Sears to Sell or Spin Off OSH Hardware Chain

Retailing giant Sears Holding Corp. said Monday that it planned to shed its Orchard Supply Hardware chain to focus on blending its Sears and Kmart stores.

San Jose-based Orchard -- better known by its acronym OSH -- will either be sold or spun off in an initial public offering, executives of Hoffman Estates, Ill.-based Sears said.

OSH’s 82 stores, all located in California, could fetch $300 million in a sale, UBS Securities analyst Gary Balter said in a note Monday. That would be nearly 30% less than the $415 million Sears paid for the chain, then at 60 stores, in 1996.

Although highly fragmented nationally, the hardware industry is very competitive in California given the expansion of superstore chains Home Depot Inc. and Lowe’s Cos.

“You just have to look at the number of Lowe’s and Home Depots that have infiltrated the markets they operate in,” said Jim Frobisch, senior partner of Farnsworth Group, an Indianapolis-based hardware industry consulting firm.

A problem for OSH is its store size, which averages less than 41,000 square feet, about one-third the size of a typical Home Depot or Lowe’s.

Sears does not release sales or profit figures for OSH.

In last year’s fourth quarter, Sears said, OSH and Sears’ other hardware stores posted year-over-year sales increases in the low single digits.

In 1996, when OSH had 60 stores, the chain had sales of $532 million, Balter said.

Some analysts believe Home Depot and Lowe’s might be interested in OSH as a way to find new locations in urban areas of California.

OSH’s 82 stores are between Laguna Niguel in Orange County and Redding in Northern California.

Alternatively, OSH’s strong cash flow could be attractive to “financial buyers,” Balter said.

Home Depot and Lowe’s cater to all home improvement and building needs; OSH found its niche with gardeners and shoppers looking to make small home repairs.

“They’ve survived and thrived in the shadow of Home Depot and Lowe’s,” Frobisch said.

“It’s a really good hardware store that is in tune with the region it operates in.”

OSH was founded in 1931 as a cooperative by 30 farmers who contributed $30 each to rent a warehouse in San Jose. It became a retail chain in the 1950s, when many farmers in the Silicon Valley were retiring.

Sears Holdings was created in March, when Kmart Holdings Corp. purchased Sears Roebuck & Co. as a way for both struggling chains to compete with discount retailers such as Wal-Mart Stores Inc. and Target Corp.

In the last few months, Sears Holdings has begun converting the first of more than 400 Kmart stores to a new format called Sears Essentials, an abbreviated version of its Sears Grand locations, which carry select Sears products such as appliances and clothing with convenience items such as health and beauty products.

Sears Chief Executive Alan J. Lacy said the company needed to shed OSH to focus on “core business.”

Sears declined to say whether it would continue to hold a stake in OSH if it spun off the company.

Shares of Sears Holdings on Monday rose $1.17 to $145.87 on Nasdaq.

The stock has risen 47% this year.