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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE TO
(Rule 14d-100)
Tender Offer Statement Under Section 14(d)(1)
or Section 13(e)(1) of the Securities Exchange Act of 1934
-------------------
LANDS' END, INC.
(Name of Subject Company (Issuer))
INLET ACQUISITION CORP.
a wholly owned subsidiary of
SEARS, ROEBUCK AND CO.
(Names of Filing Persons (Offerors))
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class of Securities)
-------------------
515086106
(CUSIP Number of Class of Securities)
Anastasia D. Kelly
Senior Vice President and General Counsel
Sears, Roebuck and Co.
3333 Beverly Road
Hoffman Estates, Illinois 60179
Telephone : (847) 286-2500
(Name, address and telephone number of
person authorized to receive notices
and communications on behalf of filing persons)
With a copy to:
Gary P. Cullen, Esq.
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606
Telephone: (312) 407-0700
[_] Check the box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number or the Form or Schedule and the date of its filing.
Amount Previously Paid: $____________ Filing party: __________
Form or Registration No.: ____________ Date Filed: __________
[X] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
Check the appropriate boxes below to designate any transactions to which the
statement relates:
[X] third-party tender offer subject to Rule 14d-1.
[_] issuer tender offer subject to Rule 13e-4.
[_] going-private transaction subject to Rule 13e-3.
[_] amendment to Schedule 13D under Rule 13d-2.
Check the following box if the filing is a final amendment reporting the
results of the tender offer: [_]
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Item 12. Exhibits
(a)(5)(A) Press Release issued by Sears, Roebuck and Co. on May 13, 2002 *
(a)(5)(B) Key Messages for Sears Corporate Strategic Leadership Team *
(a)(5)(C) Letter to Sears Associates, dated May 13, 2002, from Alan J. Lacy
posted on the Sears Intranet *
(a)(5)(D) Slides used in Conference Call held on May 13, 2002 *
(a)(5)(E) Transcript of Conference Call held on May 13, 2002
* Incorporated by reference to the Schedule TO-C filed by Sears, Roebuck
and Co. on May 13, 2002.
EXHIBIT INDEX
Exhibit Exhibit Name
- ------- ------------
(a)(5)(A) Press Release issued by Sears, Roebuck and Co. on May 13, 2002 *
(a)(5)(B) Key Messages for Sears Corporate Strategic Leadership Team *
(a)(5)(C) Letter to Sears Associates, dated May 13, 2002, from Alan J. Lacy
posted on the Sears Intranet *
(a)(5)(D) Slides used in Conference Call held on May 13, 2002 *
(a)(5)(E) Transcript of Conference Call held on May 13, 2002
* Incorporated by reference to the Schedule TO-C filed by Sears, Roebuck
and Co. on May 13, 2002.
Exhibit (a)(5)(E)
SEARS
Moderator: Alan Lacy
May 13, 2002/8:30 a.m. CDT
Page 1
SEARS
May 13, 2002
8:30 a.m. CDT
Coordinator Ladies and gentlemen, thank you for standing by.
Welcome to this morning's Sears Roebuck &
Company's conference call. At this time, all
participants are in a listen only mode. Later, we
will conduct a question and answer session and
instructions will be given at that time. As a
reminder, this conference is being recorded. I'd
now like to turn the call over to Pam White, Vice
President of Investor Relations. Ms. White, you
may begin.
P. White Thank you operator. Good morning everyone and
thanks for being with us on such short notice.
Before we begin, I'd like to provide our usual
caution that this morning's call contains forward
looking statements such as forecasts of business
results, expectations about the Company's
integration plans and the impact of the
acquisition. Actual results may differ materially
from those projected in these forward-looking
statements. For further information regarding
these factors, please see this morning's press
release.
This announcement is neither an offer to purchase
nor a solicitation of an offer to sell securities
of Lands' End. At the time the offer is commenced,
Sears will file a tender offer statement with the
U.S. Securities & Exchange Commission and Lands'
End will file a solicitation recommendation
statement with respect to the offer. Investors and
Lands' End shareholders are strongly advised to
read the tender offer statement including an offer
to purchase, letter of transmittal and related
tender documents and the related information.
These documents will be available at no charge at
the SEC's Web site at www.SEC.gov and may also be
obtained by calling 1-800-732-7780 and selecting
option 3.
A reminder that this call is being webcasted.
Also, slide presentations supporting this call are
available on sears.com and can be downloaded as a
PDF file. The call will be archived and available
on sears.com for approximately one week.
Participating on this call are Alan Lacy, Chairman
and Chief Executive Officer; Paul Liska, Executive
Vice President and Chief Financial Officer; and
Glen Richter, Senior Vice President of Finance. I
will now turn the call over to Alan.
A. Lacy Thank you Pam and good morning everybody. I do
hope that you do have the webcast going because
I've got somewhat of a formal script here to go
through that's meant to be used in tandem with the
Web cast slides. So I do hope that you do have
that part of the media turned on this morning.
We're obviously very excited about today's
announcement. From an overall perspective, today's
announcement represents a very important milestone
in the long and distinguished history of Sears
Roebuck. As indicated in our press release this
morning, we have entered into a definitive
agreement to acquire Lands' End at a price of $62
per share or $1.9 billion. This event represents
the joining of two very strong and profitable
companies with terrific brand names in American
retailing.
