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To avoid bankruptcy, Sears Chief Executive Officer Edward Lampert outlined a plan that would significantly reduce the retailer's impending debt by selling almost all of his remaining properties.
The sale of some 200 company-owned stores, as proposed by Lampert's hedge fund, ESL Investments, would certainly ease Sears' debt burden. But even if the plan succeeds in preserving the business, it would probably speed up the decline in Sears' physical presence.
The presence of Sears Holdings Corp. has already significantly decreased due to losses of more than $ 11 billion since 2011. By the end of the year, the Hoffman Estates-based company will have half the number of Sears and Kmart stores. done two years ago.
Lampert's previous attempt to leverage Sears real estate to maintain the company offers a window on the loss of control of nearly all of its remaining properties over the long term.
In 2015, Sears sold 235 stores, as well as interests in joint ventures of 31 other properties, to real estate investment company Seritage Growth Properties. Lampert is both a shareholder of Seritage and its chairman.
In the years that followed, the presence of the retailer decreased in these properties, the space being rented to new tenants better paid. Nearly a quarter of the older Sears stores still in the Seritage portfolio are no longer used by the retailer. According to the company's latest financial report, Sears and its sister brand Kmart share premises with at least one other tenant in about half of the remaining occupied stores. Sears and Kmart now account for less than half of the rent that Seritage collects each year.
Closing the weakest stores is not necessarily bad news. Sears said store closures are part of its cost reduction plans and focus on the top performing locations. But closing unprofitable stores will not automatically bring customers back to those who stay.
"If you get rid of all your underperforming stores and those that remain are still underperforming, you have a smaller, underperforming company," said Bryan Gildenberg, Knowledge Manager at Kantar Consulting.
ESL said its proposal, released Monday, would free up cash to invest in Sears retail by reducing the company's debt. Lampert and the hedge fund hold the vast majority of the $ 1.5 billion that Sears would pay back. The repayment would be financed by selling the properties either to outside buyers or, if the company has not sold enough securities to pay off real estate debts in one year, to a group of lenders willing to extinguish that debt.
The transaction would guarantee a minimum value for the sale of Sears' assets, reduce cash interest payments and give the retailer a share of profits from real estate sales above a certain threshold, ESL said. An indefinite number of stores sold to lenders would be rented to Sears, just as the retailer initially rented almost all of Seritage's properties.
But the amount of space in the Sears and Kmart stores could diminish over time, as is the case in many of the properties sold by Sears in 2015. Buyers will come up with a great deal of space. business "focused on optimizing the value of the real estate portfolio". ", Says the ESL proposal.
Sears has been a dominant retail force when many shopping malls and shopping malls were built, so its stores are in "high quality buildings" offering development opportunities. Among them: the last two Sears stores operating in Chicago, where plans include a mix of residential and commercial spaces.
The redevelopment continues further into the northern suburbs of Riverside, where Sears has downsized and Seritage has introduced a gymnasium and bowling center and Round One amusement. A Sears store owned by Seritage in Springfield has been replaced by Orangetheory Fitness, Binny's Beverage Depot, two restaurants and new stores, including the Marshall non-price retailer.
Erik Gordon, an assistant professor at the Ross School of Business at the University of Michigan, said he was skeptical about the properties that would be part of the ESL proposal, which are as valuable as those sold previously to Seritage.
"This is not what you could have disposed of earlier in a way that would give you better returns," Gordon said.
Regardless of what happens to Sears owned stores, other closures are planned, including 149 more by the end of the year. There were 866 Sears and Kmart stores in the US last month.
Sears' goal is to reach a solid base of stores it can rely on, and the retailer hopes to stabilize the number "at a significant level in the near future," said Lampert earlier this month. last quarter earlier.
As stores closed, quarterly sales of those open for at least one year decreased. However, the fourth quarter, with a 4% drop in sales, improved compared to the 11.5% drop recorded in the same quarter last year. In July and August, sales in stores open at least a year increased slightly, said Lampert in the statement.
A number of retailers reported solid sales in the last quarter, but even though confident consumers thought they had more to spend, "they will always spend it in the best places with the best value possible," said Perry. Mandarino, senior managing director of investment bank B. Riley FBR.
ESL's broader proposal could allow Sears to avoid the time needed to avoid bankruptcy proceedings, Mandarino said.
Others were more skeptical. Fitch Ratings said the real estate proposal would be difficult to execute. And even if that happens, said Fitch, this will not be enough to prevent a new restructuring, given the ongoing losses of the company.
The plan could help Sears' financial difficulties, but it will not solve the company's underlying struggle to bring buyers back, Gildenberg of Kantar said.
"I do not think Sears' problem is money; it's strategy and relevance for the buyer, and the money will not help solve this problem, "he said.
Twitter @laurenzumbach
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