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Sears’ troubles show Canada’s shine fading for U.S. stores

Struggling Sears Canada Inc.'s so-far unsuccessful attempt to find a buyer underscores a fast-changing domestic retail landscape.

Just three years ago, Canada was considered a golden spot for expansion, with U.S. chains clamouring to find store locations from which they could launch.

But as Target Corp., which launched here in March, grapples with financial results that are well below its expectations, other American retailers are growing hesitant about the Canadian market.

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Sears appears to be the latest casualty; sources say it has approached at least one retail rival about its interest in buying the business, but has so far come up empty.

"The tide has turned and Sears has missed the boat," said Hermann Kircher, a retail specialist at Kircher Research Associates.

Meanwhile, the company is rapidly selling off its best stores, raising hundreds of millions of dollars. Incumbents such as Quebec-based La Maison Simons and newcomers such as Nordstrom Inc. and Saks Inc., which was acquired by Hudson's Bay Co. this month, are lining up for the properties. Sears' coveted location in the Toronto Eaton Centre is expected to become a Nordstrom after the company makes its debut next fall, with plans for as many as 10 eventually.

Sources say Sears executives are continuing to talk to landlords about selling off more store leases.

And last week, it declared a $509-million or $5-a-share special dividend, the majority of which will flow to its parent company. It's controlled by hedge fund manager Edward Lampert. "If they had a real [buyer], they would be saving the better real estate so they could sell the whole company," said one source who is familiar with the retailers. "They figured out a long time ago they can't sell the whole company and now they're liquidating."

Sears Canada spokesman Vincent Power said the company doesn't comment on rumour or speculation. Howard Riefs, spokesman for Sears Holdings, said Mr. Lampert is not "in talks with investment bankers about Sears Holdings' interest in Sears Canada. Similarly, the claim that Mr. Lampert is conducting a 'beauty contest' also is false.

"Sears Holdings will work with the board and management of Sears Canada with a goal of increasing the value of our 51-per-cent interest and realizing significant cash proceeds to support our transformation and to create value for our shareholders."

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Industry watchers say the lack of a buyer indicates that U.S. retailers may see the Canadian market as overcrowded, and that the economic downturn is still taking a toll.

"Canada has supposedly escaped the worst of it – I don't think so," said George Hartman, an investment banker specializing in retail and food at Maison Placements. "Investors outside of Canada are bearish on Canada."

Some foreign retailers are being scared off by Target's early struggles in Canada, although the U.S. discounter probably will learn from its missteps and improve, Mr. Hartman said. He noted that Wal-Mart Stores Inc. also had a slow start in Canada in 1994 and subsequently overcame its difficulties.

And the obvious suitors for Sears, such as U.S. retailers Macy's Inc. and Kohl's Corp., aren't interested at this time, industry sources said. Officials at Kohl's couldn't be reached for comment. Jim Sluzewski, a spokesman for Macy's, said that while the company doesn't comment on potential store locations, "we have indicated on many occasions that we have no plans for expansion in Canada."

Retail specialist Mr. Kircher said selling a company like Sears is tough because retailing isn't viewed as positively here as it was a few years ago. "It dawns on some of the people looking at Canada that, in the end, there's only 35 million people here – there's a limit to how many stores you can operate," he said.

But he said a European retailer such as Carrefour of France, German-based Metro AG or British Tesco or Marks & Spencer may be interested in Sears' stores, or an Asian merchant, such as Lotte Mart or Daiei.

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