The combination supports the strategic directions
of both enterprises, benefits both current and
future customers and we anticipate that it will
create significant shareholder value. As we have
discussed with the financial community over the
last several months, we have a clear objective to
improve the relevancy, consistency and quality of
our softlines offerings. The acquisition of Lands'
End represents an important element and step
toward achieving this vision. Lands' End is a
great fit for Sears. This is a brand with
outstanding name recognition and brand equity with
customers. The Company has millions of existing
customers and has been a leader in the direct to
customer catalog and Internet channels.
Acquiring Lands' End substantially improves the
growth prospects of our Full-line Stores'
softlines businesses and significantly expands our
direct to customer capabilities. In addition, it
provides the opportunity for substantially
increased distribution of the very popular Lands'
End brand.
Lands' End is a brand with a reputation for
quality, value and satisfaction guaranteed with
2001 sales of $1.6 billion. They're the largest
U.S. specialty apparel catalog company, the number
one seller of apparel on the Internet and one of
the most popular catalogues in the United States.
What really drew us to Lands' End is its authority
and high quality classically styled apparel for
the family. Lands' End has outstanding
capabilities along numerous dimensions.
From a merchandising perspective, this Company has
strong product development and sourcing
capabilities and is well known for high quality
products produced according to rigorous
manufacturing standards. Customers recognize the
value Lands' End products represent.
Lands' End is also a leader in the
direct-to-customer marketplace. They have
innovative Web technology, with features such as
product customization, live online customer
service and virtual models. The Lands' End Web
site was ranked number one for best designed
eCommerce site by Forrester Research and was
ranked third best eCommerce site by the Wall
Street Journal in 2001.
We were also very impressed with Lands' End's
culture and heritage. Similar to Sears, they stand
for satisfaction guaranteed. The Lands' End
customer is affluent and well educated. We believe
that the Lands' End customer overlaps
demographically quite well with the Sears core
hardlines customer. Lands' End customers are also
very loyal with average spending over $200 per
year. Lands' End has a very large existing
customer base with over 30 million customers in
its file, and their active customer file continues
to grow as well.
Lands' End represents one of the most important
apparel brands in the United States. As you can
see from this chart, it compares favorably to some
of the best brands in the industry from a revenue
perspective. Lands' End has traditionally been a
catalog company generating approximately 80% of
its revenue through this channel. Increasingly,
the Company has been a leader in Internet
retailing, which now generates over $300 million
in revenue. From a product perspective,
approximately 60% or just under $900 million of
revenue comes from apparel sales. The Company also
has a large specialty business, including home
fashions, luggage, furniture and footwear. In
addition, the Company has International operations
in the U.K., Germany and Japan.
Lands' End is a great fit with Sears. The company
has a strong heritage and is recognized for its
quality, value and satisfaction guarantee. Its
performance is strong and has great growth
prospects, which we can help accelerate. Lands'
End is also a terrific brand. In terms of brand
awareness, they ranked number five of 90 men's
brands and number eight of 150 women's brands. In
regard to quality, Lands' End is ranked number
three overall and number two out of 90 men's
brands and number six out of 150 women's brands.
Clearly, they are a brand which is bigger than
what the direct-to-customer distribution alone can
capture. Lands' End is a company that has millions
of existing customers and has also been a leader
in direct-to-customer, catalog and Internet
channels. There is significant opportunity by
broadening its distribution to retail. The
addition of such a quality brand will help to
address some of the perception and image issues
associated with Sears' existing softlines
offerings.
Lastly, it is a great fit with our apparel
strategy. The acknowledged style, quality and
value of Lands' End products fills a much needed
dimension of our apparel offering. It compliments
and accelerates our numerous efforts to improve
our proprietary brand apparel business. Sears has
a reputation for high quality, dependable
products, representing great values. This has been
traditionally exemplified by our strong hardlines
proprietary brands such as Craftsman, Kenmore and
Die Hard.
The acquisition of Lands' End is a terrific
benefit to our store as it fits nicely within the
apparel strategy that we have talked to you about.
It creates a point of differentiation for Sears
and is a draw for this business, particularly at
the better and best end of our assortment. This
doesn't mean we are only going to be a proprietary
brand house. National brands remain an important
aspect of our strategy and the progress made in
recent years will continue. When coupled with
national brands, Lands' End will provide a
compelling offering to our customers.
Lands' End will be primarily our best offering and
will compliment our new proprietary brand
Covington, which is positioned at the better point
on the price quality spectrum. Together, the two
brands will provide the better/best customer
selection of apparel commensurate with their
expectations. Our research suggests that the
availability of Lands' End products and Sears
stores will be very attractive and convenient for
existing Lands' End customers. Importantly, we
believe this merchandise will be very compelling
to those customers who only shop our hardlines
offerings as well to our existing apparel
shoppers.
We also think that there is significant
opportunity to attract new customers to both Sears
and Lands' End brands. It is our intention to make
the best selling Lands' End apparel products and
select other items available at approximately 870
Full-line Stores. This chart graphically depicts
and example of how Lands' End will be positioned
against our other proprietary brands in women's
apparel. The brand will compliment the Covington
brand by being positioned as our leading best
proprietary product.
