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Sears Holdings' Store Auction Won't Help Enough

By Rich Duprey – Apr 19, 2018 at 11:04AM

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At some point, the retailer will have burned all the furniture to heat the house.

Sears Holdings (SHLDQ) is putting a bunch of its stores on the auction block. In a bid to reduce its size, increase its liquidity, and, hopefully, one day, return to profitability, the old-line department store chain is auctioning off 16 properties.

The properties being offered are mostly located in shopping malls and are being advertised as sale/lease-back deals, meaning Sears would presumably continue operating the stores in the locations after the transaction was completed and pay rent to the new owner. However, The Wall Street Journal, which first reported the auction, says some of the properties have flexible lease agreements, suggesting Sears might downsize its presence in some of them, allowing the new owners to redevelop the space into "self-storage, hotel or residential space."

Abandoned shopping mall

Image source: Getty Images.

Selling fixer-uppers

Sears has done that before. When Chairman and CEO Eddie Lampert created the real estate investment trust Seritage Growth Properties (NYSE: SRG) in 2015 to serve as the vehicle to help the retailer monetize its asset portfolio, it began divvying up the space inside some of the hundreds of stores Sears sold to it and rented it out to other retailers like Dick's Sporting Goods, Petsmart, and outlet department stores such as Nordstrom's off-price Rack chain and Saks Off 5th.

Yet whereas Sears was paying bargain-basement rents for the space, Seritage turned around and jacked up the rents on the new tenants. In its latest annual report, the REIT says the annual average rent per square foot that Sears pays on 170 leases is just $4.57, while other tenants pay anywhere from $12.73 to $17.94.

And others do want the space Sears is selling. The Journal [subscription required] quoted commercial real estate services firm Cushman & Wakefield as saying some 200 groups -- including developers, retailers, and real-estate investment funds -- have expressed interest in the auction.

Recently, Pennsylvania REIT said it had completed its "anchor replacement initiative" by having off-price chain Five Below and TJX Companies' HomeGoods chain occupy space that was vacated by Sears, while Simon Property Group detailed plans to redevelop five former Sears stores by bringing in new retailers as well as installing restaurants and dining halls, entertainment venues, residential spaces, and fitness centers.

Downsize out of existence

Although the healthy response to Sears' auction is a good sign for the retailer, as it suggests it will be able to raise substantial amounts of cash through the process, it doesn't make it any better off in the marketplace. Sears Holdings -- which owns both the Sears and Kmart brands -- is still suffering from a crushing exodus of customers that's only accelerated as the department store chain has sold off or otherwise disposed of its assets.

Comparable-store sales at Sears plunged over 18% in the fourth quarter and were down an equally devastating 12% at Kmart. Although the company posted a nominal profit for the period of $182 million, that was the result of benefiting from over $200 million worth of asset sales, and reducing expenses and costs by nearly $2.2 billion as a result of closing more than 400 stores over the past year.

Lampert's ability to secure debt extensions and seize access to short-term sources of liquidity caused S&P Global Ratings to upgrade Sears' corporate credit rating to CCC-, or junk status, and the maneuvers allowed the Pension Benefit Guaranty Corp. to give Sears the green light to sell off more properties that had previously been "ring-fenced," or had liens placed on them to protect their value.

While these exercises are in line with Lampert's capabilities as a hedge fund operator, it does nothing to shore up Sears' abilities as a retailer. At some point, Sears is going to run out of stores to close and assets to sell, and at that point, the music will stop, and Sears will be left without a chair in which to sit.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Five Below and The TJX Companies. The Motley Fool has a disclosure policy.

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