Sears Hunts for Restoration

20 Nov

Last night, Sears Holdings (SHLD) disclosed a nearly 14% ownership stake in Restoration Hardware (RSTO). Restoration, a specialty retailer of hardware, bathware, furniture, lighting, textiles, accessories and gifts, has a few retail locations but focuses the mostly on its direct-to-consumer catalog/Internet business. RSTO shares were up significantly in after-hours trading following the disclosure. Sears acquired the shares at an average cost of $5.69, including commissions. RSTO shares closed at $6.33 yesterday prior to the announcement.

This is interesting news because Eddie Lampert, Sears’ Chairman and the person designated to invest Sears’ excess cash, has been relatively quiet lately. Sears Holding stock appears to be down in large part due to lack of activity; the disclosure last night may give the market some impetus to drive shares higher. In the 13D filing, Sears disclosed that it had engaged in discussions for a transaction at an initial price ($4/share when shares were at $2.87) that was much lower than RSTO’s current price. Chairman Lampert, the President of Land’s End, and a Sears director together visited with Restoration’s management regarding a merger, only to learn that RSTO’s management was considering a management-led buyout. Though initial talks went nowhere, Sears is currently seeking a confidentiality agreement and to engage in a due diligence process regarding a strategic alliance or merger.

Restoration appears to offer products complementary to Sears’ own and a partnership (or acquisition) with them could bring important synergies as Sears could drive those products through its retail locations. Lampert is very smart and I’m sure he would like to see more here than a minority ownership. Despite that, he is not someone who overpays for assets. Perhaps we’ll get a little more color on this when Sears Holdings releases its third quarter results on November 29th.

Full disclosure: Long shares of SHLD.


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