Byline: Valarie Seckler / Joanna Ramey / With contributions from Sidney Rutberg

NEW YORK — In a move enabling it to focus more on core domestic businesses, Sears, Roebuck & Co. said Wednesday it is selling a 60 percent stake in its money-losing Sears Mexico business for $103 million to Grupo Carso, a diversified holding company based in Mexico City.
Sears Mexico’s growth has been stunted by Mexico’s weakened, small middle class and the peso’s volatility, prompting Sears to bring more resources back home.
However, on Wednesday there were reports that Sears apparently is looking to broaden its Canadian interests and that it may be preparing a bid for the T. Eaton Co. Ltd. department store chain in Canada. Eaton has been in bankruptcy since Feb. 27 and plans to close about 30 of its 86 stores. According to published reports in Canada, other American retailers have shown some interest in Eaton’s, including Federated Department Stores, May Department Stores and J.C. Penney. However, Sears now appears to be the leading candidate to take over the Eaton’s chain. Sears owns 55 percent of Sears Canada, which has been struggling recently because of the poor but improving economy in Canada.
An Eaton’s spokesman said Wednesday, “I’m not aware of any negotiations at the present with Sears. We are negotiating with our landlords towards presenting a restructuring plan to present to Ontario Court’s General Division by the June 15 deadline.” The spokesman added that he is not aware of “any discussions with other U.S. retailers over an acquisition.”
A Sears spokeswoman declined comment on plans for Sears Canada.
“I believe the Canadian business is pretty healthy now, and they will keep it,” said Peter Schaeffer, analyst at Dillon, Read Co. “Canada’s economy turned around last year and is much more akin to the American economy than Mexico’s, where the middle-class is only beginning to emerge.”
“Sears is focusing very sharply on its core U.S. market,” said a spokeswoman for the Hoffman Estates, Ill.-based retailer. “We’ve determined that Sears Mexico will require additional investments to grow the business that we don’t want to make, so we sought a partner, Grupo Carso, with the capital to devote to it.”
Sears will retain a 15 percent stake in the 45-store Mexican unit, the spokeswoman said, explaining, “We are confident that the Mexican economy is starting to improve and that Sears Mexico has a viable future. Plus, we’ll get a revenue stream from the sale of Sears goods and the use of the Sears name in Mexico.”
The deal, which is expected to close late this month, gives Sears Mexico the exclusive right to use the Sears name in Mexico for an initial five-year term.
The remaining 25 percent of Sears Mexico is publicly held.
Sears does not break out results in its international division, which along with the stake in Sears Canada, includes a small export business. Analysts estimated that in real terms, Sears Mexico’s same-store sales fell 13 percent last year and 16 percent in 1995.
John Chan, a Latin America retail analyst at Goldman, Sachs & Co., said the health of Sears Mexico is on a par with other Mexican department stores. He speculated that if Sears USA had waited another 18 months to sell the 60 percent stake, it probably would have gotten more than $103 million.
In 1996, Sears’s international operations saw sales from merchandising rise just 1.8 percent to $3.07 billion. In 1995, the businesses brought in merchandising revenue of $3.02 billion, an increase of 5.1 percent.
The day-to-day operations of Sears Canada and Sears Mexico are run autonomously, the Sears spokeswoman said. Grupo Carso Sade CV will assume management responsibility for the unit when the deal is completed.
The sale of the majority interest in Sears Mexico to Grupo Carso will afford Sears the chance to refocus funds and management time on its productive off-the-mall formats in the U.S., analysts noted.
Those operations, which include Sears Hardware stores, HomeLife furniture stores, and a home improvement services unit, are likely to be the engines that fuel Sears’ medium-term growth, analysts observed Wednesday.
“We have plenty of growth opportunities in the U.S. in our off-the-mall formats, such as our Sears Hardware chain, which is growing very rapidly, especially with the recent acquisition of the Orchard Hardware Supply chain in California,” the Sears spokeswoman said. “We’re also restructuring our auto stores’ formats to accelerate growth in a consolidating market. We have plenty on our plates here.”
In addition, the sale of Sears Mexico for $2.29 a share, or a 40 percent premium over the stock’s recent market price on the Bolsa, Mexico’s stock exchange, will enable Sears to continue refurbishing mall stores and expanding its apparel business, said Todd Slater, analyst at Lazard Freres & Co.
“The move signals a reemphasis in strategic focus on the growth opportunities they have domestically,” Slater said.
The spokeswoman said that Sears will increase its number of full-line mall stores from 821 units to 860 by 2000. This year it plans to open or expand 20 full-line stores.
Analysts said it was unlikely that Sears would look to sell its Canadian business, which produced sales of about $3 billion last year, or 8 percent of total revenue, estimated Robert Buchanan, analyst at NatWest Securities.
One analyst, who requested anonymity, said Sears may be scouting for acquisitions in Canada, including some leases from Eaton’s, or possibly the entire moderate department store chain, which filed for bankruptcy protection from creditors in February.
As the merchandising of the Sears Mexico stores is more upscale than the U.S. stores, the company spokeswoman said, “One of our biggest challenges in the U.S. has been to convince Mexican immigrants that we’re more moderately priced here.”
Wall Street liked the sale of the Sears Mexico interest, sending the company’s stock up 5/8 to close at 49 3/8 on the New York Stock Exchange Wednesday.
