Last year I wrote several articles focused upon the underlying value of Sears Holdings (SHLDQ) real estate assets far exceeding its market capitalization. Fellow Fool Mark Holder's recent article does a great job of summarizing this investment thesis. Last year I believed that real estate initiatives announced by CEO Eddie Lampert clearly signaled that he understood how to monetize the vast Sears real estate portfolio. Now I have my doubts.
Why I was overly optimistic
It seems that I read too much into Mr. Lampert's 2013 announcement of real estate initiatives Seritage and Ubiquity Critical Environments. Seritage was focused on the redevelopment of valuable infill urban properties as well as marketing excess retail space and land parcels. Ubiquity was tasked to assess existing Sears and K-Mart sites for their potential redevelopment into data centers; and the addition of cell towers at many of the over 2,000 existing properties. It sounded to me like an excellent plan. But I had also assumed that Sears's management would have followed up quickly to announce projects breaking ground. It seems like Sears was selling the sizzle but forgot to serve up the steak.
Where's the beef?
In order to "move the needle" for a company like Sears that owns and leases over 240 million square feet of space it would require a massive allocation of corporate resources. Currently, on the Sears Holdings corporate website homepage there is no mention of any significant real estate projects.
Real estate developments of any significant scale often take two or more years to go through entitlements, plan reviews, and permitting. This is a daunting gauntlet even for experienced developers who have local knowledge and boots on the ground. Mall landlords like giant Simon Property Group, (SPG -1.50%), Taubman Centers, (TCO), and Federal Realty Trust (FRT) have demonstrated the ability to successfully navigate the approval process. They have the core competencies to: finance, construct, lease, and manage large retail developments profitably. Sears desperately needs to team up with companies that have these types of skill sets.
The recent DICK's Sporting Goods sublease at the King of Prussia Mall announced by Sears on Jan. 16, 2014 seems like a step in the right direction. However, it is a one-of-a-kind deal in a very successful Simon mall. Subleasing or selling prime Sears locations is akin to drilling a second hole in a leaky lifeboat to let the water out. Not a great plan. Prime retail locations provide Sears with the highest sales per square foot. The Sears real estate challenge still remains how to quickly position the numerous fair-to-poor Sears and K-Mart locations for profitable redevelopment, joint venture, or sale.
Sears Shop Your Way vs. Amazon.com
Kudos to Mr. Lampert for having the vision and backing it up with an investment in both time and money to attempt the transformation of Sears/K-Mart from a bricks and mortar retailer into a Web 2.0 members focused retailer a la Amazon.com (AMZN -8.43%). The Shop Your Way.com initiative has been growing as a percentage of Sears's sales, while same store sales at K-Mart and Sears have recently declined 9.2% and 5.7% respectively.
However, in order to grow The Shop Your Way program, customer incentives have also negatively affected the Sears bottom line. For the full year ending February 1, 2014, Sears expects to report a loss between $1.3 billion and $1.4 billion, which equates to a loss of between $11.85 and $12.88 per diluted share.
Wall Street rewards Amazon for increasing market share without being held accountable for making a profit. Amazon.com also has the Kindle reader eco-system of e-books and Amazon Prime memberships. The free two-day shipping and streaming content libraries function to bind customers closely to the Amazon platform. When you combine that with competitive pricing and a commitment to customer service, it isn't surprising that Amazon continues to gain market share.
Sears Holdings unfortunately does not get that free pass. Like most public companies, Sears is expected to earn a profit, generate free cash flow, and have the ability to pay shareholders a cash dividend or reinvest the cash to help grow a thriving business. Sears does not own a library of popular TV shows and movies. However, it does have legacy pension fund obligations and a significant amount of debt.
When a company is hemorrhaging cash, time becomes the enemy. Sears did not cash in on Seritage or Ubiquity during 2013. During the recent Jan. 9, 2014 Sears's investor update there was no mention of any real estate strategic partnerships or development joint ventures. Unfortunately, this omission speaks volumes. I am now concerned that any meaningful monetization of Sears Holdings real estate assets will be too little too late.