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Sears Canada Announces Major Cost Cutting

Sears Canada plans to cut $85 million in costs by 2008 in a move that some analysts speculated would precede an eventual sell-off by its U.S. parent.

MONTREAL — Sears Canada plans to cut $85 million in costs by 2008 in a move that some analysts speculated would precede an eventual sell-off by its U.S. parent.

To cover the cuts, Sears plans to take a pretax hit of $60 million in the fourth quarter. All figures have been converted from Canadian dollars. The majority of the trims will occur next year.

“What caught me off guard was the magnitude of the cuts and the restructuring charge,” said analyst David Brodie of Research Capital Corp. of Toronto, who expects Sears to lay off up to 10 percent of its staff of 40,000.

Brodie said Sears Holding Corp. chairman Edward Lampert “will wait for the cost-cutting process to go through before he has any thoughts of a sell-off.”

Sears Canada’s credit rating was downgraded to junk status by Standard & Poor’s Ratings Services after the retailer announced the cost cuts.

There has been speculation that Lampert might turn Sears Canada into an income trust, a tax-efficient way to pay dividends to investors instead of reinvesting in the company at a higher tax rate.

“It appears their financial policy is being dictated more and more by their U.S. parent, which is trying to extract more value out of the company, and that’s why the income trust idea is being floated,” said analyst Don Povilaitis at Standard & Poor’s, also in Toronto.

He said Sears’ credit rating has been weakened by the decision last month to sell its lucrative credit card division to J.P. Morgan Chase & Co. for $1.9 billion, most of which is expected to be distributed to shareholders as an extraordinary cash dividend.

The income trust idea “has merit for shareholders to convert equity into cash, which seems to be the focus south of the border,” said analyst John Chamberlain at Dominion Bond Rating Service in Toronto.

Analysts have mentioned the possibility of a merger between Sears Canada and rival Hudson’s Bay Co., which also operates the Zellers discount division, to gain strength to compete with Wal-Mart Canada’s growing market share.