With the sale, Sears will take a charge of a couple of cents a share in the first quarter, Schaeffer estimated. “I think they’ve had difficulty in Mexico since the peso was devalued around three years ago,” he added. “It makes sense to wipe the losses off the books, and Grupo Carso has a reputation for turning around struggling businesses.”
The transaction will also bring Sears about $100 million of additional capital to seed its U.S. business, Lazard Freres analyst Slater noted.
A First Call survey of 22 analysts yielded a consensus earnings estimate of 42 cents a share for the first quarter ended March 29. In the first quarter of 1996, Sears netted $151 million, or 36 cents a share, on sales of $8 billion.
“I’m not surprised that Kmart’s leaving Mexico, and Sears is scaling back its commitment,” said Buchanan. “I’ve not been a big fan of Wal-Mart’s big commitment to Mexico, either.
“If Wal-Mart commits to selective Latin American countries like Chile or Argentina or Venezuela, so be it,” Buchanan continued. “Mexico is a land of haves and have nots. It’s a poor bet for an American broad-lines retailer that is mostly aimed at the middle class.
“About five years ago, retail growth abroad was all the rage,” Buchanan added. “I think the smarter retailers, such as Sears, are pulling back from that. [Sears chairman and chief executive] Arthur Martinez has been giving the signal now for a few years that he wants to concentrate on the core U.S. business.”
Goldman’s Chan agreed, saying, “If the U.S. is your bread and butter, then having a Mexican investment is less important because it’s very complicated and takes a lot of time.”
Sears Mexico has been on a roller coaster since the bottom fell out of Mexico’s economy in December 1994, just as the chain was set to implement marketing and merchandising plans hatched by then-ceo Warren Flick.
Flick, who left Sears Mexico last year to become president of Kmart Corp., had played a key role in Sears’ apparel renaissance in America and was brought to Mexico to work the same magic.
At the time, Sears was regarded as a mid-market department store in Mexico, carrying such labels as Evan Picone and Jones New York, and Flick moved to fortify that position. The chain launched a costly expansion plan, beefed up denim departments, and introduced the Carole Little and Liz Claiborne brands.
The effort was driven, in part, by plans of J.C. Penney, Dillard Department Stores and Saks Fifth Avenue, among others, to enter the Mexican market.
However, Sears Mexico’s strategy was rendered obsolete by the peso’s devaluation of more than 50 percent — a move that brought consumer spending on non-essential items to a virtual halt.
In the last two years, Sears Mexico’s plan, as well as those of most other Mexican retailers, has been to slash operating costs and find the cheapest way to merchandise. The strategy marks a reversal of the better-to-moderate mix Sears Mexico had previously marketed.
Most of Sears Mexico’s apparel is now produced in Mexico, a mix of established national brands and low-cost knockoffs of Seventh Avenue trends.
According to analysts, the change was made so that Sears Mexico can pursue a lower-middle-class customer in Mexico’s still-ailing economy. Although there has been a gradual pickup in consumer spending, analysts do not expect any significant recovery to occur until well into 1998 or 1999. Same-store sales at retailers throughout Mexico fell an average of more than 30 percent in 1996, they noted.
J.C. Penney, which opened two stores in Mexico just as the economy was unraveling, still expects to add four more stores, a spokesman said. With sales improving at its stores in Monterrey and Leon, construction on new sites could begin as early as next year, the spokesman said.
As for Dillard’s, plans to open five stores in Mexico are still on the drawing board, pending resumption of shopping center construction there, said Bill Haviland, vice president of store planning.
“We would have to open a package of stores in order to make us viable,” Haviland said.”If all the developers said they were going to re-start projects, we would seriously consider opening stores. As it stands now, the commercial real estate development has not rebounded, and they aren’t talking to us about starting up any malls.”
Meanwhile, Wal-Mart, and its Mexican joint-venture partner, Cifra, continue to dominate the mass merchandise-supermarket sales in the country. The team is consistently cited by most analysts as the best-positioned chain in Mexico, mostly because of its size, low operating costs and debt-free status. According to Cifra’s annual report, the joint venture in five years has invested $1.48 billion in the business. The two firms jointly own 213 stores, a mix of Wal-Mart and Cifra formats. Cifra independently operates 156 units.
Sears Mexico will join Grupo Carso’s principle retail concern, Sanborn’s, a popular national chain of stores comprising a family restaurant, book store, cosmetics retailer, pharmacy and luxury goods boutique, all under one roof.
Carso’s other retail interests are a chain of record stores called Mix-Up, and the Denny’s restaurant operation in Mexico. In addition, one of its sister companies last year bought Sears’ stake in the Prodigy on-line service.
Grupo Carso is a $3.04 billion diversified blue-chip holding company with interests in auto parts, construction and consumer goods, and the manufacture of Marlboro cigarettes. Carso’s chairman, Carlos Slim Helu, is a leading shareholder of telecommunications giant Telefonos de Mexico.
Alberto Montagne, Latin American retail analyst at Lehman Bros., said Carso should be able to get Sears Mexico performing again. “They have a lot of work to do, but their record for turning around companies is quite good,” Montagne said.


’96 Sales: Sears Mexico, Sears Canada and an export arm
had combined sales of $3.4 billion. Canadian sales estimated at $3 billion.

Stores: 45 (42 full-line, 3 satellite units)

’97 Growth Plan: No new stores. Opened 1 store
and closed 3 last year.

Distribution Centers: 2

Employees: 10,000

President: Robert Moran

Headquarters: Mexico City
Source: Sears, Roebuck & Co.

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