Sears Canada: Is this the end?
‘Significant doubt’ raised about future as firm explores options,
TORONTO Many consumers and retail experts have been predicting the death of Sears Canada Inc. for more than a decade. Their belief may soon come true.
The retailer, whose sales have been on a steady downward trajectory to $2.6 billion in 2016 from $6.7 billion in 2001, on Tuesday issued the direst warning yet about its future, saying it had “significant doubt” about its ability to continue as a going concern. The company said it is exploring strategic alternatives, including a possible sale of the business.
The retailer’s net loss more than doubled year over year in the first quarter and it abruptly pulled the plug on its annual meeting, scheduled for Wednesday, postponing it to an undetermined future date.
Sears Canada shares plunged 23.7 per cent on Tuesday to close at 87 cents, as investors grew even more wary about the company’s ability to raise enough cash to survive.
The chain has raised hundreds of millions of dollars over the past five years by divesting plum pieces of real estate and selling off its most valued store leases, such as Vancouver’s Pacific Centre and Toronto’s Eaton Centre, to mall landlords.
“Sears has cashed out of its best department stores and has been existing by doing that for years, and now they have spent it,” said Alex Arifuzzaman, a partner at retail real estate specialist InterStratics Consultants.
“The entire industry is transforming, and a transformation means you have to adapt for the future. In order to do that, you have to have some money.”
Department stores, many of which have not recovered from the incursion of big-box specialty stores into their core categories in the 1990s, have been hard hit by online retail, even as they try to grow e-commerce operations.
Given the failure of multiple new merchandising strategies introduced over the years at Sears, experts say it’s remarkable that it is still operating at all.
Sears Canada’s warning comes in the midst of a brutal period for the broader department store sector, and after a similar warning in March by U.S.-based Sears Holdings Corp.
Though the Canadian unit is no longer majority-owned by the struggling U.S. retailer, its biggest single shareholder is Sears Holdings chief executive Edward Lampert, who along with his hedge fund controls about 45 per cent of the Canadian company’s shares. Lampert and his fund also control close to 50 per cent of Sears Holdings.
Last week, Hudson’s Bay Co. announced it would lay off 2,000 employees and cut costs aimed at saving $350 million a year by the end of fiscal 2018.
Sears Canada said its cash and forecasted cash flows from operations likely will not meet its obligations coming due over the next 12 months. It had planned to borrow an additional $175 million secured against its real estate under its existing term loan, but its lender recently reduced that amount to $109 million.
Sears has always been able to raise cash from asset sales, but that appears to be over. The company said it has few alternative sources of liquidity, “through real estate monetizations, asset sales or otherwise.”
Sears posted a net loss in the first quarter of $144.4 million, or $1.42 per share, compared with a net loss of $63.6 million (62 cents) in the same quarter last year.
Brandon Stranzl, Sears Canada’s executive chairman, was not available for comment Tuesday.
The retailer pointed to its 2.9-per-cent rise in first-quarter same-store sales, a key measure that strips out year-over-year square footage changes, as an indication that it had made “substantial” progress in regaining the confidence of Canadian consumers.
But overall revenue slid to $505.5 million, a decline of 15.2 per cent, as its business, including its legacy catalogue operations, continued to shrink.
“The idea of a Sears Canada turnaround was a ruse, but it was a remarkable, almost 15-year ruse,” said Jim Danahy, chief executive of Toronto-based retail advisory firm Customer Lab.
“When a retail organization begins to sell off resources, it sounds like a death knell: vendors put retailers on cash terms, and landlords get nervous. But this is a major retail organization that has run for more than a decade without any significant capital investment. That’s a remarkable management of trust and expectations.”
Danahy also pointed out that Lambert “had his return on investment long ago from this company,” referring to the more than $600 million in special dividends issued to Sears Canada shareholders in 2012 and 2013.
Sears Canada ended the first quarter with cash of $164.4 million, down from $235.8 million at the end of the fourth quarter. On June 5, it drew $33 million under its existing revolving credit facility, as much as it could draw from the facility on that date to maintain its operations.
The idea of a Sears Canada turnaround was a ruse, but it was a remarkable, almost 15-year ruse. JIM DANAHY, Chief executive of Customer Lab retail advisory firm