There was a very interesting tidbit in the 13-D filed by Sears Holdings (SHLD) regarding its bid for Restoration Hardware (RSTO) with the SEC today.

Here it the filing:

"In June 2007, on behalf of Sears Holdings, the Chairman of Sears Holdings and another member of the Board of Directors of Sears Holdings approached a non-management director of the Issuer to inquire as to his views concerning a possible business combination or other strategic transaction involving the Issuer and Sears Holdings. This director advised Sears Holdings to contact the Chief Executive Officer of the Issuer. Following this conversation, the Chairman of Sears Holdings spoke with the Chief Executive Officer of the Issuer and discussed the potential benefits of a business or strategic combination between Sears Holdings and the Issuer. After that conversation, the Chairman of Sears Holdings spoke to the non-management director of the Issuer with whom he had previously spoken and this director suggested that the Chairman of Sears Holdings continue speaking with the Chief Executive Officer of the Issuer. Shortly thereafter, the Chairman of Sears Holdings requested an opportunity to meet in person with the Chief Executive Officer of the Issuer to discuss the benefits of a transaction involving the Issuer and Sears Holdings. Due to scheduling conflicts, the Chairman of Sears Holdings and the Chief Executive Officer of the Issuer did not meet during the summer.

In early October, the Chairman of Sears Holdings, the President of Sears Holdings’ Lands’ End business and a non-management member of Sears Holdings’ Board of Directors had a meeting with the Chief Executive Officer of the Issuer. Sears Holdings did not enter into a confidentiality agreement or receive non-public information about the Issuer or its business in connection with these discussions, and no price or terms of any transaction were solicited by the Issuer nor proposed by Sears Holdings. In late October, in a conversation with the Chairman of Sears Holdings, the Chief Executive Officer of the Issuer informed Sears Holdings for the first time that the Issuer was considering a potential management buyout transaction and that a Special Committee of the Board had been established. After being informed of this development, Sears Holdings sent a letter to Raymond C. Hemmig, chairman of the Special Committee of the Board of Directors of the Issuer, proposing a transaction at $4.00 per Share (a 39% premium to the Shares’ closing price of $2.87 on the last trading day prior to Sears Holdings making its proposal) and informing him of Sears Holdings’ potential to increase the offer as a result of information gained from a due diligence process. Mr. Hemmig later responded by e-mail that the Special Committee was not prepared to have Sears Holdings engage with the Issuer’s management team and advisers in due diligence on the proposed terms and indicated that in order to have the opportunity to engage in due diligence Sears Holdings should revise its proposal to offer a substantially higher price.

On November 8, 2007, the Company announced it had entered into an Agreement and Plan of Merger (the “Home Merger Agreement”) with Home Holdings, LLC, a Delaware limited liability company, and Home Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Home Holdings, LLC.

On November 23, 2007, Sears Holdings sent a letter to the Special Committee of the Board of Directors of the Issuer (the “November 23 Letter”) providing the Special Committee, at its request, with a proposal to offer holders of Shares of the Issuer $6.75 per Share in cash via a tender offer, subject to the terms set forth in the November 23 Letter. The November 23 Letter also stated that Sears Holdings would contemplate entering into a merger agreement on terms substantially similar to the Home Merger Agreement, modified as necessary to accommodate a tender offer structure and with a lower, more reasonable break-up fee than contained in the Home Merger Agreement. A copy of the November 23 Letter is attached hereto as Exhibit 1 and incorporated by reference into this Item 4.

Subsequent to sending the November 23 Letter, representatives of Sears Holdings and the financial advisor for the Issuer and counsel to Sears Holdings and counsel to the Issuer and counsel to the Special Committee engaged in discussions about a confidentiality agreement and Sears Holdings’ proposal. On December 7, 2007, after extensive negotiations, Sears Holdings and the Issuer entered into a confidentiality agreement on terms permitted by the Home Merger Agreement (the “Confidentiality Agreement”). A copy of the Confidentiality Agreement is attached hereto as Exhibit 2 and incorporated by reference into this Item 4.

