Orchard previously has dedicated considerable effort to addressing the substantial overleveraging that originated in 2006, when it was still owned by Sears. Since the spin-out in late-2011, the Company has reduced its debt and has made significant progress against its strategic initiatives to project a consistent and compelling brand identity, drive sales through merchandising and marketing initiatives, improve operational efficiency, and better align resources and talent, and has increased year-over-year same-store sales as a result. Still, the Company anticipated it would not be able to make scheduled payments when the first tranche of its debt matures in December of 2013 and accordingly reviewed a range of alternatives to establish a sustainable capital structure, which would allow it to more effectively run its business and execute on its repositioning and growth strategy. Management and the Board of Directors determined that a sale of Orchard through a Chapter 11 process was the best possible outcome for the Company and its stakeholders.
We believe this telegraphs a strategy of trying to recover additional funds from Sears based on a claim that the company was insolvent at the time of the separation. We have written about similar claims made regarding Verizon’s spin of Idearc and Peabody Coal’s spinoff of Patriot Coal. One might also question the actions of Sears Holdings CEO Edward Lampert, who has been selling all the way down. While there may be some merit to this, ultimately, this company failed to execute. Despite an inability to deliver same-store sales growth and earnings, the company invested heavily in an expensive store-remodeling plan and continued to open new locations. CEO Mark Baker was certainly singing a different tune in a January 2012 interview.
There is likely to be no recovery for either common shareholders or holders of the strange preferred that was issued as part of the spin. Let this be a lesson – highly leveraged spins must execute perfectly or all will be lost.
Disclosure: Unfortunately, the author still has a few shares of OSH and OSHSP
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- Lowe’s Enters into Purchase Agreement with Orchard Supply Hardware (dailyfinance.com)
