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Change at top of Sears has landlords eyeing leases

Calvin McDonald’s unexpected departure comes halfway through his three-year transformation plan to revive Sears.

Peter Power/The Globe and Mail

Sears Canada Inc.'s move to replace its chief executive officer with a former turnaround specialist has landlords weighing the prospect of buying back more of the retailer's coveted leases to make way for new rivals.

Sears confirmed on Tuesday The Globe and Mail's report that CEO Calvin McDonald was leaving "to pursue an opportunity with a leading international company," without naming it. He is being replaced by chief operating officer Douglas Campbell.

Landlords have been in talks with Sears about the possibility of buying back prized leases from the struggling retailer, industry sources said. Already, Sears has sold a handful of its leases, raising almost $400-million. The landlords are hankering to regain control of the properties because of Sears' weak results, the stores' prominent mall locations, their low rents, and the scarcity of prime retail space.

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The discussions have the potential to shift the retail landscape, introducing new and expanding foreign retailers to Canada. But the changes could also put more pressure on Sears and other incumbents to improve their performance or risk being overtaken.

"Many of Sears Canada's department store locations would presently be more productively deployed if operated by other retailers," said Keith Howlett, retail analyst at Desjardins Securities.

He said he expected additional selective sales of leases back to landlords, although he didn't anticipate that a single foreign retailer was in the wings to nab most of Sears's leases. Two years ago, Target Corp. bought most of Zellers' leases as a way for the U.S. discounter to enter Canada, which it did last March.

But as George Minakakis, CEO of strategy firm Inception Retail Group and author of Last Retailer Standing, warned about Sears: "You can't be focused on building a brand if you are contemplating selling more of your premium leases, unless you are looking for an exit."

Mr. McDonald's unexpected departure comes halfway through his three-year transformation plan to revive Sears, focusing on "hero" categories, such as children's products and women's dresses, and dropping less profitable toys and electronics.

He raised money by selling the leases of some key stores, including the one in downtown Vancouver that ultimately was picked up by U.S. rival Nordstrom Inc. He said he was beginning to see sales gains in key apparel categories.

Executives at landlords Oxford Properties Group and Cadillac Fairview Corp., which have bought back some Sears leases, could not be reached.

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Mall operator Ivanhoé Cambridge said it welcomes the opportunity to "pursue our partnership" with Sears' new leader. "We have a vested interest in the success of all our anchor stores, and are hopeful that Sears will secure the leadership necessary to help them prosper in this competitive landscape," co-chief operating officer Roman Drohomirecki said in an e-mail.

Sources familiar with Sears said this week that Mr. McDonald had differing views with parent Sears Holdings Corp., whose controlling shareholder is hedge fund manager Edward Lampert. The disagreement was tied to "the pace at which capital was being deployed," a source said.

Sears spokesman Vincent Power said there was no disagreement. He said he expected a smooth transition under Mr. Campbell. "For now – no great changes."

He said there "might always be" discussions with landlords about Sears leases. "I'm not saying there are not discussions."

At a conference last week, Mr. McDonald said Sears was only "halfway through" its transformation. "We still have a long way to go. However, these are indicators that we're moving along the right path."

Mr. Howlett said that Mr. McDonald's departure reduces the probability of an operating turnaround. He was a "talented, energetic retail executive and might have been able to accomplish a turnaround against what we perceive as long odds," the analyst said.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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