From an in-store product placement perspective, we
will blend Lands' End merchandise into our men's,
women's and kid's assortments. We will not have
separate Lands' End shops in our stores. We will
also allow Lands' End customers to return products
to our Full-line Stores for our mutual customers'
convenience. The retail pricing of Lands' End
product will be consistent with online and catalog
pricing at competitive everyday levels. We will
fully support the Lands' End brand through our
various marketing activities.
Being part of Sears is extremely advantageous to
Lands' End by providing a broad retail
distribution channel to leverage and grow its
already substantial brand awareness and brand
equity. Ultimately, Lands' End product will be
available in all of our approximately 870
Full-line Stores. The exclusive retail
availability of Lands' End in Sears stores will
put the product within 75 miles of 95% of the U.S.
population.
Each company operates a leading online commerce
operation, each with significant Web site traffic
and unparalleled product and service offerings.
Both Web sites will contain a link to the other
site. Sears will benefit from Lands' End's
direct-to-customer expertise more broadly as well.
Obviously, no actual integration will occur until
regulatory approvals are received and the
transaction closes. We will put in place a
seasoned and fully resource integration team
headed by senior members of the Sears and Lands'
End management. The core Lands' End business is to
remain intact. Lands' End is a high quality
national brand. We want Lands' End to be Lands'
End. Dodgeville Wisconsin will remain the hometown
and headquarters and Sears will maintain the
quality, style and character of Lands' End
products and culture as well as the strong
relationships it enjoys with its customers.
Lands' End CEO, David Dyer, will continue to lead
Lands' End and will report directly to me. He will
also assume responsibility for Sears Roebuck's
Customer Direct business including sears.com and
our specialty catalog business. Lands' End senior
management team will be an important component in
the building and integration of the business. As a
result, the organization structure will remain
largely unchanged allowing management to stay
focused on the core operations of the business.
There are some cost synergies in this acquisition.
Some examples would include product sourcing and
paper savings. We will finalize the integration
plan over the next several months. Key items will
be available in select stores for the holiday
season will a full roll out of merchandise in
stores by the fall of 2003. Sears' stores will
carry the most popular assortment of Lands' End
men's, women's and kid's apparel plus an
assortment of footwear, accessories and home
fashions. Lands' End catalog and Web site will
continue to carry its current full assortment.
The Lands' End acquisition by Sears Roebuck
announced this morning is a cash tender offer
transaction totaling $1.9 billion or $62 per
share. This represents a 21.5% premium to Friday's
closing price and a 26% premium to Lands' End 90
day average price. It is an appropriate price for
this high quality company and it is affordable for
Sears. The acquisition is expected to close in
June following customary regulatory review and
receipt of any other required approvals.
Shareholders owning approximately 55% of Lands'
End have agreed to tender their shares to Sears.
Shareholder value is created primarily by
accelerating both companies' growth. We are
expanding Lands' End product distribution to
approximately 870 Sears stores, where it will
occupy approximately 15% to 20% of apparel selling
space. It will replace brands that are less
profitable and are not very relevant to our
customers.
This transaction is being reviewed with the rating
agencies and each will be making a determination
of this transaction's effect on their firms
respective ratings of our debt. From a balance
sheet perspective, it should be noted that Lands'
End has no public market debt.
In summary, we expect that this acquisition will
create significant shareholder value. It is a
reasonable and attractive price and clearly within
our means. We expect this transaction will be
slightly dilutive to break- even in 2002 and 2003
and significantly accretive in 2004. We are,
therefore, reiterating our previous comparable
earnings per share guidance for 2002 of
approximately 17% growth versus 2001.
We are excited about this acquisition as we
believe it addresses strategic needs for both
companies. This transaction brings together two of
the great names in American retailing and in the
process strengthens both companies and brands. In
particular, it gives Sears a compelling point of
differentiation and draw in softlines, as well as
contributing to the overall positioning for the
Full-line Stores. This also allows Lands' End to
quickly expand distribution in retail outlets,
broadening customer access to this very popular
brand.
This transaction is clearly a win for both Sears
and Lands' End. Lands' End brand strength quality
and business capabilities significantly enhance
our softlines offerings and we will greatly
enhance our overall efforts to fundamentally
restructure and reposition our Full-line Stores.
So with those remarks, we'd now like to open up
the call for questions.
Coordinator Thank you. At this time, we are ready to begin the
question and answer session. One moment please.
Our first question is from Daniel Barry of Merrill
Lynch. You may ask your question.
D. Barry Good morning Alan. My congratulations on some out
of the box thinking.
A. Lacy Thank you.
D. Barry I've got tons of questions, but let me ask just
sort of over question. I'm curious to know who
initiated the deal and is this the beginning of
maybe a more aggressive acquisition strategy in
the future?
A. Lacy Well I think on the initiation piece, we've had
conversations with Lands' End over a period of
time now. So this idea has been around for a
while. I think the timing as of now is triggered
by a number of events, some of which that they can
speak to more clearly than I can. So I guess I
would say that these are conversations that we've
had in the past and we think the timing now is
appropriate for both parties. On a go forward
basis, needless to say, this is a lot of money for
us. It's very affordable by us, but it's a lot of
money. I think it's clearly something that
strategically we think takes us to another step on
our journey to our turnaround of Sears. I wouldn't
anticipate anything of this order of magnitude
anytime soon. We need to digest this one first and
continue to work on our restructuring activity.
