Sears' Big Move

By Greg Sushinsky | October 05, 2011 AAA

Shares of retailer Sears Holding (Nasdaq:SHLD) recently rose more than 6% in one trading day on the strong evidence that the company is unlocking its considerable real estate. There had been previous speculation that Sears would eventually move in this direction. Now the question is, to what extent will it do this and how successful will it be? (To help you evaluate Sears' move into real estate, check out How To Analyze Real Estate Investment Trusts.)

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Sears and Its Real Estate
Sears announced it has signed deals with other retailers to lease space in its Sears and Kmart stores. In conjunction with this, Sears also began to allow its brands to be sold by other retailers, with its Craftsman tools and Kenmore line of appliances to be available at Costco (Nasdaq:COST). Estimates of the brand value of Sears' brands such as Diehard, Kenmore, Craftsman and others have been placed in the $15 billion to $20 billion range, while the value of its spacious real estate, square footage, might be worth in the $30 billion range. So, instead of its $6 billion market cap, a company in the $45 billion to $50 billion range would be unleashed.

How Sears and Lampert Reached This Point
There's been a long-held view that Eddie Lampert, main shareholder of Sears, would eventually lease space and sell off some of Sears' brands to other retailers. Lampert, who brought Kmart out of bankruptcy in 2005 and then bought Sears, had previously been a highly successful manager of his ESL Investment firm, a concentrated hedge fund, and had been known for his value approach to buying businesses, an approach that made him a billionaire.

With the merger of Sears and Kmart, many investors hoped that Lampert would be able to take the cash flows from the revamped retailers and invest that cash into other profitable holdings. Unfortunately, things didn't turn out that way. Instead of Sears being a cornerstone and cash conduit of a giant holding company, Sears remained, well, a retail chain, and not a very good one at that. (For more on Mergers and Acquisitions, read Mergers & Acquisitions: An Avenue For Profitable Trades.)

In fairness to Lampert and Sears, the new Sears-Kmart amalgam ran straight into the teeth of the awful recession before the company had a chance to come close to completing a makeover. Revenue has fallen from $53 billion in 2007 to $43 billion in 2011, while net income has shrunk from nearly $1.5 billion to $133 million in the same period. In 2009, at the bottom of the recession, Sears recorded $53 million net income.

Department Store Blues
While many investors obviously are applauding this potential direction for Sears, via buying up its shares, it doesn't yet change that Sears hasn't been a well run department store and discount chain. One can argue Lampert is an investor, not a manager, but in the meantime, recession notwithstanding, many of Sears' retailing peers have fared better. JC Penney (NYSE:JCP) has struggled most, like Sears, to find its niche and has seen its earnings shrink dramatically from pre-recession levels. Macy's (NYSE:M) has come roaring back and is poised to grow. While on the luxury end, Nordstrom (NYSE:JWN) has powered back to near pre-recession levels.

The Bottom Line
Sears is providing a lot of options for different styles of leasing while throwing open its properties to prospective retail tenants. It's a plan that many investors would say is long overdue, while others might be skeptical as to whether it can be successful enough to transform the company. It would have obviously been better for Sears' retailing to have achieved better operational results in the last few years under Lampert. That would have given the company more flexibility as it would be dealing from the strength of both its retailing and real estate. This way, the new real estate approach looks like it's going to be the core of operations, so it has to work in a big way. The market seems to think it will. ( If you would like to venture in the real estate market, read 5 Mistakes Real Estate Investors Should Avoid.)

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