SEARS DE MEXICO: NEW GROWTH PLAN

Byline: Joanna Ramey

WASHINGTON — Sears de Mexico’s new owners are putting their plans for the 46-store chain into motion.
The key to the strategy is to reissue Sears de Mexico stock, according to Mexican retail sources and Wall Street analysts. Grupo Carso, the Mexican conglomerate and turnaround expert and Sears de Mexico’s new owner, is expected to bundle the offering on the Mexican Bolsa with another Carso retail entity, the 150-store Sanborn Hermanos, a cafe, luxury goods and bookstore chain, along with some valuable Sears de Mexico shopping mall real estate and two music stores, Mix-Up and Disco Landia.
The plan to revitalize Sears de Mexico revolves around putting a spotlight on clothing and perfume to attract young female customers.
The IPO for the new entity, Carso Comercial SA, could bring in as much as $500 million, according to some estimates. Officials at Grupo Carso, which in April bought 85 percent of Sears de Mexico, leaving the American entity, Sears, Roebuck & Co., with 15 percent, declined to be interviewed. The issuing date of the IPO is expected before the end of the year.
The company hasn’t announced whether, or how much, of the IPO proceeds it will invest in its retail operations. After the offering, and with the recent sale of interests in Mexican tobacco and paper operations, Carso will have a war chest estimated at $1 billion, according to analysts, who note that the money could easily be plowed into other investments. Last year, Carso’s revenues were $3 billion.
There’s been speculation in the Mexican retail market that with some of the Sears-Sanborn stock proceeds, Carso might buy the 36-store mass-market apparel chain Suburbia, or the 57-unit VIPS family restaurant chain, both part of the Cifra-Wal-Mart joint venture.
While analysts say it would make sense for Wal-Mart and its Mexican partner, Cifra, to unload the companies to concentrate on their core supercenter and warehouse club business as they expand internationally, it’s unlikely Suburbia’s or VIPS’s price would be low enough for Carso.
“It wouldn’t fit the profile of the type of companies Carso has traditionally bought. Their specialty is to buy properties that are undermanaged and undervalued. Cifra manages its companies well,” said Santiago Pique, a Latin America conglomerate analyst with Bear Stearns.
“It would be positive for Cifra to get rid of Suburbia and VIPS,” said Julio Zamora, a Latin America equity analyst with Morgan Stanley. “You’ve got 30 percent of Cifra’s labor force in VIPS and Suburbia. Suburbia also has a different inventory cycle.”
A Wal-Mart spokesman said company officials won’t comment on market speculation about Suburbia and VIPS, which last year contributed $250 million and $139 million, respectively, to Cifra’s $2.95 billion in sales. Wal-Mart in April announced plans to take a direct equity interest in Cifra’s operations.
“In fact, when we announced the Cifra acquisition, we also reiterated we intended to operate all five Cifra concepts,” the spokesman said. The other Cifra units operated in Mexico are the 35-store supermarket/mass merchandise Aurrera and 60-store warehouse Bodega Aurrera, along with 36 Superamas, a traditional supermarket chain.
The Sears-Sanborn IPO comes at a time when the Mexican economy, after suffering a devastating downturn for nearly three years, is beginning to show consistent signs of improvement, however incremental. Department store retail sales since January have posted overall increases after suffering double-digit declines for most of the previous two years, according to ANTAD, Mexico’s retail association.
While all retailers have struggled with devastating drops in sales, Sears de Mexico is widely viewed by analysts as being hit particularly hard. The crisis caught the chain in the midst of multimillion dollar capital improvement project and remerchandising with higher-priced imported apparel, all targeted at beefing up its image to target Mexico’s then emerging middle class.
Analysts say, in hindsight, that this strategy — launched by a team of U.S. store officials — was not only ill-timed, but ultimately lost sight of the Mexican shopper.
In many respects, the economic crisis allowed Sears the time to recover from this merchandising miscalculation, since Mexican consumers weren’t shopping anyway because their buying power had been dashed. While new strategies were weighed, the pricy apparel was dumped at fire-sale prices and was replaced with low-cost domestically produced apparel based on trendy knockoffs.
Even after six months with Carso at the helm, Sears still lacks a countrywide image, said Patricia Tyler, an analyst with SBC Warburg/Dillon Read Inc.
“As far as the consumer is concerned, Sears is still cheap clothes, white lines and auto repair,” Tyler said. “From the investment community’s point of view, it’s a positive Carso has bought Sears because of its reputation for turning businesses around.”
Carso got a good deal in buying Sears de Mexico, paying roughly 40 cents on the dollar of value. For its initial purchase of 65 percent of Sears de Mexico, Carso paid the parent $115 million and bought the remaining shares on the open market.
“Sears was a classic turnaround company for Carso to buy. It was at the bottom of the retail cycle and losing money,” said Terry Sigler, a conglomerate analyst with Robert Fleming Securities, characterizing Carso as a strictly no-frills, family-run operation headed by chairman Carlos (Slim) Helu.
“Their corporate headquarters is very nondescript, very unassuming,” Sigler said. “When they go into an operation, you won’t see them running around with their corporate jets. What they do is understand the marketplace.”
Carso has inherited a mixed bag when it comes to the variety of stores in the Sears de Mexico fleet. They range from the posh, marble-filled store in the Commercial Center of Santa Fe just outside of Mexico City to the cluttered, urban flagship on Insurgentes Avenue in the capital.
A Sears in Pabellon Polanco, a small upscale urban mall in Mexico City that was renovated just before the economic crisis, is singled out by analysts as typical of the new Sears format. Additionally, a new store in the Gulf city of Veracruz is also mentioned as a prototype for the pending chainwide facelift.
Regarding merchandise, store officials are looking to improve quality, while keeping price-conscious consumers in mind. They are also emphasizing display to better attract Mexicans who flock to shopping malls, often as entire families.
“What they are doing is taking the electronics — all the stereos and TVs — and putting them at the back of the stores and bringing to the front the perfumes and clothing. The stores are also being designed around the young female customers,” Zamora of Morgan Stanley said, noting money generated by the IPO should help pay for Sears’ chainwide redesign.

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