D. Barry Great, thanks.
Coordinator Our next question is from Theresa Donahue of
Newberger Berman. You may ask your question.
T. Donahue Hi guys. Congratulations, strategically. Just
being somewhat familiar with Lands' End, I'm
wondering if you could address the historic
volatility of their earnings and what your
expectations are? Then I had a people question.
A. Lacy Okay, yes, they have had some erratic performance
as you go back two years ago now. That largely was
in the mid-to-later part of the 1990's. And then
in the later part of the 1990's, a new management
team was assembled with Dave Dyer coming back to
Lands' End having been gone for a number of years.
In the period of time that he's been back and
reassembled a new management team, their
performance has improved dramatically and they are
now performing in a very consistent and high
quality fashion. So we believe that they
understand what they did wrong back in that latter
part of the 1990's time table and that the
business is now well managed and will track
consistently going forward.
T. Donahue Just to be clear, in terms of the people in the
Full-line Store side, there's no change to
anyone's position or oversight at this point?
A. Lacy That's correct. I think relative to the Lands' End
transaction, the principle person involved in it
on the retail side is obviously Kathy Bufano, our
new head of softlines. Kathy will be working very
closely with the Lands' End management team to
basically build the assortments of Lands' End
product that we want to be adding to our retail
stores. So the Lands' End organization will
continue to own clearly the direct channel for
their product and they will also continue to own
the brand as it's developed and distributed within
the retail channel.
T. Donahue If I could sneak one more in. Do you have a sense
for what the incremental opportunity is of
capturing more of the hardlines only shoppers
dollars?
A. Lacy We do. I think for purposes of today, what we'll
be saying is we anticipate having, needless to
say, several hundreds of millions of dollars of
Lands' End product sales within Sears stores. We
expect several hundred million dollars of
incremental sales of apparel beyond what we would
otherwise be able to do by having a brand of
Lands' End quality and draw and differentiation
within our store. Those incremental sales come
largely speaking from finally connecting with our
hardline shoppers with our apparel offerings,
attracting current Land's End customers to Sears
to buy more of the product and also attracting new
customers overall to Sears and Lands' End because
of its retail availability.
T. Donahue Thank you.
Coordinator Our next question is from George Strachan of
Goldman Sachs. You may ask your question.
G. Strachan Thank you. It's George Strachan and Adrienne
Shapiro here at Goldman Sachs. Congratulations. I
mean this can obviously be a win/win if you can
leverage the catalog in the stores and vice versa,
but clearly there's a risk here as well Alan in
that it would that let's say that you end up
cannibalizing the catalog with store sales. I was
wondering if you've done any studies on that, if
you have any expectations on the risks of
cannibalization and what the relative
profitability of a sale in store versus through
the catalog looks like?
A. Lacy Yes, we've looked at that very closely. Our
valuation that led to the price that we paid did
assume some cannibalization of the direct channel.
We've anticipated some of that in our analysis.
But generally speaking, as we've looked at what's
happened in the industry in terms of other catalog
retailers that have added store distribution,
typically what happens is the overall brand grows
in revenues. The direct channel, catalog and
Internet, often sort of flattens out in terms of
its level of performance and the growth typically
comes by the expansion of the product into the
retail distribution.
So looking at other direct merchants that have
expanded into retail, we think that we've properly
captured some modest risk of cannibalization to
the direct channel. We do think that we're going
to be able to offset that more than other examples
in the past because giving Lands' End access to
Sears customers, we think will give the direct
channels some additional growth opportunity to
counter balance whatever cannibalization might
come from an enhanced retail distribution.
But we surveyed their customers. We surveyed our
customers, both current apparel shoppers as well
as current hardlines and non-apparel Sears
shoppers. Essentially everybody says that they
like the idea and they'll buy more as a result of
Lands' End product being available in Sears
stores.
G. Strachan Is there a credit opportunity here? Have you
looked at the overlap of the Sears credit file
with their active file?
A. Lacy No, we haven't done that degree of data
comparison. But the Lands' End organization feels
that having a proprietary credit offering will
support additional sales within in their channel.
It's highly likely that we will do a Lands' End
co-branded master card akin to what we've done
with the Great Indoors with the co-branded of
MasterCard for that format. So clearly the Sears
card will be accepted as a payment vehicle at
Lands' End and then in addition, we'll develop a
proprietary co-branded card for their brand as
well.
G. Strachan Very exciting Alan. Thank you.
A. Lacy Thank you.
Coordinator Our next question is from Wayne Hood from
Prudential. You may ask your question.
W. Hood Yes, Alan. I was just wondering when you talk
about accretion and dilution, kind of your
assumptions without being specific about margins,
I guess, for Lands' End in the next couple of
years. Are you thinking maybe they're close to a
peak, maybe not? I'm not sure. I mean we've had
such enormous improvement over the last couple of
years, I just don't know where your thinking is in
terms of where they can go from here.
A. Lacy Well generally speaking, we've been very
conservative on all of our profitably assumptions
and have generally speaking discounted the margins
in their channel going forward and also we've been
conservative on the margin of the products in our
channel. I just realized I didn't ask an element
of somebody's previous question on the margin
aspect within our stores.
