Sears CEO proposes selling off real estate

The retailer is trying to avoid bankruptcy with a move it’s tried before

To stave off bankruptcy, Sears CEO Edward Lampert has put forward a plan that would significantly shrink the struggling retailer’s looming debts by selling off nearly all of its remaining real estate holdings.

Selling about 200 companyowned stores, as Lampert’s hedge fund, ESL Investments, is proposing, certainly would lighten Sears’ debt load. But even if the plan succeeds in preserving the company, it likely would accelerate the decline of Sears’ physical presence.

The bricks-and-mortar footprint of Sears Holdings Corp. already has shrunk dramatically amid more than $11 billion in losses since 2011. By the end of the year, the Hoffman Estates-based company will have half as many Sears and Kmart stores as it did just two years ago.

Lampert’s previous attempt at leveraging Sears’ real estate to keep the company going offers a window into what losing control of almost all of its remaining properties could mean for the retailer’s business in the long term.

In 2015, Sears sold 235 stores, along with its stake in joint ventures involving 31 more properties, to real estate investment trust spinoff Seritage Growth Properties. Lampert is both a stakeholder in Seritage and its chairman.

In the years since, the retailer’s presence has been shrinking at those properties as space is leased to new, higher-paying tenants. Nearly a quarter of the former Sears stores still in Seritage’s portfolio are no longer in use by the retailer. Sears and its sister brand Kmart share space with at least one other tenant in about half the remaining occupied stores, according to the company’s most recent financial report. Sears and Kmart now account for less than half the rent Seritage collects each year.

Closing weaker stores isn’t necessarily bad news. Sears has said store closures are part of its plan cut costs and focus on the bestperforming locations. But shuttering unprofitable stores won’t automatically bring shoppers back to those that remain.

“If you get rid of all your underperforming stores, and the ones that are left are still underperforming, you just have a smaller underperforming company,” said Bryan Gildenberg, chief knowledge officer at Kantar Consulting.

ESL said its proposal, made public Monday, would free up cash to invest in Sears’ retail business by reducing the company’s debt. Lampert and the hedge fund hold the vast majority of the $1.5 billion Sears would repay. The repayment would be funded by selling the properties, either to outside buyers or, if the company hasn’t sold enough to pay off real estate debts in one year, to a group of lenders willing to extinguish that debt.

The deal would guarantee a minimum value for the sale of Sears’ property, reduce its cash interest payments and give the retailer a share of profits from real estate sales above a certain thresh-

old, ESL said. An unspecified number of stores sold to lenders would be leased back to Sears, much the way the retailer initially kept leasing all but a handful of the Seritage properties.

But the amount of space in those stores devoted to Sears and Kmart could shrink over time, as it has at many of the properties Sears sold in 2015. Buyers will come up with a business plan “geared towards optimizing the value of the real estate portfolio,” the ESL proposal says.

Sears was a dominant force in retail when many malls and shopping centers were being built, so its stores are in “superior real estate locations” with opportunities for new development, Seritage said earlier this month in a report to investors. Among them: the last two Sears stores that were in operation in Chicago, where plans call for a mix of residential and retail space.

Redevelopment is further along in suburban North Riverside, where Sears downsized and Seritage brought in a gym and a Round One bowling and amusement center. A Seritage-owned Sears store in Springfield, meanwhile, was replaced by Orangetheory Fitness, Binny’s Beverage Depot, two restaurants and new stores, including off-price retailer Marshall’s.

Erik Gordon, assistant professor at the University of Michigan's Ross School of Business, said he’s skeptical the properties that would be part of the ESL proposal are as valuable as those that were previously sold to Seritage.

“It’s not the stuff you could have disposed of earlier in a way that gave you better returns,” Gordon said.

Regardless of what happens to the Sears-owned stores, more closures are planned, including another 149 by the end of the year. There were 866 Sears and Kmart stores in the U.S. as of last month.

Sears’ goal is to get down to a solid base of stores it can build on, and the retailer hopes it can stabilize the number “at a meaningful level in the near future,” Lampert said earlier this month in a news release discussing the company’s most recent quarter earlier.

As stores closed, quarterly sales at those open at least a year have declined. However, the most recent quarter, with a 4 percent sales decline, was an improvement from an 11.5 percent decline during the same quarter last year. In July and August, sales at stores open at least a year increased modestly, Lampert said in the news release.

A number of retailers reported strong sales in the most recent quarter, but even if confident consumers felt like they had more to spend, “they’re still going to spend it at the best places with the best value they can get,” said Perry Mandarino, senior managing director at investment bank B. Riley FBR.

ESL’s broader proposal might buy Sears the time it needs to avoid bankruptcy court, Mandarino said.

Others were more skeptical. Fitch Ratings said it thinks the real estate proposal will be difficult to execute. And even if it does go through, Fitch said, it won’t be enough to prevent another restructuring given the company’s ongoing losses.

The plan might help Sears’ financial woes, but it won’t address the company’s underlying struggle to bring back shoppers, Kantar’s Gildenberg said.

“I don’t think Sears’ problem is money; it’s strategy and relevance to the shopper, and money isn’t going to help fix that,” he said.