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Sears to spin off Orchard Supply Hardware

OSH, a California chain that has bucked the bigger-is-better trend in home improvement stores, plans to be publicly traded as a stand-alone company.

June 25, 2011|Andrea Chang, Los Angeles Times

Sears Holdings Corp. plans to spin off its home improvement unit, Orchard Supply Hardware Stores Corp., as a separate publicly traded company, the department store giant said.

Often called OSH, Orchard Supply is a San Jose-based chain that operates 89 stores, all in California. Shares of OSH, which plans to be traded as OSHS on the Nasdaq once it becomes a stand-alone company, will be distributed to Sears Holdings shareholders.

Sears Holdings said in a filing with the Securities and Exchange Commission on Thursday that it believed OSH would generate more value for shareholders as an independent entity and that the move would provide "financial, operational and managerial benefits to both" companies.

Retail analysts said Sears Holdings could be spinning off the home improvement retailer because it doesn't view OSH as a core asset and so it can focus on its Craftsman line of tools and lawn and garden equipment.

But Brian Sozzi, an equity research analyst at Wall Street Strategies, questioned the company's decision to rid itself of a relatively healthy chain. OSH reported a profit of $8.7 million on $660.7 million in revenue in fiscal 2010.

"I don't know if I want to see Sears stripping off assets like this, especially one that's doing so well," he said. "I don't know what Sears stands for at this point. You have Wal-Mart that stands for price, Target which stands for cheap-chic, but Sears is lost in the middle."

However, with Sears Holdings struggling financially and perceived as a flagging brand, Sozzi said the move could help prevent OSH — an 80-year-old company that has succeeded despite stiff competition — from "getting lost under the mess of Sears."

"Any time you can get out of the Sears umbrella and make your own decisions, that's good," he said. "They can execute a little quicker if they see something trending."

Orchard Supply began in 1931 as a supply cooperative for farmers and orchardists, opening its first store in San Jose.

The company became a general retailer in the 1950s and has since gone through several ownership changes, including its acquisition in 1986 by Santa Monica-based Wickes Cos. In 1996 OSH was bought by Sears, Roebuck & Co., now a wholly owned subsidiary of Sears Holdings.

Significantly smaller than national big-box rivals Home Depot Inc. and Lowe's Cos., OSH has avoided the bigger-is-better format, instead sticking to a medium-size strategy driven by a wide merchandise selection and strong customer service.

A typical store is about 40,600 square feet and offers a selection of repair and maintenance products comparable to larger warehouse competitors, the retailer said.

Instead of targeting the do-it-yourself customers looking to remodel their kitchens and bathrooms or contractors working on larger-scale projects, Orchard Supply focuses on the fix-it shopper looking to make smaller home repairs.

Sears Holdings did not list a target price for OSH stock and said the spinoff, expected to take place in the fall, still needed final approval from its board of directors.

Spinoffs by major companies have been relatively rare in recent years. There were 30 in 2007 but just 14 last year as financial markets continued to recover from the 2008 crash. There have been six spinoffs so far this year, according to data tracker Dealogic Inc.

Companies that opt to spin off a division sometimes do so to shed a unit that has lower profitability than the rest of the business.

In one of the largest transactions this year, defense giant Northrop Grumman Corp. spun off its shipbuilding division into a separate company called Huntington Ingalls Industries Inc. Northrop said the low-profit-margin business no longer had much synergy with the rest of the company.

In another recent deal, Motorola spun off its smartphone unit as Motorola Mobility Holdings Inc.

For the quarter that ended April 30, Sears Holdings reported a loss of $170 million compared with a profit of $16 million during the same quarter a year earlier. Sales fell $341 million to $9.7 billion primarily because of a 3.6% drop in sales at U.S. stores open at least a year.

Shares of Sears Holdings fell $1.99, or 2.8%, to $69.51 on Friday.

andrea.chang@latimes.com

Times Staff Writer Tom Petruno contributed to this report.

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