Sears Canada Inc. is moving to sell the leases of some of its best store locations in a race to revive its tired operations.
The department store is selling two leases worth $191-million back to its landlords, and sold an option on a third location for $1-million, which could see it close a third store within five years, netting an additional $53-million.
The selloff comes amid intensifying competition in Canada, with the arrival of U.S. retail heavyweights. Other big American retailers that are looking to expand here are grappling with a dearth of attractive store locations. That's putting pressure on Sears to improve its performance or divest more of its lucrative assets, following in the footsteps of its U.S. parent.
"You're going to continue to see this at Sears," predicted Brian Sozzi, chief executive officer at Belus Capital Advisors in New York. "At some point they're not going to have attractive assets left to sell and that's when you really start to get worried."
Calvin McDonald, chief executive officer of Sears Canada, said his strategy is to improve the core retail business by focusing on "hero" categories such as appliances, mattresses and children's goods, while selling off non-core assets and slashing costs. The stores that Sears plans to exit are larger than 100,000 square feet – which is Sears's sweet spot – and in locations that aren't necessarily destinations for so-called hard goods such as mattresses, which make up about half of its offerings, he said.
"We weren't looking to exit these locations," he said. "On this particular one, we were approached and a financial offer was made that was very significant."
The leases the company has agreed to sell are located at Toronto's Yorkdale Shopping Centre and Square One Shopping Centre in Mississauga, Ont., owned by Oxford Properties Group and Alberta Investment Management Corp. (AIMCO). Sears is expected to leave the sites by March 31.
And the department-store retailer agreed to sell an option to its store at Scarborough Town Centre to the two landlords for $1-million, also to be paid by June 24, giving Oxford and AIMCO five years to exercise the option on the property for $53-million. Department-store purveyor La Maison Simons, which opened its first store outside of Quebec last fall at West Edmonton Mall, is among retailers interested in Sears's space, industry observers said.
Mr. McDonald unveiled lease sales last year, divesting three other key stores – one of them a flagship at Vancouver's Pacific Centre – for $170-million to landlord Cadillac Fairview Corp. in 2012. Cadillac then sold the leases to Nordstrom Inc., the upscale Seattle-based department-store retailer, to help it launch in Canada, with its first store set to open in the fall of 2014, raising the heat for Sears and others.
Sears's store in the Toronto Eaton Centre is the jewel in the crown, hankered after by Nordstrom, for one. But Mr. McDonald said he's not selling its lease back to Cadillac, which is believed to have tried to buy it back. "We haven't had any discussions that are progressing to suggest we would be exiting the Toronto Eaton Centre."
While Cadillac was seen as a clear winner in the high-profile 2012 lease sales, Oxford is viewed as a winner in the latest deal. With scarce premium retail space in this country, landlords are eager to buy back leases of weak tenants and replace them with potentially higher-performing retailers. U.S. chains have been flocking to Canada, where mall merchants have generated higher sales-per-square foot than at their counterparts south of the border.
Blake Hutcheson, chief executive officer of Oxford, said it hasn't decided what it will do with the space that Sears is expected to vacate. He said nothing is "in the wings that is imminent or could be announced." But he said retailers are hankering to get into Yorkdale and Square One. "The demand for that space will be deep and long."