TORONTO – A new round of store closures by Sears Canada, which includes its flagship location in Toronto’s Eaton Centre, has raised questions about the company’s turnaround strategy and which American retailer will claim that coveted spot.
Sears (TSX:SCC) said Tuesday it was selling the leases on five department stores, in a $400 million deal, which comes as the company pushes ahead with a broader effort to revamp its operations that will also see about 1,200 employees lose their jobs.
The transactions amount to the biggest sale of leases since the company began to shed assets and cut jobs in an effort to revitalize its struggling operations amid intense competition.
Under the agreements, store leases for Sears locations at Sherway Gardens in Toronto, the Markville Shopping Centre in Markham, Ont., London-Masonville Place in London, Ont. and Richmond Centre in Richmond, B.C. will also be sold back to mall operator Cadillac Fairview and its partners.
Sears Canada says about 965 employees at its stores will be affected, though they will have the option to apply for other available jobs within the company.
An outdated distribution centre owned by Sears will also be closed in Regina next year, affecting another 276 jobs, while the company plans to replace it with a new facility in Calgary that would support its online and catalogue business.
The decision by Sears to exit the Eaton Centre is especially notable because it’s one of the company’s most visible Canadian stores, located in a central tourist area.
The five-storey retail space is unique because shoppers entering the north end of the mall are forced to walk through the store to access most other stores. That design makes it especially appealing for retailers who want to increase traffic, but the massive square footage of the complex will be expensive and daunting to occupy for most companies.
Some of Sears’ previously-divested locations have already been picked up by U.S. high-end retailer Nordstrom, which used them to launch its first stores in Canada. That has prompted speculation that Nordstrom may also be eyeing the Eaton Centre or Sherway stores, which are seen as prime real estate for retailers.
Nordstrom would be the most obvious choice for that space, and a much better fit than Quebec-based Simons, another large retailer some have suggested could move into such a key spot, said John Crombie, senior managing director of national retail services at Cushman and Wakefield.
“The American brands still like Canada, are interested in coming to Canada,” said Crombie.
“Nordstrom would be highly interested in it. Cadillac already has a good track record with Nordstrom and I would think they would love to be in the downtown core.”
While Sears’ decision to give up some of its choice locations may be hard to understand, he added, it’s also important to consider that leases can be liabilities. When a tenant wants to get rid of such liabilities, they sometimes go to the best real estate first.
The sell off has also prompted questions about the viability of Sears’ attempted turnaround, especially after Calvin McDonald, the retailer’s former CEO, abruptly resigned last month for a job at North American beauty giant Sephora.
Evan Mann, senior analyst at New York-based Gimme Credit, said his firm remains “skeptical” on the long-term prospects for Sears Holdings.
“This mornings’ announcement strikes us as a ‘sugar coated’ continuation of the struggling retailer’s orderly liquidation,” he said in a note to clients.
Mann also pointed to the troubles that Sears Holdings Corp. is having in the United States, where it said Tuesday it would consider separating its Lands’ End and Sears Auto Center businesses from the rest of the company. Sears Holdings said it would likely pursue a spinoff of Lands’ End and not a sale.
Despite the challenges in Canada, the sale of leases is part of Sears’ turnaround strategy, said Doug Campbell, who replaced McDonald as CEO. He said it doesn’t mean the company is moving away from urban markets or engaging in any kind of asset sell off.
“I don’t have any strategy to sell stores, nor am I approaching anyone to try to sell stores,” Campbell said in an interview.
“This is an example where if I am approached for an offer for a piece of property, whose real estate value far exceeds the trading value, it’s an offer that I have to take seriously.”
Campbell said the company would do everything possible to mitigate the impact on those losing their jobs as a result of the changes, and reassured consumers that the company wasn’t going anywhere.
“We continue to invest in the business and to be as relevant as we can to Canadian customers,” he said.
Reaction on Twitter was mixed, with some lamenting the decline of what was once a retail giant and others looking forward to new shopping alternatives.
“More bad news for #Sears. Retail Darwinism in action,” tweeted one user.
“#Sears is closing #Toronto store because nobody btw (between) 14-40 yrs shops there,” said another.
“I really hope @Nordstrom replaces #Sears in #LdnOnt Masonville Mall!,” another user said.
Sears will leave most of the stores by Feb. 28, 2014, but will continue to operate its headquarters on the top four floors of its space in the Eaton Centre, where it opened in 2000. The stores in Markham and Richmond will be vacated before Feb. 28, 2015.
After the latest round of lease sales, which are expected to close Nov. 12, Sears will have 111 department stores across the country.
Sears Canada also recently sold leases for several prominent stores, including Toronto’s Yorkdale Shopping Centre and Square One Shopping Centre in Mississauga, Ont. Those were in addition to leases sold last year, including one at Vancouver’s Pacific Centre.
On the Toronto Stock Exchange, Sears shares were trading up 81 cents, or nearly six per cent, at $14.35.