Will Sears Canada be forced to fold?
The clock is ticking down on sale process
TORONTO — By the end of the working day on Sunday, most of the 59 Sears Canada stores slated for closure when the retailer filed for creditor protection this summer will lock their doors for the last time.
In all, 2,900 Sears employees in stores and at head office will have lost their jobs.
That may not be the end of it. The remaining 13,000 employees are still at risk of losing their jobs and the remaining 74 full-line Sears department stores, eight Sears Home Stores and 49 Hometown Stores across Canada are at risk of closing, too, if no one steps up to buy what’s left of the chain.
“If they don’t sell, they are obliged to liquidate,” said commercial lawyer Lou Brzezinski, citing the terms of the agreements filed in the matter under the Companies’ Creditors Arrangement Act (CCAA).
Brzezinski is a partner in Blaney McMurtry’s commercial litigation group, representing suppliers and landlords.
Reports of a deal in the works have been circulating almost since creditor protection was granted on June 22, but no firm offer has been announced. The first deadline to submit proposals was Aug. 31.
Sears Canada is scheduled to report to court on the sales process on Wednesday, but while motions submitted to date seem to indicate some deals with certain landlords are in the works, there is nothing to suggest there is a buyer for what is left of the enterprise.
“It looks like they’re selling a bunch of properties,” said Brzezinski. “It’s not a sale en bloc. I don’t think there’s an offer.”
Sears operates a store in Fairview Park mall in Kitchener. The Sears outlet store in the Cambridge Centre has closed.
After reviewing the most recent Sears earnings, Rebecca Teltscher, portfolio manager, Leon Frazer & Associates, believes it’s more unlikely than likely that Sears Canada will be able to emerge from creditor protection.
The metrics don’t look good. The cash is mostly being drawn from a term loan and proceeds from real estate, which is not sustainable, Teltscher points out. Despite a 2.9 per cent increase in same store sales year-over-year, revenues were down 15 per cent in the last reported quarter.
Closing stores and selling products at a discount will further compress profit margins and the company needs money to revamp its product lines and invest in a better transactional website.
With fewer stores and less money to spend on advertising and technology, the outlook for Sears as a going concern is weak.
“Not many department stores are doing well right now. If you take that with the amount of money Sears would need to revamp its image, it’s a difficult landscape,” said Teltscher.
“To me it’s looking grim, but I guess never say never.”
Jeffrey Berkowitz, president of Aurora Realty Consultants Inc., a retail tenant consultancy firm with offices across Canada and internationally, is more optimistic that a solution will be found that will see Sears Canada continuing to operate in an altered form.
If not, he doesn’t think the impact on the retail real estate sector will be catastrophic — the demise of Sears is something that landlords in Canada have been considering for a long time.
“I think at this point in time, every landlord most likely has already started thinking for quite awhile about what their options B and C would be, and have a game plan at the ready if they are able to get their hands back on the real estate,” said Berkowitz, adding that smaller market landlords may have a more difficult time.
“It’s going to be quite challenging — and don’t get me wrong — some will have to demolish all or part of the Sears box. Some will have to repurpose it.”
It could also represent an opportunity, giving landlords or developers the green light to add residential or office space.
While anchors like Sears used to draw shoppers, now stores like Apple are able to draw more traffic to a mall, using a much smaller footprint — 10,000 square feet instead of over 100,000 square feet, Berkowitz said.
While Sears Canada folding would present a hardship for employees, it is unlikely to have a meaningful impact on the economy, despite the size of the operation, said Doug Porter, chief economist and managing director, BMO Financial Group.
“Target essentially did a hard shutdown just a little bit more than two years ago and they were bigger at the time in terms of employment (17,600 people), and if you look at employment in the retail sector, you would barely notice it,” said Porter.
“There’s roughly 40,000 more people working in retail now than there was before Target shut down,” said Porter.
“I think there will be some short-term pain for the economy and certainly for the individuals involved, but from a broader standpoint, consumers will still spend money, they’ll still go shopping somewhere, whether it’s online or in stores and eventually, I suspect, we’ll see those jobs replaced somewhere else.”
Porter says that in fact, the economy is in a better place now to absorb the shock of the loss.
“I would argue actually that the economy was more wobbly when Target closed. We had just been hit by the oil shock. Recall that the economy was barely growing at one per cent. In contrast, consumer spending has actually been remarkably good over the past year in Canada — real consumer spending is up by almost 4 per cent in the last year.”
Uncertainty in the retail sector has led some investment firms to steer away from retail-based Real Estate Investment Trusts.
“We believe the asset class will continue to suffer from the changing retail industry and REITs owning smaller, non-dominant assets will likely have to reposition or divest a substantial portion of their portfolio,” wrote Frederic Blondeau, director, real estate research, Eight Capital, in a note to investors on Sept. 25.
Blondeau pointed out that Canadian retail real estate is expected to be subjected to growing threats from e-commerce.
Brzezinski said that if Sears Canada asks for an extension on Wednesday in order to finalize a bid, it would likely be granted.