Credit ratings agency Moody’s Investors Service said a shrinking Sears Holdings Corp. footprint could benefit some retailers in the department store distribution channel, as well as at higher tier malls.
Christina Boni, vice president and senior credit officer at Moody’s, said, “As Sears continues to shrink its footprint following its Chapter 11 filing, department stores in locations that overlap with Sears stores, such as Macy’s, J.C. Penney and Dillard’s, will have the opportunity to pick up new customers.” Boni said a similar situation happened last year with the bankruptcy of The Bon-Ton Stores Inc., which created a sales boost for Macy’s and Kohl’s.
Sears filed its voluntary Chapter 11 petition for bankruptcy court protection on Oct. 15. At the time it said it was closing 142 stores, and then last month added another 80 stores to that list. Earlier this month, Sears chairman Edward S. Lampert and his hedge fund ESL Investments submitted a rescue bid to save the retailer from liquidation. The $5.2 billion going-concern bid, which would keep at least 425 Sears and Kmart stores in operation, still requires bankruptcy court approval. A hearing date is scheduled for Feb. 1.
Presuming Lampert and ESL receive court approval, Boni said that only helps to determine the pace in which retailers and malls need to adapt to a shrinking Sears footprint. “In recent years, Sears has failed to meaningfully improve its sales trends and profitability, largely because it has lacked a viable core customer proposition. We do not foresee this changing if the bid succeeds and believe it faces the risk of shedding more stores or outright liquidation,” she said.
Critics of Lampert, including some unsecured creditors in the Sears bankruptcy, believe that Sears no longer has a reason to exist. They believe that the retail operation eventually would liquidate anyway, and that’s why unsecured creditors have pushed for a liquidation now while Sears’ assets are still deemed to have some value. Lampert and ESL have maintained that Sears can survive with a smaller footprint. And they’ve said that legacy components of the business have been a drag on the company, problems that likely will be shed if Lampert gets the bankruptcy court nod to exit Chapter 11.
Boni noted that department stores that have overlapping locations with Sears are positioned to pick up new customers as Sears stores close, or later on if Sears is “unsuccessful in effectively operating stores post emergence.”
As for malls in general, Boni said, “Successful malls with good demographics and strong sponsors can justify the substantial expense of re-tenanting an anchor space.” That’s compared with struggling malls that don’t have the capital to replace its anchor tenants.
She also identified regional real estate investment trusts as the sector that’s more pressured when a Sears store closes. “These REITS generally have lower productivity malls with higher in-line tenant vacancy, as compared with mall REITS that operate high quality portfolios with average sales per square foot exceeding $600,” Boni explained.
It wasn’t immediately clear what Sears’ annual volume might be with fewer stores upon its exit from bankruptcy court proceedings, although it currently does an estimated $10 billion. According to Boni, “Sears Holdings [generates about] $1.7 billion in apparel sales from Kmart stores, which are generally off-mall and therefore not in direct competition with mall-dependent department store operators.”