Subject to the terms of the Confidentiality Agreement, Sears Holdings intends to evaluate the Issuer and the desirability of confirming the proposal set forth in the November 23 Letter (or a proposal on substantially similar terms). Subject to the terms of the Confidentiality Agreement, Sears Holdings also intends to review its holdings of Shares on a continuing basis and in that connection expects to consider various factors including, without limitation, the current and anticipated future trading price levels of the Shares, the status of the transactions contemplated by the Home Merger Agreement, the financial condition, results of operations and prospects of the Issuer, tax considerations, any non-public information which it receives from the Issuer, conditions in the home furnishings industry and securities markets, general economic and industry conditions, other investment and business opportunities available to Sears Holdings, and other factors that Sears Holdings may deem relevant, and will in the future take such actions with respect to Sears Holdings investment in the Issuer as it deems appropriate. Such actions that Sears Holdings may take include, subject to the terms of the Confidentiality Agreement but otherwise without limitation: (a) announcing its intention or plan to undertake or otherwise undertaking an extraordinary corporate transaction such as a tender offer or exchange offer for some or all of the Shares or a merger, consolidation, other business combination or reorganization involving the Issuer; (b) increasing or decreasing its position in the Issuer through, among other things, the purchase or sale of Shares in open market or private transactions for cash or for other consideration; (c) seeking to acquire or influence control of the Issuer, including seeking representation on the board of the Issuer; (d) entering into derivative transactions, engaging in short selling of or any hedging or similar transactions with respect to the Shares; or (e) taking any other action similar to those listed above. Subject to the terms of the Confidentiality Agreement, any open market or privately negotiated purchases, sales, distributions or other transactions may be made at any time without further prior notice".

The part that got me the most? "In early October, the Chairman of Sears Holdings, the President of Sears Holdings’ Lands’ End business"

Just yesterday I posted that my thesis for Lampert wanting Restoration was its mail order business. The success of that part of Restoration despite the current retail environment in the last quarter underscored its strength and the possibilities for it. I further stated that I thought a Lands End and Restoration combination was the likely reason for his interest.

Now we find out that in October Lampert had Lands End's President accompany him to see Restoration's CEO. It would appear as though Lampert was thinking along the same lines, a Restoration / Lands End combination.

The filing also states that Sears may at any time take any action it deems appropriate regarding the acquisition or disposition of shares in Restoration. Simply put, Lampert got the confidential information he wanted without giving up his ability to seek other channels to acquire more control of the company.


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Perhaps this little nugget is the reason for Sears Holdings (SHLD) interest in Restoration (RSTO).

Let's ignore the store traffic and start with the mail order division (think Lands End)..

Third quarter net revenues increased $16.6 million compared to the year ago period, primarily driven by growth in the Company's Direct-to-Customer segment. Direct-to-Customer revenues were $97.2 million and accounted for 56% of total revenues, up from 36% of total revenues in the third quarter of last year. The increase reflects growth in catalog and page circulation, and a continuing shift in revenues from the Stores segment to the Direct-to-Customer segment resulting from management's multi-channel merchandising and marketing strategies and operational changes implemented in the second quarter of 2007. Revenues in the Stores segment were $76.5 million in the third quarter of 2007.

So, Lampert is offering about $262 million for a company with more than $150 million in owned inventory, $1.7 million in cash, $8.5 million in receivables and a mail order division with profits of about $32 million a year that grew 71% over last year. If we take those numbers alone, Lampert will receive $192 million back for his purchase price almost immediately.

By merging Restorations back end operations with Land's End, profitability at the segment will jump. One also has to consider the added benefits to both catalogues by cross selling merchandise in them. Perhaps a combined Land's End / Restoration issue?

