Sears is a real estate play after all
Retail industry watchers have been saying for years that Edward Lampert’s acquisitions of Kmart and Sears were nothing more than real estate plays. After all, there has been very little evidence over the years to suggest he knows what it takes to run a retail empire, particularly one made up of two large and struggling chains. So the recent news that Sears Holdings was selling some of its properties to raise cash provided an opportunity for many to engage in self-congratulation.
Earlier this month, Sears Holdings announced real estate deals including:
- The formation of a real estate investment trust (REIT) with Seritage Growth Properties to acquire 254 of its properties, which will be leased back to Sears Holdings. The company is expected to earn $2.5 billion from the deal.
- The planned creation of a joint real estate venture with General Growth Properties whereby Sears will contribute 12 properties valued at $330 million. General Growth will contribute $165 million to the joint venture.
Yesterday, the retailer announced the creation of another joint venture, this one with Simon Property Group, in which Sears will sell and lease back 10 of its properties valued at $228 million. Simon will contribute $114 million.
"We are pleased to reach this agreement with Simon Property Group, which is an important step in Sears Holdings’ continued transformation to a membership company, without the significant asset intensity of its traditional retail business," said Mr. Lampert in a statement. "This transaction, taken together with our other initiatives to create shareholder value through our vast real estate portfolio, enhances Sears Holdings’ financial flexibility to invest in longer-term strategies such as our membership and integrated retail platforms."
- Sears taps its real estate to bring in cash – CBS Moneywatch
- Sears Seeking Additional Capital In Deal With Simon Property Group – Forbes
- Sears Holdings and Simon Property Group, Inc. Form A 50/50 Joint Venture To Unlick Real Estate Value At 10 Sears Holdings Properties At Simon Malls – Sears Holdings Corporation
- Sears Holdings And General Growth Properties Announce 50/50 Joint Venture And Sale-Leaseback Involving 12 Sears Holdings Properties Located At GGP Malls – Sears Holdings Corporation
- Sears Holdings Announces Filing Of S-11 Registration Statement By Seritage Growth Properties – Sears Holdings Corporation
Discussion Questions
Will Sears’ recent real estate deals help make it a stronger retail business? How far along is Sears Holdings, in your opinion, in its “transformation to a membership company” and will this mean future success?
Textbook example of how to mismanage a formidable brand that reaches back long before Lampert made it irrelevant.
Spinning off real estate assets to fund operations or ongoing transformation (we’re in year three) buys time and can only go so far.
The real test is whether or not Sears is bringing new customers through their doors and online. What does the brand stand for in this congested retail landscape? What reasons is Sears giving consumers to shop and return again and again—what is its identity?
Stronger retail business? I can and do wish for that but the past track record suggests otherwise.
Do Sears and Kmart matter? These famous retailers are pawns in a billionaire’s real estate game, and both have suffered to the point of being beyond repair.
No, because instead of investing any proceeds in its remaining stores to make them at least minimally shoppable, Lampert will instead focus on the so-called transformation, which really only fits his vision of the future U.S. retail. Plus I’m very much skeptical of how successful its member strategy actually is. We don’t have a clear picture of how many are paying members. And despite stronger sales from these members, there sure aren’t enough to offset the large and ongoing sales declines.
I don’t know what the heck a “transformation to a membership company” means—and they certainly haven’t spent any time trying to explain it to shoppers. I can’t make myself see this as anything more than a deal to line pockets while sucking Sears dry.
It is still not about making it in retail. It has always been about real estate. The retail company is worthless (actually may have a negative net worth on the balance sheet). In the long term, this deal moves cash out of the retail business into the hands of the stockholders.
The objective of a company is to increase shareholder value. To take Sears and Kmart and combine them into a sustainable retail business was never in the cards. They were on their way to dead before Lampert got involved. His strategy for the shareholders is right on. Why would one continue to sustain a retail company when the objective is shareholder ROI?
Certainly this approach generates some cash. Now how will that money be used? Today consumer experience at retail is critical. Will some of that money be used to experiment with different retail experiences or will it be used as a way to easily close retail locations down the road? This move, by itself, is not enough to determine what direction or strategy will be followed.
Yes.
The next step is to sell the stores to someone who actually knows how to run them (and who will accept Lampert’s terms for the real estate leases of course).
Just the final steps in the plunder of a once-fine retailer with fees to the Masters of the Universe and hopefully distributions to the shareholders. Sadly the employees lose everything. All Sears does is increase their operating costs through new lease payments which will just accelerate the coming cash crunch. So why not stop the charade, distribute the cash and free up the space for redevelopment by retailers who can utilize the space?
Wish I could say I see the strategy on the retailing side, but I don’t. A real estate play is the more clear vision I can see for Kmart and Sears, as has been suggested from the start.
Like Mohamed Amer says, they are just buying time. The dollar amounts are small and they should burn through it fairly quick, covering their losses. Sears and Kmart are low-volume zombie stores. For all practical purposes they are closed.
Poor Sears and Kmart. They have so lost their ways. Sadly their business models, affiliations and brands (with the exception of Crafstman) have got them in the middle of nowhere. Maybe the best real estate play for Sears is to subdivide into not shops, but affordable living spaces with a new brand called NotLofts. That way consumers can live by the mall, shop by the mall and eat in the mall. Covered parking optional!
No, huh and no. Why would I, or anyone else for that matter, want to be a Sears member? What’s the value proposition for customers?
I too am befuddled at how real estate deals contribute to their business as retailers.
With that said, I have seen some attempts by Sears Holdings over the past few years to try a few things but none of them appear to have worked. I was equally befuddled when they tried doing something along the lines of data center processing. I have certainly seen nothing to indicate a move to a membership company.
As much as we hate to see retail icons go down, this one is surely headed that way. For my two cents.
Merging two weak retailers does not give you one strong retailer, it only gives you one larger weak retailer. Sears Holdings has done everything it can to turn off consumers. Reverting back to their old tired merchandising leaves it closer to the end than having any hope. Sears Holdings will not be a stronger retailer by selling off its real estate. It will only obtain some cash to keep the company alive for a year or two. Sears Holdings becoming a membership retailers is laughable. Who wants to pay a membership fee for poor merchandising and customer service? The company requires a complete makeover including a name change after they determine what type of retailer they want to be.
Based on the Instant Poll responses, it appears Sears can’t even fool some of the people anymore…it will be an accomplishment if they can struggle back to zero credibility.
The real questions at this point are: 1) could someone actually interested in the company (as a going concern) have been able to effect a turnaround—notice this is a past-tense question—and 2) in an overstored world, how many of the sites have significant value?
Working capital never hurts, but this is less about retailing per se, and more about ROI from the broader asset base. Insofar as the leverage of real estate to drive market level returns, etc., keeps Sears on the radar, it’s bound to be good for the company—as opposed to subpar ROI which can only lead to breakup, shut down, etc. As for the retail operations themselves, I hope this provides cash while keeping the focus on retail. Strategically, they have to sell product to be “Sears” per se.
It gives Sears short-term cash and easier “out” for underperforming stores. The main problem is increased investment in a flawed strategy will only hasten the inevitable outcome.