Retail Rap: Sears Goes on a Selling Spree
About a year and a half ago, I wrote the following about Sears in an article that appeared in this space: “the company has been run less like a retail operation and more like a REIT for many years now.”
It’s fascinating to me that, as of April 1, Sears went from being run like a REIT to being run as a REIT — at least partly. The Hoffman Estates, Illinois-based company formed a new REIT, Seritage Growth Properties, with the stated intention of raising a cool $2.5 billion by selling and leasing back 254 stores. Sears promptly began moving forward with those plans, and has since announced three separate deals to do just that with Macerich Co. (nine properties); General Growth Properties (12 properties) and Simon Property Group (10 properties). The deals are joint ventures, with Macerich, General Growth and Simon contributing $150 million, $165 million and $114 million respectively for a 50% stake.
Deals like the ones that have been announced so far are certainly proving that Sears can make money by selling its assets, but the question is, why? To what end? Sears will be leasing the stores back and will continue to operate them, but is this just a way for a struggling retailer that hasn’t turned a profit in years to keep operating — or is there something deeper?
On one hand, these deals have all been done quickly and announced almost simultaneously, which speaks to some level of strategic planning. On the other hand, we have yet to see any public sign that Sears understands and is attempting to address its liabilities as a retailer. What is the long range plan? It seems to me that the missing piece of the puzzle is any sort of statement of a new direction or big-picture strategy designed to turn around the retail portion of the business.
Sears’ only points of differentiation have been appliances, with the Kenmore brand, and tools with Craftsman. Those are two very recognizable Sears-owned brands that not only have a good reputation with consumers, but also tend to receive high ratings from independent outlets like Consumer Reports. Ultimately, however, those two brands represent a very small portion of a very large store, and it’s tough to generate any real optimism for Sears’ retail prospects going forward. In my opinion, Sears as a retailer is likely too far gone to survive — and already on life support in many ways.
While Sears can use this new influx of cash to pump money into its retail operations, would that not be throwing good money after bad? Absent a cohesive and workable strategy, this seems like a case of wasting resources trying to keep afloat an already sinking ship. More importantly, it isn’t sustainable in the long run. It’s somewhat analogous to a farmer who keeps selling off acreage in order to keep operating as a working farm. You can only do that for so long before the whole thing breaks down.
Now to be clear, Sears is still a very viable company in terms of its real estate holdings. And it’s not entirely clear to me whether the decision to sell now isn’t part of a broader real estate strategy, or is at least in part due to the fact that Sears might feel like the time is right. With commercial real estate prices where they are, it’s definitely not a bad time to be selling — there is a lot of investor money sitting on the sidelines, and Sears clearly has something investors want. To be able to generate this amount of money from what amounts to a relatively small percentage of your overall portfolio means that this doesn’t qualify as a fire sale. It also speaks to the value of the real estate, itself, which is substantial. Not only does this say something about the value of Sear’s real estate, but the value of mall real estate in general. At a time when many people are writing the obituary of the traditional mall, this is a reminder that malls typically occupy some very desirable real estate, and the long term positioning of a mall is a complex calculation that involves more than just pedestrian traffic and sales-per-square foot.
I don’t know about you, but I’ll be watching with interest to see what Sears does next. Is this just the first step in a turnaround effort for this floundering retailer? How are they going to use the money? Is there a surprise in store? It will be interesting to watch and see what unfolds in the months and years ahead. Let’s keep the conversation going — leave a comment below or send me an email: [email protected].