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In order to improve financial performance and enhance its liquidity position, the largest U.S.-based broad line retailer Sears Holdings Corporation (SHLD - Analyst Report) has recently announced the successful separation of its Sears Hometown and Stores business. The newly separated company has been named Sears Hometown and Outlet Stores, Inc. and is scheduled to be traded on the Nasdaq Capital market from today under the ticker symbol SHOS.

The separation, which has been completed through a rights offering, fetched the company gross proceeds of $446.5 million, including a cash dividend of $100.0 million prior to the separation. Sears Holding has distributed 23.1 million shares of Sears Hometown to subscribers.

As part of the separation transaction, Sears Hometown entered into a secured revolving credit facility agreement with a consortium of financial institutions. The company can borrow a maximum amount of $0.250 billion under the credit facility. Moreover, it has partially utilized the fund to pay dividend to Sears Holdings.

The company has long been grappling with weak top-line performance and even weaker bottom-line results. Moreover, as of July 28, 2012, it had a huge long-term debt burden of $1.970 billion while cash and cash equivalents stood at just $0.730 billion.

In an effort to optimize its financial performance, the company took a number of measures to focus on its core businesses and reduce investment in sections that no longer contribute significantly to its growth.

In doing so, Sears Holding announced its intention to partially spin-off its interest in Sears Canada Inc. Sears Holdings currently has a 95% ownership interest in Sears Canada, which it intends to reduce to 51%. The move is expected to enhance Sears Holdings’ liquidity position. The company expects to successfully close this transaction in the second half of 2012.

We believe that the company’s strategy of capitalizing on opportunities while increasing profitability through its revamped organizational structure and new operating model will boost its top and bottom line. Apart from this, Sears Holding is focusing on cost containment, inventory management and merchandise initiatives to improve margins.

Sears Holdings, which competes with Wal-Mart Stores Inc. (WMT - Analyst Report) and Target Corporation (TGT - Analyst Report), currently retains a long-term Neutral recommendation. Also, the company has a Zacks #2 Rank, implying a short-term Buy rating.

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