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Sears Canada’s assets have been well picked-over

Anyone want to buy a used department store chain? Make that well-used?

Sears Holdings Corp. has put its Canadian subsidiary, Sears Canada Inc., up for sale. This is no big surprise; Sears Holdings essentially signalled that the Canadian operation was in play two years ago, when it reduced its stake in Sears Canada to 51 per cent from 95 per cent.

But what the parent company, controlled by hedge fund billionaire Edward Lampert, has now put up for sale is a mere shell of what was there two years ago. Mr. Lampert has seen to that – selling off huge swaths of Sears Canada's most valuable real estate and cashing in, literally, on its best locations. Sears Canada has raised more than $1-billion in the past two years through the sale of 10 store leases and a real estate joint venture – including the company's most-coveted flagship urban locations, such as Toronto's Eaton Centre and Vancouver's Pacific Centre.

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Hopes for a substantial turnaround in Sears Canada's operations faded when CEO Calvin McDonald quit last September, apparently fed up with Mr. Lampert's zeal to sell assets rather than invest in them. From that point on, Sears Canada became, essentially, a real estate play.

And Mr. Lampert, having already cashed in on the quickest and easiest real estate sales, apparently would prefer to leave the rest to someone else. What's left is a gutted company with struggling operations, and a portfolio of suburban and small-market locations that won't be highly attractive to any potential new entrant to Canada's notoriously challenging retail market.

Sears Canada is still sitting on 116 department stores – which in a market such as Canada's, with its recent influx of new competition and relatively thin supply of prime retail real estate, must be worth something to someone. The question is, who? There may be individual buyers interested in specific locations, but it's hard to see a retailer who would want all the Sears stores as a package deal. Newcomer Nordstrom is focused on high-profile urban locations (including several that Sears has vacated). Wal-Mart is already well represented in the suburban retail space. Ditto Hudson's Bay Co. There are other potential specialty retail entrants to Canada, but the Sears stores are much too big to suit their needs.

Target Corp. may be well-suited to Sears's suburban mall space, but its ambitious Canadian expansion is on hold. Target was once talking about opening as many as 200 stores in Canada; now, with disappointing sales and mounting losses, the talk is that Target may actually look at closing some of the 124 locations it opened last year, its first year in Canada. Indeed, Target's Canadian stumbles present a caution flag for any foreign retailer looking at Canada – even further thinning the ranks of possible suitors for the Sears Canada assets.

As an ongoing operation, Sears Canada remains challenged, seen as a tired brand unable to find its place in Canada's rapidly changing retail landscape. If you exclude gains from the real estate sales, Sears Canada lost nearly $200-million last fiscal year. On the upside, it does have a clean balance sheet, with more than $500-million in cash (even after last year's $509-million special-dividend payment) and almost no debt. But the purge of prime locations hasn't left it well positioned to mount a serious charge under new ownership.

The bottom line is, this is considerably less of a company than it was two years ago, when Sears Holdings sold off its first big chunk of it. It's not going to be an easy sell. Perhaps, like any well-used vehicle, the time may have come to simply sell it for its parts.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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