Sears to buy Lands’ End

To get its hands on both a valuable apparel brand and a 30 million-name customer file, Sears, Roebuck and Co. on May 13 agreed to buy cataloger Lands’ End. Sears will pay $62 per Lands’ End share, or approximately $1.9 billion in a cash transaction. The deal is expected to close next month.

“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.”

Lacy said that the demographics of the core Lands’ End customers aligns more closely with buyers of Sears’s well-regarded hard-goods brands, such as its Craftsman tools and Kenmore appliances, than with buyers of its lower-end apparel. To encourage its hard-goods buyers to spend more with Sears, the company will begin selling Lands’ End clothing its its 870 full-line stores.

By this fall, some “key Lands’ End” items will be featured in most Sears 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 softlines,” Lacy said, “creating a point of differentiation.”

For Lands’ End, the deal provides an effortless entry into bricks-and-mortar retail. “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 chief operating officer Jeff Jones said during a Lands’ End investors conference. “We found that Sears believes in our brand quality, and its presentation of our apparel will leverage our growth. It’s a great strategic fit for us.”

Like several analysts, 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.”

But while Lacy said that Sears’s valuation of the cataloger “did assume some cannibalization of the direct channel of Lands’ End,” he noted that “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. So we’ve captured some risk of the direct channel in our analysis but will offset some of that by giving Lands’ End access to Sears customers, giving Lands’ End an ability to counterbalance” any cannibalization.

For the fiscal year ended Feb. 1, Lands’ End total revenue was $1.57 billion, up 7% from fiscal 2000. Net income for the year rose 93%, to $66.9 million. In early morning trading, news of the deal sent Lands End stock up 21%–more than $10–to $61.72 per share.

The deal represents the culmination of extensive conversations between Sears and Lands’ End, Lacy said. “The timing of the deal was triggered by a number of events, and we feel the timing is now appropriate for both parties,” he said. “It’s a lot of money for us, but affordable. And it takes us another step in our turnaround.” He added that Sears has no plans for another acquisition “of this magnitude any time soon.”

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