The Latest Sale at Sears: the Building?

Sears Holdings (NASDAQ: SHLD  ) , as you may know, was created in the early 2000's by current CEO Edward Lampert via the merger of Sears and Kmart. Mr. Lampert also happens to own more than 50% of the company's shares. He has been trying for years to turn the business around in hopes of generating a profit for the company and its shareholders. Surprisingly, Lampert's latest move appears to have nothing at all to do with retailing; it has a great deal more to do with making the most out of the company's actual real estate.

Something must be done
Arguably, Sears Holdings has been in serious trouble for years. Revenue fell from approximately $41.6 billion in fiscal 2011 to $36.2 billion in fiscal 2013, which ended in February.

Over this period, the losses racked up by the troubled retailer have been enormous. For instance, in fiscal 2011 Sears produced a staggering $3.1 billion loss. In fiscal 2012 it lost $930 million. And just when investors thought the company might be turning things around, it yielded a loss of approximately $1.4 billion in fiscal 2013.

Clearly, something must be done -- and fast -- to slow these losses; otherwise Sears may find itself in bankruptcy. By glancing at the table below, it is quite obvious that Sears Holdings needs to make some big changes to future business strategies if it plans to earn the type of profits that competitors Macy's (NYSE: M  ) and Dillard's (NYSE: DDS  ) continue to earn.

Company Name

FY 2011 Net Income

FY2012 Net Income

FY2013 Net Income

Sears Holdings

($3.14 billion)

($930 million)

($1.365 billion)

Dillard's

$179.62 million

$463.91 million

$335.6 million

Macy's

$1.26 billion

$1.34 billion

$1.49 billion

A different kind of sale
Sears Holdings' recent moves have led customers to wonder if the company wants to be a department store anymore. On April 4, the company will spin off its Lands' End clothing line into a separate company. Sears Holdings' shareholders will receive 0.3 shares of Lands' End for every share of Sears Holdings that they own. This brand, one of the reasons customers still shop at Sears stores, will cease operating under the Sears umbrella and start making decisions on its own.

This move, however, is just the tip of the iceberg. Not only is Sears eliminating its clothing brands, but it is doing something more drastic: selling stores and cutting down on retail space. This process is just starting. But Foolish investors can simply go to a newly created website, designed by Sears Holdings, to get a picture of what the company has in mind.

To get more familiar with this idea, go to seritage.com; you will see a real estate company offering more than 200 locations and 18 million square feet of space to tenants. What is amazing about Seritage Realty Trust is that it is owned by Sears Holdings. Clearly, Sears Holdings has plans for its stores that involve more than just selling products to consumers. This decision seems to be in the early stages, but it will have major implications for shareholders.

The possible end to retail
Given the losses Sears Holdings has incurred over the last three years, it is clear that the retailer needs a major overhaul. Deciding not to operate as a retailer altogether is possibly the best option, especially in the face of competition from Macy's and Dillard's. However, a complete end to being a retailer does not seem to be in the cards for Sears Holdings.

The company, as of Feb. 1, operates 778 Sears stores and has a total of 105.8 million square feet of sales space. This compares with the numbers listed on Seritage's website, which come to 200 locations and 18 million square feet of available space.

It appears that Sears Holdings has looked at the profitability of various locations and chosen the least profitable stores for sale or lease. The percentage of selling space available through Seritage -- 17% -- doesn't mean the end of Sears as a retailer; it simply means the company is taking a step back from poor locations.

Foolish takeaway
Sears Holdings has a long way to go before it can match the profitability and strength of competitors like Macy's and Dillard's. In addition, time is not on the retailer's side. Recent losses have eaten into its assets, leaving some to wonder if Sears will wind up in bankruptcy court.

However, Sears Holdings' recent moves to make better use of underperforming stores through its new Seritage Realty division show the way in which it plans to use its stores going forward. Time will tell if these moves will work. But Sears Holdings shareholders have reason to hope for a more profitable future since the company is no longer operating as the same retailer it was a few years ago.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 01, 2014, at 2:47 PM, rimratpat wrote:

    Thanks for the Seritage link. I was wondering why the stock chart was looking more bullish as SHLD is skating on the brink of bankruptcy.

  • Report this Comment On April 02, 2014, at 10:43 PM, arydant wrote:

    The Seritige web site is featuring redevelopment of a landmark Sears property near downtown St. Paul. The "Mixed-Use Urban Development" card has been played for the last ten years in this area and has never taken off. The store is in a low income/high crime area that has resisted attempts for change for decades. Looks pretty upscale and hip in the illustrations though.

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