When CEO Calvin McDonald walked away from Sears Canada Inc. five weeks ago, talk was that he was fed up with the lack of support he was getting from his U.S. parent company, Sears Holdings Corp., to rebuild the struggling retailer. Now we have a better idea just how pronounced that rift was.
Sears Canada announced a deal to sell the leases on five stores for $400-million. Among them is the gem of the retailer's real estate portfolio – the anchor of the Eaton Centre mall in the heart of downtown Toronto, perhaps the most coveted piece of retail space in the entire country.
This was the location that, even while Sears was selling off five prime locations in the past two years, Mr. McDonald was committed to keeping. Sears Canada might have had some more asset sales to make at the right price, but the dispositions were believed to be largely done; surely if it was serious about rebuilding as a Canadian retail force, the Eaton Centre flagship couldn't be on the block.
But Edward Lampert, the U.S. billionaire hedge fund manager who is the controlling shareholder of both Sears Holdings and Sears Canada, clearly had other plans. Mr. Lampert has shown a penchant for cashing in on the rich real estate assets that account for much of the what's left of underlying value of the once-proud Sears empire. He's unleashing value for the shares he owns by removing the company's best assets.
And now, with the Eaton Centre location sold, it looks like the fire sale is on. With the writing on the wall, there's little wonder Mr. McDonald got out of the way of Mr. Lampert's business-shrinking express train.
Yet it raises the question: What does Mr. Lampert have in mind for Sears Canada, anyway?
In May, 2012, when Sears Holdings reduced its stake in the Canadian company to 51 per cent from 95 per cent, many observers thought it was a prelude to selling off the entire company. But now, a sale of Mr. Lampert's remaining stake (in addition to controlling 51 per cent through his majority interest in Sears Holdings, he also holds another 28 per cent personally) now looks like a non-starter. The company's most valuable properties are gone; the real estate portfolio, once considered the company's big selling point, is no longer much of a draw. As a going concern, Sears Canada looks strategically adrift – its flagship stores sold, its operations shrinking, its corner office vacated in the midst of a multiyear transformation plan that now looks in doubt.
Sears Canada is retreating to mid-market suburbia, where two formidable U.S. foes, Wal-Mart and Target, are expanding aggressively in Canada. Meanwhile, it would be no surprise if additional properties were targeted for sale – in all likelihood to these and other U.S. retailers clamouring to grab a slice of the Canadian market.
Given the ownership's appetite for real estate sales, maybe Sears Canada's best future would be to phase out of the bricks-and-mortar retail trade entirely. After all, the company has 60 years of experience as a mail-order catalogue operator in Canada; the online shipping business bears a striking resemblance to this business in which Sears Canada is already well versed. Why not sell all the stores, and become a Web-only retailer? There's a lot more growth potential in the online business than in a shrinking network of stores in an increasingly daunting marketplace.
A bit of a reach? Maybe. But don't think the idea has never crossed Mr. Lampert's mind.