In terms of how gross margin is reported, gross
margin in retail will be lower than it is in the
direct channel because you clearly have all the
distribution cost associated in getting the
product to store level and then you'll have some
seasonal clearance activity in that as well. We
believe that we've been conservative versus recent
demonstrated history by Lands' End and our forward
projections of margin performance.
W. Hood Okay. Then on the funding side of it, is it about
a billion and a half of additional funding you'll
need? What kind of funding rate do you think
you'll see?
A. Lacy I'll let Paul speak to the balance sheet and
funding aspect.
P. Liska Yes and you're right. We're figuring, Wayne, that
it's going to be anywhere from when we close the
transaction $1.4 to $1.6 million of funding
that'll be done via a combination. This is all
dependent upon market conditions at that point
around the closing time of the transaction. But
it'll be a combination of ABS debt and some long
term debt.
W. Hood Okay, thank you.
Coordinator Our next question is from Bruce Missett of Morgan
Stanley. You may ask your question.
B. Missett Good morning Alan and my congratulations. I think
this should work really well.
A. Lacy Thank you.
B. Missett My question is what do you do with Lands' End
growth at this point? It sounds like as they start
to put product in your stores, that's going to be
a pretty full time job. What happens to the other
things that were on their plate in terms of
growing, their catalog business, growing their
other outlets?
A. Lacy Well we're going to try to keep their management
team very focused on their existing business
performance because the bulk of what we're buying
here is an ongoing successful business. I mean if
you look at where the money goes. Essentially the
management team there will be very focused in
continuing to do better what they've been doing
and then also taking advantage of the additional
growth that we're going to provide them through
the Sears customer relationship files and so on.
Dave Dyer individually will be taking over
management responsibility for Sears customer
direct businesses as well, sears.com and our
smallish catalog operations. I think Dave,
managerially, can help us get to maybe a better
level than we would otherwise get to. But I think
importantly, the Sears organization is getting
very good at integrating the direct channel with
the store operation, what we've done in terms of
buy online, pick up in store, the research
capability of sears.com for subsequent purchase in
store is all a perspective that we've been
building our direct channel around. Then you take
their knowledge of building a direct channel
around catalog and going to market directly for
sales opportunities. We think that there really is
very good insights from both parties. With the
Lands' End product soon to be in our stores, that
store integration piece, we think that the Sears
organization can help them think through very
effectively and so on.
On the products front, we're basically just going
to pick out of their assortment. So other than
beefing up the order quantity for, as an example,
their Oxford dress shirts, to make sure there's
enough product volume to both fill the retail
pipeline as well as support the direct channel, we
do not anticipate distracting their organization
that much. It's simply going to be beefing up the
order quantity of what they're currently buying.
Therefore, their management team can pretty much
stay focused on continuing to run their business
well and pursuing it's growth opportunity.
B. Missett Terrific. So that means when I forget to bring
clothes when I'm traveling, I can find that Lands'
End store in the airport still?
A.Lacy Certainly in Minneapolis you can. Yes.
B. Missett That's good.
A. Lacy There may be some others in the future.
B. Missett Okay. Thanks Alan.
A. Lacy Yes.
Coordinator Our next question is from Michael Exstein of
Credit Suisse First Boston. You may ask your
question.
M. Exstein Good morning. Thank you. My question is really,
you have a lot on your plate already in the stores
Alan. Adding this level of complexity could be
another challenge. Can you talk about how you're
going to deal with that complexity? And also, why
the urgency to do a deal now with everything
that's going on? Thanks.
A. Lacy Okay. Yes, there is a lot going on in our stores
right now. We're now in the middle of the second
wave of store process conversions with the third
wave to start June 1st. So we're about to reach
the point where all the changes in terms of store
organizations, store activities and store
processes are going to be in full implementation
mode. Then the latter part of the second quarter
and the third quarter is when the bulk of the
changes at a store level take place in terms of
the merchandise relays on the things that we've
announced over the last several months. We think
that this for 2002 has relatively little store
level impact. We will be featuring some key items
in our store.
So the merchandise presentation aspects in the
store really don't change that much other than
there will be a rack topper that says Lands' End
as opposed to a rack topper that said something
else that was going to be in that space. So we
think that it's just another brand being added to
our assortment in stores and mostly a key item
fashion this year. As we go forward, the extent to
which it's offered will expand.
The other store complexity will be the ability to
return product to stores from direct channel
customers. We think that will be a relatively
modest volume and that we can deal with that
reasonably well. So there is a little bit of store
complexity, but I think, generally speaking, it
might be less than you might be thinking.
On the reason for doing it now is because now is
the time. I think that from their perspective,
pursuing retail distribution, they were at a cross
roads on that and from our perspective, we view
this as a very important step for us strategically
and continuing to improve the differentiation and
draw of our apparel offerings. So the timing is
the timing.
Coordinator Our next question is from Erik Miller from Goldman
Sachs. You may ask your question.
E. Miller Yes, thank you. Good morning. Two questions. One
regarding financial policies and the other
regarding your debt ratings. As it relates to the
financial policies, can you talk a little bit
about your expectations for the use of free cash
flow in the future? Will this slow down your stock
buy back program or will you use the free cash to
pay down debt? Secondly, could you comment on your
debt ratings? In the past, I recall the company
had the intimated that single A ratings were an
important part of the company's strategy. Is that
your target debt rating? Are you comfortable with
a BBB or BBB+ rated credit?
