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Toronto, Ontario - March 18, 2016 -- Sears innovation lab -- Brandon Stranzl Executive Chairman Sears Canada, gets up from the couch, as he works with Jennifer Tangco, left, Diane Dang, second left, and Corey Messom, right, at the new Sears innovation space called "Initium Commerce Lab", in Toronto, Friday March 18, 2016.

In an airy, open-space office in a trendy downtown building that houses a technology startup, Sears Canada Inc. has become an unlikely tenant.

The 62-year-old struggling retailer has set up an innovations lab, which it calls Initium, to help revive its sagging e-commerce business. Initium means "start" in Latin and Sears badly needs a new one.

Under new executive chairman Brandon Stranzl, Sears aims to re-engineer its operations, including its e-commerce and catalogue division, whose annual sales stand at roughly $500-million. In all, Sears generated $3.1-billion in revenue in 2015, which has been sliced almost in half over the past decade.

"Most retailers function with a set of stores and a website attached," Mr. Stranzl, sporting a fashionable stubble of a beard, said as he sat in the kitchen of Initium while young jeans-clad employees wandered in and out. "We're going to make Sears into an e-commerce company with a set of stores attached."

Mr. Stranzl, who took the top job last summer, is working on multiple fronts in his turnaround efforts even as rivals such as giant discounter Wal-Mart Canada Corp. are ramping up their own initiatives.

Mr. Stranzl is scaling back the number of products Sears offers and physical stores it runs to focus on its best bets, while building up its e-commerce.

Still, "the operating turnaround is very challenging," Keith Howlett, retail analyst at Desjardins Securities, said in a report late last year.

In its fourth quarter, Sears Canada posted a profit of $30.9-million or 30 cents a share, helped by a one-time $170.7-million gain from the termination of a credit card agreement. That compares with a loss of $123.6-million or $1.21 a year earlier. Revenue fell to $887.6-million from $972.5-million.

Same-store sales (at outlets open a year or more) at its core store network, which consists of 95 full-line department stores and 41 Sears home stores, fell 0.8 per cent from a year earlier.

Sears has been slashing costs and closing stores over the past few years, raising questions about its fate in an increasingly crowded market. On Friday, it said it plans to trim costs by an additional $100-million to $127-million in 2016 from $125-million of cost cuts last year.

At the same time, Mr. Stranzl has hired new top executives, including a new head of e-commerce who is leading the tech lab and hiring a team of 25 for it. "What's happening here will be the heart of the entire business," he said of the lab.

It will focus on key online product categories, such as blenders and apparel, and make the navigating and buying process easier, he said. "Our goal is to be one of the top e-comm companies in Canada."

Sears was a pioneer of sorts in e-commerce, having started its online site in 1998. It had a head start as a major catalogue, whose business model is similar to that of an online shopping site. "This company didn't evolve fast enough to keep up with the pace of technology," Mr. Stranzl said.

Now he wants to also improve Sears' catalogue operations, cutting back its current 22 catalogues a year to an unstated number in the future. He will refocus on key items with upgraded paper and more modern photography, he said.

Other re-engineering initiatives include placing products in stores in what he dubs a "pinball" strategy. Similar to IKEA, Sears is putting benches, racks and mannequins in a maze-like formation to force shoppers to browse through displays rather than speed through racks in straight rows.

It's adding more "shop-in-shops," which each focus on separate brands. The top-performing brands in shop-in-shops have enjoyed as much as a 36-per-cent lift in sales per square foot and a 19-per-cent increase in gross profit margins, the company said.

Even so, gross margins fell to 28.7 per cent in the fourth quarter from 30.4 per cent a year earlier, it said. But excluding the pinch of foreign currency shifts, gross margins would have improved to 31 per cent in the latest period, the company said.

Sears also announced Friday that it has a deal to sell its Calgary national logistics centre for $84-million and will lease back the space. The transaction will bring to $221-million the amount the retailer expects to get from real estate deals in 2016.

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