Lands’ End substantially improves the growth prospects of our stores, soft lines [apparel], and direct channels,” Sears chairman/CEO Alan Lacy said in a conference call announcing the deal. “Sears can help accelerate Lands’ End’s growth prospects and brand awareness.”

By this fall, some core Lands’ End items will be featured in most of Sears’s 870 stores, Lacy said. By fall 2003, Lands’ End clothing will take up 15%-20% of the apparel space in all Sears stores. “Lands’ End’s style and value fills a much needed dimension in our soft lines,” Lacy said, “creating a point of differentiation.”

Lacy said that in terms of demographics, the core Lands’ End customer aligns more closely with buyers of Sears’s hard-goods brands, such as its Craftsman tools and Kenmore appliances, than with buyers of its lower-end apparel. The average Lands’ End customer spends more than $200 a year with the cataloger.

The deal also provides Sears with access to Lands’ End’s 30 million-name database, although Lacy didn’t say exactly what Sears, which ceased mailing its “big book” catalog in 1993, would do with the names. Also, Sears’s and Lands’ End’s Websites will link to each other. And the two companies plan to source products and paper together to improve savings.

Both Sears and Lands’ End insist that the cataloger will continue to operate as it has been, with no layoffs planned. But Lands’ End president/CEO David Dyer, who will report to Lacy after the transaction closes, will also assume responsibility for Sears’s $500 million licensed catalog business.

Risks and rewards

Like several other industry observers, George Strachan, a retail analyst with New York-based investment banking firm Goldman Sachs, describes the deal as a win-win, provided that “Sears can leverage the catalog goods in its stores.” But Strachan cautions that it’s also “clearly a risk if Sears cannibalizes the catalog with store sales.”

In fact, Sears’s valuation of the cataloger did assume some cannibalization of the direct channel of Lands’ End, according to Lacy. But, he added, “other catalogers that have added store distribution have seen their revenue grow. Catalog/Internet sales flatten out in performance, and growth typically comes by expansion of product into retail distribution.”

Kevin Silverman, an analyst with Chicago-based investment firm ABN-AMRO, also believes the deal will benefit both parties. “There’s a lot of synergies at play here,” Silverman says. “Not only does Lands’ End gets access to the Sears database, but [by selling Lands’ End apparel in its stores] Sears will also dramatically increase the visibility of Lands’ End products to the rest of America who don’t buy through a catalog.”

Silverman adds that Lands’ End could opt to grant its customers credit through the Sears credit business. But he cautions that there’s a fine line to walk regarding integrating the two brands. “If Sears were to lessen the Lands’ End brand name in any way,” he says, “it would be a huge mistake.”

Similarly, Derek Leckow, senior research analyst with Chicago-based Barrington Research Associates, points out that Sears “has to be careful in marketing the Lands’ End brand, because Lands’ End customers may not be interested in shopping at the stores. The goal is not to tarnish the image of the Lands End product.”

But Lands’ End chief operating officer Jeff Jones believes there’s no chance that Sears will dilute Lands’ End’s more upscale image. “Sears does an outstanding job of presenting good, better, and best,” Jones says, referring to how the company distinguishes among its top-quality offerings from its less expensive and lesser-quality items. “And [Sears executives] have given considerable attention to this topic.”

In fact, Jones says, Lands’ End is “very comfortable” with Sears’s strategy to scatter Lands’ End products throughout Sears’s apparel departments. “Sears has committed to us to maintain the integrity of our brand, our high value, high quality,” he says. “It will be a very well thought out strategy.”

Besides, the Lands’ End brand “isn’t on a higher plateau than those of Sears’s hard goods,” says Ron Ramseyer, president of direct marketing for outdoor sporting goods cataloger/retailer Bass Pro Shops, who had worked at the Sears catalog for 19 years. “And customers in the stores buying lower-end apparel will recognize Lands’ End as higher end.”

What’s in store?

Lands’ End already operates 14 outlet stores in Wisconsin, Illinois, Minnesota, and New York and one full-priced store in Minneapolis International Airport. But the acquisition by Sears provides a speedy and relatively simple entry into true bricks-and-mortar retail, something that the cataloger reportedly had been looking into for at least a year.

“We had an extended dialogue with our management team and board on the opportunities we had with retail — whether we should consider a retail strategy,” Lands’ End’s Jones said during a May 13 investors conference. “We found that Sears believes in our brand quality, and its presentation of our apparel will leverage our growth.”

For Lands’ End, having offerings in all of Sears’s stores will place them within 75 miles of 95% of the U.S. population. What’s more, Sears will allow Lands’ End catalog customers to bring their catalog returns into Sears stores.

But Barrington Research’s Leckow wonders whether the eventual increased demand from Sears retail customers for Lands’ End products could hurt Lands’ End’s impressive 90% initial fill rates. If that happens, “Lands’ End could suffer potential lost business from customers not getting their goods on time.”

Lands’ End rival L.L. Bean, which started its own retail expansion in recent years, is “following this news with great interest,” says president/CEO Chris McCormick. “While I won’t speculate on what this means for the future of the Lands’ End brand and/or Sears, the sale delivers strong testimony to the accomplishments of Gary Comer. We admire his achievements in developing such a strong and well-respected apparel brand.”

Sears, Lands’ End Finally Cross Paths

1886 Richard Sears starts selling watches to supplement his income as a station agent in North Redwood, MN
1888 First Sears catalog, which sold only watches and jewelry
1896 First large general Sears catalog
1925 First Sears store opens, a catalog center in Chicago
1927 Sears launches its Craftsman and Kenmore brands
1945 Sears sales exceed $1 billion.
1963 Gary Comer founds Lands’ End in Chicago to sell sailboat hardware and equipment by catalog
1975 Lands’ End mails first catalog (30 pages of sailing gear, two pages of clothing)
1977 Lands’ End catalog begins to focus on clothing
1991 Lands’ End mails first catalog to U.K. customers
1993 Sears closes “big book” catalog
1994 Lands’ End launches Website
1999 Sears launches Website
2002 Sears agrees to buy Lands’ End for $1.9 billion

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