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Embattled Sears Canada ‘open’ to more real estate sales

Sears president and CEO Doug Campbell attends the company's AGM in Toronto on Thursday April 24, 2014.

Chris Young/THE CANADIAN PRESS

Sears Canada Inc. will continue to weigh selling more of its valuable real estate, including prime store leases, to help bolster its sagging operating results although it has no current plans to vacate more of its outlets.

"We're always open to opportunities to unlock real estate value when something presents itself that makes sense," Douglas Campbell, who took over as chief executive officer from his predecessor last fall, told the annual meeting on Thursday morning.

Over the past year alone, it sold leases to seven stores, including some of its best sites such as at the Toronto Eaton Centre – with an option for an eighth – generating $591-million for the retailer. In addition, it divested a stake in a real estate joint venture for $315-million.

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In the previous year, it sold leases to another three key stores back to their landlord in a $170-million deal. Cadillac Fairview Corp. promptly sold the leases to U.S. department-store rival Nordstrom Inc., paving the way for it to enter Canada this fall – and putting more pressure on Sears and others in the sector.

Struggling with falling sales, Sears has been divesting what it calls non-core assets and letting thousands of staff go, helping to bolster its bottom line and focus on suburban, small town and rural markets. But the massive changes raise questions about the ultimate plans of Sears, whose ailing U.S. parent Sears Holdings Corp. is controlled by hedge fund billionaire Edward Lampert. It has been reaping the rewards of the Sears Canada selloffs through bigger dividends from its Canadian unit.

Keith Howlett, retail analyst at Desjardins Securities, said he expects in 2014 further asset dispositions by Sears Canada, including under-market leases, accompanied by more special dividends.

But he doesn't envision one single retailer or company scooping up most of the leases in one major transaction, such as the way Target Corp. entered Canada by acquiring most Zellers leases from Hudson's Bay Co. for $1.8-billion.

"We are unable to identify a suitor for the company within the next 12 months," Mr. Howlett said last week.

He predicted that Sears Canada would be spun off to Sears Holdings shareholders within the next two years. Sears Holdings has stated it intends to raise $1-billion (U.S.) in cash in 2014 from moves such as spinning off Lands' End and "realizing value from its investment in Sears Canada," Mr. Howlett said. The parent's recent Lands' End sale provided Sears Holdings with $500-million in dividends.

Sears Canada has 14 owned department stores, two owned Sears Home stores, several distribution centres and other related businesses such as trucking, he said. It also has 96 leased department stores.

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Mr. Campbell told shareholders he has no plans to vacate more stores, and is focusing on improving Sears' retail operations and efficiencies. The retailer is investing $30-million in a better inventory management system, partly to help boost Internet selling and product flow. Another of his priorities is "network optimization," he said.

"While we have no plans to vacate stores, we continue to review our portfolio and may consider proposals that will substantially create value without affecting our presence in major national retail or our focus on suburban, mid-market and rural locations," Mr. Campbell said.

Sears is intent on improving its merchandise flow by stocking more fashion basics and ensuring popular sizes and colours are in stock and that stores don't run out of high-demand items, he said.

Sears is being "inclusive" rather than "exclusive" as other retailers are doing in moving more upscale, he said. His best customers are price savvy, fashion aware or "pragmatists" who are willing to pay a little more for a quality product such as a warm kids' coat.

Sears is responding to its customers' needs with more low-cost, high-margin private label merchandise, such as its new Pure NRG Athletics yoga wear line and Logan Hill casual men's wear, as well as select national brands such as Carter's and Osh Kosh children's clothing.

Its push in apparel paid off last year, when amid declining overall sales its clothing and accessories same-store sales rose 4.2 per cent from a year earlier. Its total same-store sales fell 2.7 per cent in the same period. Same-store sales are those at outlets open a year or more and are considered an important retail measure.

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Sears is also pumping up its "Canada's Best" big bets on carefully chose fashion and home products at "unexpectedly reasonable prices," he said. They include its Alpinetek women's down-filled winter parka for $179.97, a $79.97 Jessica women's washable suit and a 75,000 BTU Kenmore gas grill for $499.97.

Late last year, Sears was sued by Canada Goose for allegedly borrowing from the luxury coat maker's high-profile parka designs in its Alpinetek line, which the retailer has said was a big hit. Sears countered by accusing Canada Goose of mounting a "campaign of intimidation."

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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