Sears Canada’s Divestitures Present Opportunities for Other Retailers

When one company reduces its presence in a geographical area, those consumer dollars go elsewhere.

Jan 22, 2014 at 5:30PM

Sears Holdings (NASDAQ:SHLD) is making as many moves as possible to set itself up for survival. However, the path Sears is taking is often the sign of a dying business. Is it possible for Sears to turn itself around? The short answer is yes. Anything is possible, and more improbable turnarounds have taken place. However, the unfortunate follow-up question might be: is it likely for Sears to turn itself around? The unfortunate answer is "no." 

Waning demand 
Most retailers that continuously divest are doing so due to waning demand. The best chance for Sears to survive is to buy time while attempting to figure out a new business model. A new business model hasn't been revealed, but Sears is buying time. The most recent example is the announcement of Sears Canada cutting more than 1,600 jobs, which equates to approximately 7% of Sears Canada's employees. Note: Sears Holdings owns a 51% stake in Sears Canada. 

Over the next nine months, Sears Canada will outsource three call center operations to IBM. This will reduce Sears Canada's headcount by 1,345. And 283 employees will be cut right away due to the reorganization of the logistics unit and streamlining opportunities. Though unfortunate for many people, 1,628 in this case to be exact, the best way for a retailer to cut costs is by reducing headcount.

Furthermore, Sears Canada currently has 181 locations. That number will be reduced to 109 by April. This is important for other retailers situated in Canada thanks market-share gain opportunities. For instance, if Sears Canada stores close up shop, those consumers will spend their money elsewhere. 

These recent moves will not directly help Sears' top line, which has been falling rapidly over the past five years:

SHLD Revenue (TTM) Chart

Sears' revenue (trailing-12 months) data by YCharts

However, it will allow Sears to free up some capital that can be used to reinvest in the business , which might have the potential to drive the top line. This move should also have a small positive impact on margins and the bottom line. But investors aren't looking for companies that are seeing declining revenue and small upside potential on the bottom line. Investors want to know what companies will stand to benefit from another company's divestitures in a geographical area. 

Target's Canadian expansion
Target (NYSE:TGT) now has 124 locations in Canada. That's the good news. The bad news is that Target hasn't been as well received by Canadians as the big-box retailer had expected. There are two primary reasons for this. One, Target hasn't been able to keep popular merchandise on shelves. This is a potential long-term positive because it indicates high demand. The other reason Target hasn't fared as well in Canada is pricing.

Approximately 75% of the Canadian population lives within 100 miles of the U.S. border. Many of these people drive across the border for better pricing on retail goods. Therefore, those who have become accustomed to Target pricing were none too pleased to see Target Canada's pricing higher than in the states. Target has attempted to combat this by pointing out REDcard savings and its better pricing than many local retailers. We'll see if it works out, but after Target expected to be profitable in Canada in the fourth quarter or 2013, it's now expecting to be profitable in Canada in the fourth quarter of 2014.

It looks as though while Target might see market-share gains related to Sears Canada's divestitures, it's not likely to be the top beneficiary.

A larger Canadian presence
Wal-Mart Stores (NYSE:WMT) launched in Canada back in 1994. And it launched its Canadian Walmart Supercenters in 2006. Currently, Wal-Mart has a total of 382 locations in Canada, 223 of which are Walmart Supercenters and 149 of which are Walmart Discount Stores. But what's most important here is that this small store count compared to Wal-Mart's presence in the United States (4,800 locations) allows for significant growth potential.

In fact, Wal-Mart is currently the fastest-growing retailer in Canada for groceries as well as general merchandise. If any retailer is going to benefit from Sears Canada's divestitures, it's likely to be Wal-Mart. Keep in mind that Wal-Mart sells everything. While it might not offer the same brands as Sears, consumers look at Wal-Mart as a one-stop shopping destination regardless of what they want or need. 

The bottom line
Sears Canada is divesting. This is potentially good for the bottom line, and it will help Sears buy time. However, investing in retailers seeing waning demand is rarely a good idea. Target's Canadian presence is expanding, but it hasn't met its own expectations and Canada has proven to be a challenging environment.

Wal-Mart is already the fastest-growing retailer in Canada for groceries and general merchandise, and Sears Canada's recent divestitures are only going to help fuel that growth. Therefore, if you're looking to invest in retailer growth opportunities in Canada, then Wal-Mart is likely to be your best option. Please conduct your own research prior to making any investment decisions.

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