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Sears Sells Most Profitable Stores; Realty Its Greatest Asset

Faced with tough choices as a result of chronic underperformance, Sears Holdings Corp. is selling off some of its most profitable stores in order to raise much needed cash.

Over the last eighteen months, Sears has sold almost a dozen stores in the US and Canada, some of them admittedly among their best money makers. Some have noted that this 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.”

Sears CEO Eddie Lampert, however, has consistently demonstrated he’s allergic to the conventional, experimenting with a wide palate of diverse turnaround strategies. He has leased space within Sears’ locations to third-party vendors, like Western Athletic Clubs Inc., which rented a colossal 69,000 square feet in Cupertino, California. In 2012, Sears allocated a grand total of $378 million to store improvements, a paltry sum in comparison with competitors like Kohl’s Corp., which spent $785 million and Macy’s, which parted with $942 million. Even ailing JC Penney ponied up $810 million.

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 Penny managed to raise a billion dollars without cutting itself off from future centers of profit.

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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.

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 sold off the majority of its top performers? “We highly doubt there would be a profitable chain left. What we are likely to see n the future is that too many pieces have been removed, which in turn is reducing the strength of the core,” he said.