P. Liska Okay. First of all, with regard to the share
repurchase policy, of course we don't talk about
the plan going forward and everything else But you
may have noted that we did $427 million in the
first quarter. So we have been pretty
significantly buyers of our stock in the first
quarter. Clearly going forward, and we talk about
maybe through the end of the year, we would have
to consider a whole bunch of factors, such as
economic factors, the price of our stock and our
debt ratings and any consideration of future share
repurchase but I would tell you that it would be
safe to say that this will in the near term put a
hold on that.
Then with regard to our debt ratings, the rating
agencies have different processes with regard to
how they go about evaluating and some of them
might put you on watch, then at the time of the
deal, they'll opine on how it affects our debt
rating, and others may do it right away. But we've
been in contact with the rating agencies and at
the appropriate time they'll come forward with
their opinion as to how this impacts our debt
ratings.
E. Miller Can you just comment as to what your target may
be? Are you targeting a single A category rating
over the long term? Is this a deviation from your
prior strategy or are you just more comfortable
with more leverage on the balance sheet?
P. Liska Well we think that we could have more leverage on
the balance sheet and it shouldn't necessarily
affect our debt rating. However, that's up for the
rating agencies to decide how they want to handle
that. I would tell you that yes, we would rather
have, obviously a single A debt rating, but we
would be comfortable going to a BBB+.
A. Lacy I guess this is a matter of quick historical
perspective. We were a BBB for the early half of
the 1990's. Life was fine in that perspective. We
were happy to get back up to a single A rating.
Clearly given the credit business that we have,
cost of funds is an important cost in our
corporation.
E. Miller Great. Thank you.
Coordinator Our next question is from Bernard Sosnick from
Fahnestock. You may ask your question.
B. Sosnick Yes. I want to add my congratulations on a
brilliant strategic move. The operational issue
would entail, as you said, beefing up the ordering
at Lands' End. Do you foresee the Sears
organizational group managing the inventory flow,
managing the reorders, which may be very difficult
to do under Lands' End's current method of buying
and operations? How would that develop?
A. Lacy I think Bernie, it would be different. I think
what would happen and I'll pick men's dress shirts
for a minute. There's going to be a quantity buy
for the fall season for the combined volume of
both retail and direct channel. The direct channel
quantities would go through Lands' End existing
pick, pack and ship fulfillment capabilities,
which by the way, we think we can get broader
utilization of within Sears. The retail piece of
it will, as soon as it hits the dock in Los
Angeles or wherever, would wind up going through
our current apparel and softlines distribution for
our retail stores. We do anticipate basically
bifurcating the order into two different distinct
channels in terms of how the product flows.
B. Sosnick The real issue is the reorder flow. Do you foresee
being able to do that in a retail methodology as
compared with Lands' End catalog approach?
A. Lacy Yes, we believe that we can. We're trying to, I
mean there are certain seasonal buys etc. that the
reorder piece isn't quite as key on, for example
swimwear or something like that where you may want
to be able to chase it a little bit with a reorder
volume. But basically you get what you want to
sell through for the season.
But they've got some very good relationships with
their vendors on keeping their supply chain both
good from a work quantity and customer service
fulfillment standpoint, but also efficient from a
supply chain management perspective. So this is
something we've got more work to do on before I
can give you a very definitive answer. But we
think it's doable. A number of the sources that
they work with, we also work with. So we're
familiar with a number of the sources that were
involved in this. We think that the ability to
satisfy both kind of a retail supply chain need as
well as a direct-to-customer supply chain need is
doable.
B. Sosnick Well again, my congratulations.
A. Lacy Thanks, Bernie.
Coordinator Our next question is from Brian James from Loomis
Sayles. You may ask your question.
B. James Thank you. When you say that there's a minimal
dilution this year and next year, are you basing
your cost of capital on just the cost of debt or
are you factoring in that you would have made
substantial share repurchases with the $1.9
billion that you're spending on this acquisition?
A. Lacy Well we never would have spent $1.9 billion buying
back our stock because we're clearly buying
earnings capacity and cash flow generation in an
acquisition whereas in a share repurchase, we're
simply retiring outstanding stock that we have
free cash flow to do so with. So I think, if I
understood your question right, is a little bit
apples and oranges. But the dilution guidance that
we gave is based on a cost of debt and it's not
based on an opportunity, what might otherwise have
happened had we taken some amount of money, not
necessarily $1.9 billion and bought back stock.
B. James Okay, just one other question. You say the Lands'
End customer is consistent with your hardlines
customer demographic profile. Did you just find
that your hardlines customer was more upscale than
your softlines customer?
A. Lacy I'd say that our softlines customers are also our
hardlines customers. But our hardlines customers
also go to a higher demographic than we see in the
apparel side only. So I'd say that we've got a
large number of our shoppers are clearly middle
America and middle America shops the whole store.
Upper middle America tends to like our hardlines
offerings very much so, but have not really
engaged as broadly in our apparel offerings as we
would like and Lands' End product and their
current customer demographics fit that very well.
We think once we connect our softlines business
better with the millions of hardlines shoppers
that like Sears, but just haven't connected with
apparel and we also think it's going to be
basically attractive for our existing apparel
shoppers, that they'll see Lands' End products in
the better best in of the assortment offering and
they'll view it as a very nice trade up brand for
them.
