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Sears Turns from Retail to Realty: Subleases Store Space to Dick’s

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Desperately trying to find firm footing during financial turbulence, Sears Holding Corp. continues to sublet store space in an effort to find new sources of reliable revenue. To that purpose, the slumping retailer has leased an entire floor of a two-story Sears store to Dick’s Sporting Goods.

Sears is leasing out the space in a store located in the sprawling King of Prussia Mall in Pennsylvania. Sears controls the massive 215,000 square-foot retail space under a contract with the Simon Property Group. Under the new arrangement, Dick’s will take over the second floor, while Sears will maintain exclusive use of the first floor entrances.

This has been a historically challenging year for Sears: it just reported that it expects an adjusted loss between $213 million and $316 million for the fourth quarter, which amounts to as much as $2.98 per share. In response to the grim news, Sears’ shares dropped 13 percent to $36.98 from $42.57 after hours.

Eddie Lampert, Sears’ chief executive and top shareholder, said, “The results that we posted are not nearly what we want them to be.” Lampert personally owns 25,120,220 shares of the retail giant, about 23 percent of the company. The 13 percent falloff in share price cost Lampert $142,180,433 in losses.

Sears Holdings’ comparable store sales dipped 7.4% for the quarter to date in the U.S. and 4.4% in Canada. Comparable sales for Sears stores in the U.S. are down 9.2% in the nine weeks that ended January 6, and down 5.7% for Kmart. ShopperTrak reported that U.S. retail sales for the industry at large have risen 2.7% for the same period.

For the fiscal year, Sears expects a loss as large as $914 million, potentially amounting to $8.61 per share. This is considerably worse than the loss of $6.20 per share most analysts have been predicting.

And unable to reinvigorate languishing sales, Sears has relied upon the value of its realty as a centerpiece of its turnaround strategy. In 2012, Sears earned more than $47 million in revenue from multiple leasing arrangements. Since 2011, Sears had leased major commercial space to other marquee retailers: Whole Foods, Forever 21, Bay Club and Northgate Gonzalez Markets have all moved into space operated and formerly occupied by Sears.

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.

Alan Shaw, vice president of real estate leasing for Sears, said, “The sublease agreement with Dick’s Sporting Goods is a great example of Sears Holdings selectively redeploying its asset base to dramatically improve our retail shopping experience while working to create long-term shareholder value.”

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