NEW YORK — Sears, Roebuck & Co. is building its store base with the acquisition of 54 Kmart locations in a deal worth $620 million that also includes leasehold interests in seven stores from Wal-Mart.

This story first appeared in the July 1, 2004 issue of WWD. Subscribe Today.

Sears said it will fund the purchase with available cash. In the deal with Wal-Mart, Sears’ obligations will be for the lease payments in the underlying agreements. The Hoffman Estates, Ill.-based retailer said that the majority of the stores are expected to be converted by the end of 2005 to Sears nameplates, with a large portion being changed to Sears Grand, its new mid-size format. Sears expects to be operating 12 to 14 Sears Grand stores by the end of 2005.

Alan Lacy, chairman and chief executive officer, said in a statement, “These transactions will jump-start our strategy to grow the Sears brand off-mall, increase our points of distribution and acquire well-located real estate at a fair value in key markets for Sears.”

Lacy added that the acquisition will enable the company to quickly open more stores and boost its “off-mall presence in priority markets that have synergies with our existing mall-based stores.”

The Kmart stores are located in urban areas, and the discounter will continue to operate the stores until they are sold in March or April 2005. According to Kmart, Sears agreed to consider offering employment to any Kmart employee who seeks to work at the soon-to-be converted sites. This is Kmart’s second real estate deal in less than a month. On June 4, Kmart said it will sell up to 24 stores to Home Depot for up to $365 million.

Julian Day, ceo of Kmart, said in a statement that the deals with Sears and Home Depot represent a total of $1 billion for fewer than 80 of its stores, or 5 percent of its current store base.

“We are committed to achieving value for our shareholders by operating our stores and recognizing the value of our assets. After both transactions are closed, Kmart will remain one of the largest retailers in America, with over 1,420 stores and approximately $20 billion in revenues,” Day said.

He added that the company is now able to direct its attention to building upon and accelerating the operating improvements it has achieved toward “making Kmart a better company every day.”

Since Edward Lampert, ceo of ESL Investments and chairman of Kmart, bailed Kmart out of bankruptcy and became the majority shareholder of both Kmart and Sears, speculation has been rampant about what he might have in mind for the two retailers.

Cheryl Carner, national director for retail finance at CapitalSource Finance, observed, “There’s been speculation for a while about Lampert’s grand plan. Nobody knows yet what it is.”

Carner noted that the deal was an interesting one because real estate and retail are two distinct businesses.

“It may not be in the best interest of a retailer’s cash to use it to own real estate. Real estate purchases are generally a long-term play and what you find with the evolution of the retail industry is that what is a good location now may not be so great 10 to 15 years down the road. On the other hand, Sears has a lot of cash on its balance sheet, and it needs to do something to give sufficient value back to its shareholders,” she said.

According to Richard Hastings, retail analyst at Bernard Sands, “The incredible shrinking Kmart continues to seed easy location solutions for other big retailers looking for big-box locations in off-mall sites. Sears, looking to make their Grand strategy stick, will benefit from the existing locations being disgorged by Kmart. Kmart, which has many gigantic stores that simply do not fit in with their emerging softlines strategy, has too much excess square footage for the new, rounder, Kmart.”

He noted, “Kmart’s strategy is to reduce the store base to a size where cash capital expenditures perfectly fuel store modernization without requiring any debt and within the scale of its modest operating cash flows.”

As for Wal-Mart, Hastings said, “With occasional asset sales, Wal-Mart could put the sense of ‘risk and reward’ back into their stock, although there are continuing concerns over the total performance in the supercenters in addition to possible cannibalization by Sam’s Clubs and rough competition from Costco in selected markets.