B. James Okay and you said you were going to put this in
about 15% to 20% of the apparel square footage
that exists now. Is that correct?
A. Lacy That's correct, yes.
B. James Thank you very much.
A. Lacy That's a little over 5,000 selling square
feet will be devoted to Lands' End products when
we're fully rolled out and that will not be
minimally until fall 2003.
B. James Thank you.
Coordinator Our next question is from Rosemary Sisson of UBS
Warburg. You may ask your question.
R. Sisson Yes, thank you. Good morning. I wanted to talk a
little bit about the purchase price and the
funding methodology for the transaction. Alan, you
mentioned in your remarks that you think that you
paid the right price or a fair price for the
company. When I do my back of the envelope numbers
because I don't follow Lands' End, I come up with
a multiple of about 13.5 times EBITDA. I'm curious
if I'm in the right ballpark on that or if you're
considering cost synergies going forward, what
those might be and relative to what other apparel
companies you think that this multiple makes
sense.
Also, in terms of your funding strategy, why did
you choose to do it as an all cash transaction?
Thank you.
A. Lacy Okay. Let me start and I'll have Paul chime in
here quickly. The Lands' End stock if you look at
its value versus its peer group actually had a
lower relative multiple than a number of other
direct players in the public market. Your EBIT DA
multiple is about right in terms of where the
transaction is taking place, direct companies
don't have a lot of DA. Basically their earnings
drive not a lot of depreciation or amortization
given the nature of the business, EBITDA multiples
tend to be very high. We do have some cost
synergies, most notably around sourcing activities
both product as well as things like paper. But
this is really a revenue driven opportunity.
Revenues from our ability to accelerate their
growth given our extensive customer relationships
and revenues based on extending their brand to our
store. So that's where the value capture really
comes from. I'll let Paul speak to the other
aspects of your question.
P. Liska Yes, first of all, we wanted to use cash in this
transaction. We continue to believe that our stock
is undervalued. We clearly have the financial
flexibility and free cash flow to do it. So it's
clearly affordable to do it on a cash basis with
Sears. Given the fact, going beyond the fact that
we believe our stock is undervalued, a stock
transaction would have been dilutive to our
shareholders. So for all those reasons, we wanted
to use cash on this.
R. Sisson Okay, thanks. One more question just to your
capital spending needs for the year. You said
originally about $1.3 billion. Has that number
changed with this transaction?
P. Liska No, it won't change at all.
R. Sisson Okay. Thanks a lot.
Coordinator Our next question is from David Lieberman of
Peterman Investment Group. You may ask your
question.
D. Lieberman Hi, congratulations on the transaction. Just a
quick question. How much revenue do you presently
have in the catalog business?
A. Lacy Our customer direct revenues in total expression
is about a half a billion dollars. Of that, I'd
say roughly speaking $150 million is done through
licensees. So we have some licensees that use the
Sears name to basically market to our customer
files. So not all of that half a billion dollars
is on our P&L. But in terms of sort of customer
level revenue and our direct customer businesses,
it's about a half a billion.
D. Lieberman How much of that is apparel?
A. Lacy Sorry.
D. Lieberman Do you know how much of that is apparel just off
the top of your head?
A. Lacy I'd say about half of the half of billion, roughly
speaking. I guess I'd also say I mean what I'm
leaving out of that is the impact that the Web has
on in-store purchases. If you order online, pick
up in store, that counts as a store level revenue
item. It doesn't count as online revenue.
Likewise, if you research online and then go to
the store to buy it, that's also store revenue
versus customer direct. So our customer direct
influence revenue is substantially more than the
half of billion. In fact, it's more like a billion
dollars.
D. Lieberman Okay. Was this as a result of an auction process or
was this a one on one?
A. Lacy That's a question for the Lands' End folks in terms
of the process.
D. Lieberman Okay. Thank you. Are their shares, the 55%, locked
up? Do they have to vote for this transaction if
there's a superior offer?
A. Lacy They're locked up. If a superior offer is
presented, they do have the ability to contemplate
it. But we have certain rights in that arrangement
to basically come back and match and there's also
a break up fee involved in the transactions if for
some reason something else happens.
D. Lieberman What size is the breakup fee?
A. Lacy Four percent.
D. Lieberman Four percent. Thank you.
Coordinator Our next question is from Larry Robbins from
Glenview Capital. You may ask your question. Mr.
Robbins, your line is open. You may ask your
questions.
A. Lacy Operator, we're going to take about two more
questions and then we're going to have to cut off
I'm afraid. We've got a lot to do this morning.
Coordinator Thank you. Our next question then is from Philippe
Goosens of CSFB. You may ask your question.
P. Goosens Good morning Alan. A couple of questions here.
There have been some recent articles in the press
that were rather critical on J. Crew and its
aggressive store expansion program. Can you just
share with us what degree of an overlap there
exists between the traditional Lands' End customer
and a J. Crew customer? Then also, in how many
malls you currently overlap?.
The second question I had is if you could briefly
comment on how the Lands' End merchandising is
going to impact not only your Canon River Blues
merchandizing, but also how it might impact your
relationship with Levi? Thanks.
A. Lacy Okay. In no particular order of your questions, I
guess, national brands still very important to us.
