Sears Canada makes big payment to major U.S. shareholders

Shares jump after announcement

TORONTO – Department store chain Sears Canada Inc. is paying its shareholders a hefty dividend as part of a move that will send nearly half a billion dollars in cash back to its U.S. parent company and financier Edward Lampert.

The extraordinary payment of $5 per share that will be made on Dec. 5 is equivalent to about 30 per cent of the company’s latest stock price, and comes as the retailer reported its latest financial results on Tuesday.

Sears Canada (TSX:SCC) is in the midst of a turnaround plan that has involved selling key stores and laying off thousands of employees over the past few years.

The biggest winners in the Sears Canada payout will be its largest shareholders: parent Sears Holdings Corp. (Nasdaq:SHLD), which owns 51 per cent of the company and hedge fund ESL Investments Inc., headed by Lampert, which owns 27.6 per cent. Lampert owns another 10.2 per cent stake in Sears Canada.

Together, the group owns 88.8 per cent of Sears Canada and will receive nearly $453 million as part of the special payment, according to ownership figures tracked by Thomson Reuters.

Another $315 million could be headed to shareholders once Sears Canada decides what to do with the proceeds from the sale of some other assets, which will happen early next year.

Predictably, shares jumped Tuesday after the early-morning announcement but later gave up some of the gains. The stock traded as high as $19.89 — a level unseen since July 2011 — but gave up the bulk of those gains while finishing the session up $1.07 or 6.4 per cent at $17.87.

The dividend increase comes as Sears Canada released its third-quarter results, including an enlarged net loss of $48.8 million or 48 cents per share — mainly due to severance and restructuring costs.

Sears Canada has been downsizing some of its operations and redirecting its merchandising focus in response to intense competition from other retailers, including newcomers Target and established rivals such as Hudson’s Bay Co. (TSX:HBC).

The company says the net loss included $20.2 million for severance, accounting for about half the quarter’s non-recurring items totalling $42.8 million.

Excluding the non-recurring items, Sears Canada earned $7.3 million in the 13 weeks ended Oct. 27 — up from $3.9 million in adjusted earnings a year earlier.

Same-store sales for locations open at least a year improved by 1.2 per cent but overall revenue declined by 6.4 per cent to $982.3 million from $1.05 billion a year earlier.

The company has closed some of its big-city locations in Western Canada and has announced plans to vacate other large stores, including its flagship downtown Toronto location, but continues to operate more than 100 stores as well as an online and catalogue business.

“Gross margins came in ahead of our expectations and the company did a good job controlling costs,” said CIBC analyst Perry Caicco, who has the company’s stock rated as a “sector outperformer” at $16.80 per share.

Sears is a veteran player in the Canadian retail sector but has been revamping its operations.

“This is the first quarterly same-store sales increase for the company since 2008,” said Doug Campbell, the new Sears Canada president and chief executive officer, in a statement Tuesday.

“October was our strongest month of the quarter, during which we adjusted our plans to market conditions and experienced double-digit same-store sales increases in both our apparel and accessories and home and hardlines categories.”

Campbell, who had been a senior executive of the company, was promoted to CEO in September after the sudden departure of Calvin McDonald, who left for a job at cosmetics retailer Sephora.

Under McDonald’s watch, Sears Canada had begun a multi-year strategy to reduce operating costs and improve sales.

Parent company Sears Holdings has faced its own troubles in the United States where it is also trying to transform its business. In late October, the U.S. company said that sales of certain Canadian department stores would give it the cash it needs to have “financial flexibility and accelerate our transformation.”