Of Monday's results, Gary Friedman, President and Chief Executive Officer, stated, "Weakening consumer spending and traffic levels continued to affect our business in the third quarter, particularly higher ticket durable categories. Revenue did not achieve our expectations, driving substantially all of our larger than anticipated operating loss in the quarter. While we are encouraged by some of the early holiday trends in our business, we remain cautious due to the macro economic environment, which has proven highly challenging for the home furnishings sector this year."

The same song has been sung by all housing related retailers this fall like home Depot (HD), Lowes (LOW) and Sears itself.

Lampert will end up getting Restoration for essentially nothing. Sound familiar? Is restoration a huge deal that will make a huge difference in the $53 billion in annual sales Sears generates? No. But Lampert is picking up a quality brand name at a song that will generate positive results and will add to the current brand base Lampert has .

True, Restoration's results sucked and well, that is why Lampert can get it so cheap. It is called "value" investing for a reason.

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Restoration Hardware (RSTO) answered Sears Holdings (SHLD) today only a day after Sears reminded it who was "it largest shareholder".

The release below:

PRNewswire-FirstCall/ -- "In response to media and other inquiries concerning the Schedule 13D amendment filed by Sears Holdings Corporation on Monday, November 26, 2007, the Independent Committee of Restoration Hardware's Board of Directors stated if Sears will agree to execute the customary confidentiality and standstill agreement on substantially the same terms that other parties have signed, it would be pleased to provide Sears with the confidential information it requested.

"While Sears has announced its willingness to sign a confidentiality agreement, there is no agreement on terms and, to date, instead of agreeing to the standstill agreement to which other interested parties have agreed, Sears has proposed to reserve the right to launch a tender offer outside the process," the Independent Committee said in a statement today.

The Committee stated that it is encouraged by Sears' current proposal at $6.75 per share based upon publicly available information, which is a vast improvement over its prior proposal at $4.00 per share. At the same time, the Committee stated that it believes that stockholder value will be maximized if Sears participates inside the process with other interested parties.

"Sears is an American icon," said Ray Hemmig, Chairman of the Independent Committee. "We are flattered that it is interested in learning more about our company. We welcome its participation in the process along with the other interested parties. However, the Committee is firmly committed to a fair process that will yield the best results for all stockholders and believes that process is best served through all parties agreeing to the proposed standstill terms without preferential treatment of one party over another."

On November 8, 2007, Restoration Hardware announced a merger agreement with Catterton Partners. In that announcement, the Company said that under the terms of the agreement, the Independent Committee of the Company's Board of Directors, consistent with its fiduciary duties, would be soliciting competing proposals from third parties during a 35 day period ending December 13, 2007. On November 19, 2007, Sears filed a Schedule 13D with the SEC indicating that it had accumulated shares equaling just under a 14% ownership position in the Company."

The whole release is a bit self-serving at best. Why? The other "bidders" in this situation is management itself! What unfair advantage could Sears possibly get over the people currently running the company? Answer? None. Restoration is trying to save face.

Restoration got bitch slapped by Lampert & Co. the other day when they reminded them that as the "largest shareholder" they actually owned more of the company than the current bidders and the Board or Directors themselves and that as such, deserved consideration in the process in getting the information they wanted. It is no coincidence that this information was forthcoming immediately.

There is nothing to stop Lampert from acquiring more shares on the open market during this process, he just cannot launch an official tender offer for shares. Semantics.

Where do we go from here? Lampert gets what he wants (information) and either two things happen. He ends up buying the company OR management raises it offer above that of what Sears would be willing to pay and Lampert cashes out at a profit. Either way Sears shareholders win.

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Just days after I wrote about the focus at Sears (SHLD) being store redesigns, not non-core asset sales, we get a timely SEC filing from the company announcing its interest in bidding for home furnishings retailer Restoration Hardware (RSTO). The comments from Sears are very interesting. Chairman Eddie Lampert has been eyeing the company since [...]

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