Levi is still a very important brand to us. So I
think that we anticipate still having very much a
blend of national brand and proprietary brand as
we go forward. In terms of the impact on our other
internal propriety brands right now, we view our
lead brands on a proprietary basis to soon to be
Lands' End plus Covington plus Apostrophe and
Canon River Blues. We believe that those are our
strongest propriety brands. While we will still
have others beyond that, your question is
specifically on Canyon River Blues. We view that
as an important label for us going forward.
In terms of J. Crew's troubles. Yes, there have
been quite a few of them. I can't speak and
probably shouldn't speak to their issues. They do
have an even more affluent customer base than
Lands' End. It is a significantly higher priced
product than Lands' End. Lands' End very much has
taken the position within that whole direct
channel of offering best quality at better prices,
which I would also say is very similar to what
we've tried to over time with Kenmore, Craftsman
and Die Hard. Those are best products, leaders in
their category at very good value for customers.
There's about 530 Eddie Bauer stores in the world.
We have 870 Full- line Stores. I suspect that
there's a high percent overlap there, although I
don't know the number exactly. I believe that J.
Crew has about 200 stores. So it's much smaller,
both as an entity and in terms of the overlap as
well.
P. Goosens Just one other question, Alan. You referred to the
International customer of Lands' End. Does that
perhaps in the future provide kind of a new
opportunity for you guys to start exploring
selective international growth opportunities?
A. Lacy I'd say that they've got a very nice
well-established business in the U.K., Germany and
Japan. Profitable businesses growing and it's
conceivable that supplementing their assortment
with certain Sears items could be beneficial. But
I think that's a very long term thought at the
moment. So I think there's a point at the moment
for them to continue to grow those businesses as
Lands' End. If it turns out that adding additional
products makes sense from the Sears assortment, we
may do that.
I think that I didn't comment in the presentation,
but we think that the Lands' End brand is
extendable and that we will be able to perhaps
take it a little bit further in home fashions and
sporting goods etc and sort of outdoor activities
like camping and so on that they might have been
able to do so on their own given our product
knowledge in some of those categories. So it's
conceivable that we could have just as an example,
Lands' End branded camping equipment available at
Sears that they would also add to their catalog
distribution.
P. Goosens Great. Thanks Alan.
Coordinator Our final question today is from Derek Leckow of
Barrington Research. You may ask your question.
D. Leckow Thank you. Congratulations.
A. Lacy Thank you.
D. Leckow Alan, could you clarify what you said about the
timing of the Lands' End product roll or in your
stores? It think you said you're targeting 20% of
your apparel square footage by fall 2003. What
percentage do you think you can reach by 2002?
A. Lacy Well 2002 is going to be basically just key item
focused, really. So I don't know that I can give
you a percentage relative to the fall of 2002.
Orders are being placed as we speak for the fall
season. We're going to focus primarily on those
items that are going to be key items for the
Lands' End organization. As you may know, they
often get behind a single item very aggressively
from a marketing standpoint and that we would like
to have those products primarily featured in good
depth in our stores. Beyond that, it kind of
depends on how quickly we can scale up the vendors
to our quantities.
But the number once again is between 15% and 20%
of our selling square footage in men's, women's
and kid's we ultimately see in Lands' End. If we
think we'll be pretty close in fall of 2003,
although full year effect in 2004.
D. Leckow It sounds like you're focusing primarily on the
apparel. Are the home products also scheduled to
be in the stores as well?
A. Lacy Well they do have some very attractive offerings,
particularly in soft home in terms of towels and
bedding that we will probably have on the early
wave list of consideration along with apparel. But
our focus for the most part has been on apparel
given our desire particularly to add, draw on
differentiation to that part of our store. So
there is likely to be some home fashion items that
work their way into the assortment as well.
D. Leckow Okay, and then my final question relates to the
Lands' End Business Outfitters division. What are
your plans for that longer term?
A. Lacy That's a great business and we hope that they can
continue to grow it very aggressively. I didn't
talk about it in my remarks, but they have a very
attractively business where essentially they'll do
corporate logos for corporations on Lands' End
apparel basically to be worn by either selling
associates or service technicians or other sales
people etc. That's a very nice business for them.
It basically works off of their core assortment,
but does customization for people that want to
have their associates outfitted in a logoed work
wear item. So that's a nice business that will
continue to grow.
D. Leckow So you're not planning to operate that as a
separate business? That'll still be under the same
management team at Lands' End?
A. Lacy Yes. No, they've done a great job with it and we
might place a decent order for them for some Sears
associates to wear some of that stuff now. But
beyond that we want them to just continue to do
what they've been doing.
D. Leckow Okay. Thanks a lot. Congratulations.
A. Lacy Thank you. All right. Well that concludes our call
for today. Pam White and Joe Grabowski will be
available to you individually through our normal
investor relations program channels as we go
forward. Once again, we are very excited. We think
once again that we bought a great business and
Lands' End is a great business with great growth
potential that we can accelerate. We also bought a
great brand here that will add differentiation and
draw us to our Full-line store assortments and
that the brand is bigger than the current
distribution that is expressed through the direct
channels. So we think we can help grow the brand
and help grow the business. This is going to be a
very good next step for Sears and our journey here
as we continue to try to revitalize and reposition
our business.
So thank you all very much for your interest. We'll
get back to you later.