Shares ofLampert’s Sears Holdings Corp. fell 5.85 percent on Wednesday followingthe retailer’s news that it has retained an investment bank to explorestrategic alternatives for its 51 percent stake in Sears Canada, or thesale of the Canadian operation as a whole.
Sears’ shares fell $2.53 on Wednesday to close at $40.70.
Asale of part or all of Sears Canada would be the last cash-generatingtactic by Lampert to shore up the retailer’s weakening balance sheet.Such a sale would follow the recent spin-off of Lands’ End, the disposalof numerous real estate assets and the divestiture of subsidiariesincluding Orchard Supply and Hometown Outlet.
Sears’ free cashflow has been negative for the last four years, with an outflow of $1.44million. At this rate, experts believe Sears will burn through its cashin less than a year.
“The noose is tightening in terms of whatthey have left that they can do,” said Matt McGinley, an analyst at ISI,referring to Sears’ assets. “I don’t think 2014 will be different interms of operating cash burn. Sure, they’ll find some other things tosell or spin off if they can, but the number of options is limited.”
Searsis perpetuating a cycle of decline, McGinley said, noting that theretailer continues to lose sales every year. In its attempt to return toprofitability, it cuts SGA costs, which largely consists of payroll andadvertising expenses. Sears spends about $300 million a year on capitalexpenditures, less than $1 per square foot on stores. By comparison,other retailers spend $5 to $10 a square foot just to maintain theirstores. “Most of these locations have been neglected for so long. A poorshopping experience leads to less foot traffic. It becomes a viciouscycle,” he said.
Mary Ross Gilbert, an analyst at ImperialCapital, said Sears Holdings a year ago was “planning to do somethingwith Sears Canada. Over the last few years, they talked aboutconsidering monetizing some of these investments. It could include asale of their stake or a sale of Sears Canada as a whole. They wentthrough a similar process with Lands’ End. It seemed like they couldn’tget the deal they wanted, so they spun it off.”
Sears Canada hasslowly been divesting of some of its stores. In November, the retailersold its 50 percent stake in eight properties in a deal valued at $315million. Sears Canada previously sold the lease to its flagship in theToronto Eaton Centre and four other leases for $400 million.
SearsCanada has three locations left that are joint investments with asmaller stake of 15 percent to 20 percent. “We were valuing those threestores at $43 million,” Gilbert said.
Sears is also evaluatingits strategic position with its Auto Center, which was valued in 2013 at$666 million. About a year ago, Sears talked about monetizing itsProtection Agreement service, a warranty business, which is reportedlyprofitable. Nothing has been said about the warranty business since,leading some observers to the conclusion that Sears wasn’t able tostructure a deal to its liking.
Sears reported a net loss in thefourth quarter of $358 million, or $3.37 a diluted share, for the threemonths ended Feb. 1, below the loss of $489 million, or $4.61, a yearago. Revenues decreased 13.6 percent to $10.59 billion from $12.26billion. Comparable-store sales fell 6.4 percent, reflecting a 5.1percent decline at Kmart and a 7.8 percent drop at Sears’ domesticstores.
For the year, the loss extended to $1.37 billion, or$12.87 a share, from a loss of $930 million, or $8.78, in 2012. Revenuesfell 9.2 percent to $36.19 billion from $39.85 billion.
Lastyear, sales of Sears Canada totaled $3.8 billion out of the company’stotal merchandise and services revenues of $36.19 billion. The Canadianoperation has a higher concentration of apparel and soft home goods thanits U.S. counterparts. In 2013, those categories accounted for 49.2percent of Canadian revenues, or about $1.87 billion.
KeithHowlett, a retail analyst at Desjardins in Toronto, said Sears Canadahas about $500 million in cash on its balance sheet, of which half wouldgo to Sears Holdings.
Howlett said potential buyers includepension funds or mall owners who want to reposition their properties —Sears Canada stores are generally in better locations than theirAmerican counterparts. “They tend to be in every good mall in Canada,”Howlett said. In addition, turnaround companies such as Sun Capital,Hilco and Gordon Brothers may be interested, along with private equitygroups. Retailers such as Wal-Mart Stores Inc. or Hudson’s Bay Co. couldlook at the real estate, although the latter appears to have its platefull with Saks Fifth Avenue, Lord & Taylor and Hudson’s Bay.However, it might want to purchase the properties as a preemptive striketo thwart competition. “There’s been some discussion as to whetherMacy’s would be interested in entering Canada, or Kohl’s, which haslooked at Canada,” Howlett said. “Wal-Mart has 380 stores here and hasgotten into some pretty good malls. Target would look at some of thestores.”
“[Sears] has significant operating loses they need tofund with asset sales,” McGinley said. “As far as the type of buyer,it’s not too long of a list. They’ll get plenty of lookers but not toomany bidders.” The fact that Canada is a difficult retail environmentwill discourage some chains.
“Private equity shops may want it ata reasonable price,” McGinley said. “Some retailers might want to lookat it. But it’s relatively unlikely that they would find a buyer for theentire asset. In six months or a year, they will likely spin out theremaining 50 percent.”
Moody’s Investment Service said divestingof Sears Canada is “considered a credit positive for Sears Holdings asthis transaction, if concluded, could generate significant cash proceedsthat would help to offset the expected cash burn for the company in2014.” Moody’s said there’s no impact on the company’s rating.
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