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Sears Canada's head office building in Toronto is seen in this file photo.

Tim Fraser/tim fraser The Globe and Mail

Struggling Sears Canada Inc. will close three of its department stores in top locations by the end of October, selling its leases back to their landlord for $170-million.

The deal, which was announced on Friday morning, is the latest move by Sears' new chief executive officer, Calvin McDonald, in his race to turn around the retailer's troubled operations. In doing so, he borrows a page from Sears' U.S. parent's playbook as it spins off stores to raise cash.

The sale of the three Canadian leases, in prime sites in Vancouver, Calgary and Ottawa, also could open the way for U.S. department-store retailer Nordrstrom Inc. to finally pick up coveted space in Canada – potentially providing even more stiff competition for Sears.

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"Overall, this is a very advantageous agreement for Sears Canada," said Calvin McDonald, chief executive officer at Sears Canada.

Mr. McDonald, who stepped into the top job last summer, is scrambling to improve Sears' deteriorating results as the company faces rising competition, including the arrival of U.S. discount giant Target Corp. early next year, and a cautious consumer. He has cut 470 jobs and moved to streamline offerings by focusing on core segments of appliances, furniture and mattresses as well as women's and children's fashions. Starting last month, he slashed prices by up to 30 per cent on more than 5,000 items.

Now, in closing three major stores, he's betting he can emulate Sears' parent, Sears Holdings Corp., which under controlling owner Edward Lampert, is selling off some of the U.S. company's best assets and closing dozens of stores to shave costs and bolster the bottom line.

Sears' results have been weak on both sides of the border. In Canada, fourth-quarter profit plummeted by more than half to $38.7-million while sales dropped 6.4 per cent to $1.37-billion. Same-store sales, a key measure in retail, fell 7.4 per cent, steeper than the 4.1 per cent drop at its namesake U.S. outlets.

Still, Mr. McDonald said in an interview that he is not looking to sell more stores in Canada. He said Cadillac Fairview approached Sears about taking back the three leases, whose rents are believed to have been considerably below market rates.

He said the deal offers Sears an "attractive financial benefit" allowing it to focus on new prototypes at other locations to build on its strengths. He outlined four new formats that Sears will soon start to test, including four conventional department stores, expanded franchised "dealer" stores in smaller communities and a larger-than-usual home-goods store in Ottawa.

He said the sales results in the three stores that will close failed to reflect Sears' strengths, particularly in the categories of appliances, furniture and mattresses. And in each of the three cities, the retailer has other nearby stores.

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The closings of the Sears stores now provides Nordstrom with the opportunity to set up shop in Canada after it looked unsuccessfully for sites here for the past year.

Last month, Erik Nordstrom, executive vice-president at the U.S. chain, told a conference call the retailer still finds Canada to be "an attractive market for us ...

"The challenge, as you can probably guess, is the real estate," Mr. Nordstrom said. "It's a tough real estate market given the – mainly the dense urban areas where the population is. So we have an interest in there and we think we could learn a lot that could inform us for other expansion after that. But right now, it's really a real estate question and at this point we haven't answered that one."

Colin Johnson, a Nordstrom spokesman, said late Thursday it continues to look "at a number of different opportunities in Canada. We don't as yet have anything definitive to share."

And while the Sears locations are attractive, they may now be pricey for Nordstrom. While Sears is believed to have paid low rents, its future replacement is expected to face big rate increases.

The three stores whose leases are being returned to their landlord are in Vancouver Pacific Centre, Calgary Chinook Centre and Ottawa Rideau Centre.

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Industry observers have long speculated that Sears would itself sell some of its leases to Nordstrom or another U.S. department-store merchant, just as Hudson's Bay Co. spun off as many as 220 of its Zellers leases to Target for $1.8-billion last year.

Even so, as Sears struggles to bolster its performance, its real estate remains valuable with low rents, giving landlords the incentive to try to find a stronger retailer, such as Nordstrom, to snap up some of the space now occupied by Sears.

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