(SHLD) Sears Holdings Spins Off Hardware Chain

Sears Holdings Corporation (SHLD) declared that it is spinning off its hardware chain, Orchard Supply Hardware Stores, after five continuous years of bad performance. Sears believes that Orchard Supply will perform way far better and yield good returns to its shareholders as a separate, publicly traded company. Orchard Supply was originally founded in 1931 as a farmer-run purchasing co-op in San Jose, Calif., and was bought by Sears, Roebuck in 1989.

The hardware chain, which has 89 stores in California, will have 80% of its shares owned by Sears shareholders and the remaining 20% will be held by Ares Management LLC. Orchards shares will not be directly available to the public but through Sears shareholders who will trade them on the open market. Sears has filed a Registration Statement on Form S-1 with the Securities and Exchange Commission for the spin-off.

Sears Holdings Corp. is the fourth largest broadline retailer in the U.S. and offers home appliances, tools, lawn and garden equipment, electronics, automotive repair and maintenance products through a countrywide network of over 4,000 retail stores. Moreover, the company is the largest home services provider in the United States, with over 11 million service calls made annually.

The company disappointed the Street with its overall first-quarter 2011 results. Sears Holdings reported an adjusted loss of $1.39 per share, compared with the Zacks Consensus Estimate of a loss of $1.22, and a drastic plunge from the prior-year quarter earnings of 16 cents per share, primarily due to the sluggish top-line performance. Management’s cost-cutting measures for enhancing profits were largely criticized as improving the merchandise mix and customer service would have been a better option.

To add to its woes, the company operates in a fiercely competitive industry, which includes retailing giants such as Wal-Mart Stores Inc. (WMT), Target Corporation (TGT), and Lowe’s Companies Inc. (LOW). Moreover, the company also faces competition from regional departmental stores, home improvement stores, consumer electronics dealers and specialty retailers. Consequently, the cut-throat competition may further dent the company’s future performance.

Sears Holdings currently has a Zacks #5 Rank, implying a short-term ‘Strong Sell’ rating. Over the long term, we have an ‘Underperform’ recommendation on the stock.

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