Sears takes a 13.7 per cent stake in DIY company Restoration Hardware

Sears, the retailer controlled by hedge fund manager Eddie Lampert, has said it has taken a 13.7 per cent stake in Restoration Hardware, according to a regulatory filing on Monday 19 November.

Specialty retailer Restoration Hardware agreed to a $267 million buyout on 8 November in a deal involving its chief executive and private equity firm Catterton Partners.

Sears used $30.2 million in cash, including commissions, to buy the Restoration Hardware shares, the filing with the US Securities and Exchange Commission (SEC) said.

But the deal has drawn flak, considering that Sears has failed to report a single quarter of same-store sales growth in the years since it merged with the bankrupt Kmart. Analysts are asking why a struggling Sears would want to buy a hardware retailer, which is also faltering in sales and earnings.

There seems to be little to recommend a merger. Restoration Hardware has 102 stores, eight outlet stores, and direct-to-customer Internet and catalog sales channels. Sales in the last quarter amounted to $183.8 million, up just 2.5 per cent from the year before, as the sinking housing industry nixed progress. Profits too are down, with operating income falling to a loss of $5.5 million from a $2.1 million profit in last year''s quarter.

But Restoration Hardware''s direct-to-customer business reported a 37 per cent increase in sales for the quarter. That may be the key to Sears''s proposed bid. Sears itself is struggling in the face of competition from Target and Wal-Mart. Some analysts question whether CEO Eddie Lampert is actually committed to building the retail chain or simply intends to liquidate its real estate.

Sears has its own bright spot too - the Lands'' End division. Bought in 2002 for $1.9 billion, Lands'' End has seen higher sales. But Lands'' End has a catalogue and online-retail business, and merging the Restoration Hardware direct-to-customer channels with it might make a decent fit.