A grim indication of its financial struggles, Sears Holding Corp. is closing several stores in Mississippi, including seven Kmarts and five Sears stores.
Howard Rieff, Sears Holdings director of corporate communications, said, “The store closures are part of a series of actions we’re taking to reduce on-going expenses, adjust our asset base, and accelerate the transformation of our business model. These actions will better enable us to focus our investments on serving our customers and members through integrated retail — at the store, online and in the home.”
The store closings are part of nationwide trend for Sears, which has been shuttering locations quietly in both the US and Canada. Over the last eighteen months, Sears has sold almost a dozen stores, some of them admittedly among their best money makers. Some have noted that this is an unconventional strategy since retailers typically invest more money into their top performing locations, rather than unload them. Robert Futterman, chief executive of RFK, a realtor which specializes in leases to retailers, said, “Retailers invest in their best stores and refurbish them, they don’t sell them.”
Of course, a dozen locations comprise a miniscule fraction of Sears’ massive holdings, with more than 2,000 stores in the US and another 148 scattered about Canada. Still, the sale of profit-generating stores is evidence of its straitened circumstances; while the better locations are more lucrative pieces of realty to move, such a strategy obviously diminishes the company’s ability to make more money by moving product. Also, worried investors are left wondering why other avenues for further capitalization are foreclosed to Sears. Even in its harrowed state, JC Penney managed to raise a billion dollars without cutting itself off from future centers of profit.
Once a store is slated to be closed by Sears’ management, it aims to unload its remaining inventory through liquidation sales. It’s not yet clear what impact this will have on the retailer’s sales force: this could translate into layoffs or workers from the closing locations could be absorbed into other stores.
Some industry experts have speculated that Eddie Lampert was originally attracted to Sears precisely because of the value of its real estate. One of Sears’ investors, Baker Street Capital, issued a report recently that the retailer’s 350 remaining locations were collectively worth $7.3 billion. Consider that Sears’ total market capitalization is approximately $600 million.
Gary Balter, analyst at Credit Suisse, observes that the principal problem with Sears’ strategy is that its best priced realty is also its most profitable. What would happen if Sears sold off the majority of its top performers? “We highly doubt there would be a profitable chain left. What we are likely to see in the future is that too many pieces have been removed, which in turn is reducing the strength of the core,” he said.
Howard Riefs, a spokesman for Sears, explained that when the retailer sells a store, it is making a calculation that the value of the sale will outweigh the future loss in profit from the shuttered store. He also claimed that only 2 percent of the more than 300 stores Sears has shut down since 2010 were performing well.
Sears has seen better days, reporting a second quarter net loss of $194 million, compared to $132 million at the same time last year. Revenues plunged 6.3% to $8.87 billion from $9.47 billion.
Sears also recently announced it is seeking a secured term loan of $1 billion in order to refinance already existing debt. The loan will replace Sears’ existing $3.275 billion asset-based credit line. A spokesperson from the ailing retailer said that the loan will be secured by the same collateral already in place.