Dec. 17 (Bloomberg) -- Soheil Khojasteh walks through the Sears Canada Inc. department store in Toronto’s Eaton Centre without a second glance at men’s shoes on sale for 40 percent off, gold earrings marked down 65 percent and signs declaring “Everything Must Go!”
“I don’t shop at Sears for clothes to be honest, I just shop at Scotch & Soda and Club Monaco,” the 24-year-old dental student said yesterday, referring to the boutique stores at the downtown mall in Canada’s biggest city. “I don’t think Sears has what I look for in terms of my style.”
With urban shoppers like Khojasteh going elsewhere, Sears Canada, the country’s largest department store chain, is closing the Eaton Centre store along with four other locations as it shifts focus to middle-class families in smaller rural and suburban markets. The closures may not be the last, Chief Executive Officer Douglas Campbell said.
“There could be other opportunities where there is real estate that is greater than the trading value, it all depends what the offer is on those particular properties,” Campbell said in an interview at the Eaton Centre store on Dec. 13. There is “opportunity for more store closures.”
Campbell is trying to stop a streak of 20 straight quarters of declining year-over-year revenue by catering to smaller markets where the brand has a larger presence, while squeezing value out of its real estate assets for shareholders, including Sears Holdings Co. and its CEO Edward Lampert.
After making C$400 million ($378 million) on its latest lease sales -- which it used to fund a special C$5 dividend for shareholders -- Sears will have 111 stores across Canada. The company considers 17 of those to be in urban markets and the rest in mid-sized markets, Vincent Power, a spokesman for Sears Canada, said in an e-mail. Sears also has a network of 241 smaller Hometown franchises in rural or small markets.
Lampert has been spinning off and selling assets at Sears Holdings, most recently the profitable Lands’ End Inc. clothing brand, to fund a turnaround of the parent company. In addition to Sears Holdings’ 51 percent stake in Sears Canada, Lampert directly owns 27.6 percent of the Canadian unit, through his own investment and hedge fund ESL Investments Inc., according to data compiled by Bloomberg.
Retailers like Sears have found themselves under pressure in Canada amid an influx of new competition from the U.S., with Target Corp. and Wal-Mart Stores Inc. expanding into the lower price end of the market and luxury retailers like Nordstrom Inc. and Saks Fifth Avenue preparing to enter the luxury segment.
“We are strongest and our heritage is in rural and suburban markets and that is the core and model which we need to grow from,” said Campbell, named CEO on Sept. 24 after former CEO Calvin McDonald left to join cosmetics company Sephora, a unit of LVMH Moet Hennessy Louis Vuitton SA.
Sears Canada has gained 32 percent this year, or 82 percent including the special dividend paid on Dec. 6, according to data compiled by Bloomberg. The stock fell 0.6 percent to C$13.30 at 4 p.m.
Sears Canada announced Dec. 13 that SHS Services Management Inc., which provides home services like roof and window installations under the Sears Homes Services banner, entered receivership and said it would no longer provide Sears with its services. Sears is working with the receiver, PricewaterhouseCoopers LLP on a viable option for the future of the home service business, the company said.
As SHS and Sears were separate entities there will be no impact on any business within Sears Canada, Power said in an e-mail yesterday.
“They’re going to do what’s best for Sears Holdings,” said Don Lato, who manages about C$50 million, including shares of Sears Holdings, as president of Padlock Investment Management Inc. in Toronto. “He’ll sell the leases that he can for the most profit and if there’s something left as an ongoing entity - - and there may not be, it may be the value is truly in the leases -- you may see potentially a wind up of Sears two or three years from now.”
For Campbell, the focus is on containing costs and serving middle-class families. Sears’s business has shrunk in recent years but its costs haven’t declined at the same pace, Campbell said. The key to stabilizing the business now is bringing costs in line with revenue, he said.
“We have to get the operating costs right for our business,” he said. “We used to be a C$6 billion business, now we’re closer to a C$4 billion business and those adjustments haven’t been made in our costs.”
As an example, he points to the almost 800 job cuts in November in the company’s parts and repair business.
As for the C$315 million Sears will receive after selling its interest in eight Quebec properties, Campbell said he will determine how to use the money when the deal closes, though the stores there would stay open.
Sears Canada’s third quarter revenue declined 6.4 percent from a year earlier to C$982.3 million and the net loss rose to 48 cents per share from 22 cents a year earlier due in part to restructuring costs, according to a statement from the company. Sales in stores open at least a year increased 1.2 percent, the first quarterly same store sales increase since 2008, according to the statement.
“Usually a company will take its proceeds when they’re trying to reinvent themselves, and use that in the process of reinventing themselves,” said Alex Arifuzzaman, a partner of Interstratics Consultants Inc., a Toronto-based retail consulting firm. “In this case from what I’m seeing they’re giving it back to the shareholders, which is more of a liquidation process. It’s a slow motion liquidation.”
Christine Hong, a 26-year-old student, was also making a beeline through Sears yesterday, clutching a Zara bag, on her way to other stops at the Eaton Centre. Along with Inditex SA’s Zara she also frequents Ralph Lauren Corp.’s Club Monaco outlet and Urban Outfitters Inc. stores, but not Sears.
When asked what she hopes will take Sears’ place when it closes, Hong answers immediately. “Nordstrom.”
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