Mar 23, 2017
Sears' plan to sell brands no salve for financial woes
Mar 23, 2017
Sears' plan to avoid bankruptcy in part by selling off or licensing brands including Kenmore and DieHard may prove difficult because of changing consumer tastes and possible legal roadblocks.
Sears Holdings Corp, once the largest U.S. retailer, warned on Tuesday about its ability to continue as a going concern after years of losses and declining sales.
The Kenmore brand for appliances and the DieHard brand for car batteries are among the best-known remaining assets of the U.S. retailer, whose roots date back to 1886. In January, Sears sold its Craftsman tool brand to Stanley Black & Decker Inc for $900 million. Sears, which also owns Kmart Corp, has dozens of other in-house apparel and houseware brands.
Analysts in the past four years have collectively valued the Craftsman, Kenmore and DieHard brands at up to $3 billion. However, several industry consultants and restructuring experts said the worth of those assets has declined as Sears has fallen out of favour with consumers. Like their parent, Sears brands are hampered by a perception that they are yesterday's names.
"Sears is serving a customer base that is over the age of 50 or 55," said Doug Stephens, an independent retail industry consultant. As younger consumers increasingly embrace "smart appliances," they do not perceive the 90-year-old Kenmore brand as being at the cutting edge of technology, he said.
Sears declined to comment.
Fitch Ratings said in January Sears would need to raise $2 billion in 2017 to avoid bankruptcy and another $2 billion in 2018.
'NOT A THROWAWAY BRAND'
Because of Sears' shaky financial situation, potential buyers of Sears' brands would have to confront some unusual hurdles. Any asset sale would need approval from the U.S. Pension Benefit Guaranty Corp, a government agency that protects retirement incomes for American workers.
Sears made a deal with the PBGC in March 2016 to use certain intellectual property and real estate assets to fulfil its pension obligations. The agency signed off on the Craftsman sale only after securing a promise from Sears that its pension plans would receive a $250 million payment and a 15-year income stream from Stanley Black & Decker’s sales of Craftsman products.
Another obstacle to selling the Kenmore and DieHard brands is the prospect that Sears could end up filing for bankruptcy. If it does, unhappy creditors could retroactively challenge a sale and ask a judge to void it as "a fraudulent conveyance" intended to hide assets.
David Tawil, president of the hedge fund Maglan Capital, which invests in distressed companies but does not have a stake in Sears, said that was unlikely, but the risk might deter some buyers.
Kenmore was once the top U.S. appliance brand. But its share of the home appliances market fell from 17.4 percent in 2011 to 12.7 percent in the twelve months ending in March 2016, according to the Stevenson Company, a market research firm. DieHard’s share of the auto battery market dropped to 5.2 percent from about 7 percent during the same period, the firm said.
Sears itself has lowered the book value of its intangible assets, which include the brands and other items like internet domain names and customer goodwill, from around $4.5 billion in 2011 to $1.8 billion in January.
Greg Portell, a retail industry consultant with A.T. Kearney, said he believes Sears brands can still command a strong price. He said big-box retailers or hardware superstores might take over the Kenmore brand to launch an in-house line. And lesser-known foreign manufacturers might see it as a way to gain a foothold in the U.S. market.
“This is not a throwaway brand that someone is going to shut down,” Portell said.
The company has already raised some money from the Kenmore name. In February, Sears announced it reached a licensing agreement with the grill manufacturer Permasteel Inc that allows the company to sell Kenmore-branded grills. Financial terms of that transaction were not disclosed.
Gene Baldwin, a restructuring expert at the financial advisory firm CR3 Partners, said it is unlikely Sears can generate the liquidity it needs just from selling or licensing its brands. The retailer's most valuable assets are its real estate holdings, he said.
"I don't see Sears and Kmart stores sticking around," said Baldwin. "This has been a slow-motion liquidation for a while now."
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