The Wall Street Journal-20080123-Sears Would Face Soft Real-Estate Sector- Reorganization Proposal Helps Lift Stock by 12- While Questions Remain
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Sears Would Face Soft Real-Estate Sector; Reorganization Proposal Helps Lift Stock by 12% While Questions Remain
If Sears Holdings Corp.'s plan to reshape itself into several separate operating units heralds a long-anticipated spinoff or sale of the retailer's real estate, the precedents for investors seem promising but the timing for Sears isn't.
Sears, Hoffman Estates, Ill., confirmed that it will reorganize its operations into five major units in a bid to give management teams more autonomy and control over their groups. Sears identified its real-estate holdings as one of those units, but stopped short of indicating whether it will remain under the retailer's ownership, be sold or be spun off.
Even so, investors long have speculated that Sears's chairman, hedge-fund manager Edward S. Lampert, may sell some or all of the roughly 765 company-owned Sears and Kmart locations to raise capital and then lease them back from the buyer. He had indicated he might do so if the struggling company's value as a retailer fails to exceed that of its real estate.
The trouble is, the continuing credit crisis has sapped the value of residential and commercial real estate alike in recent months. Credit Suisse Securities estimates the value of Sears' real estate has "declined materially" in recent months to nearly $4.7 billion. Sears's market value was $13.74 billion as of yesterday's close. In addition to its owned stores, the retailer leases 2,032 store sites and an additional 974 stores are owned and operated by independent companies.
Investors appeared to welcome Sears's reorganization plan, reported Saturday by the Wall Street Journal, by lifting its stock 12%, or $10.42, to $99.85 in Nasdaq Stock Exchange 4 p.m. composite trading.
Credit Suisse analyst Gary Balter noted that motivation to sell Sears's real estate could be undermined by the costs of vacating some of Sears's least-desirable locations. Those costs could exceed the amount those properties would bring in a sale. Most of Sears's store sites are of "C" or "D" quality, meaning they are average or below average, according to Credit Suisse.
"We still believe that Sears and Kmart have some excellent locations that will command premium prices should the company decide to sell," Credit Suisse's Mr. Balter wrote in a Jan. 14 research report. "However, the market has recently dropped significantly, and...there is a cost, not a benefit, to getting out of weak locations."
A Sears spokesman yesterday declined to comment on the fate of the retailer's real-estate unit, instead referring to a line in Sears' press release about the reorganization explaining that the real-estate unit "will focus on increasing the sales productivity of the company's physical . . . real estate." The spokesman declined to elaborate.
If and when Sears divests its real estate, it can point to other public companies that did so to the benefit of shareholders. Hotel operator Marriott International Inc. in 1993 spun off its hotel properties as Host Marriott, now known as Host Hotels & Resorts Inc., as a real-estate investment trust. The spinoff allowed Marriott to remove debt and tax liabilities from its balance sheet. The stock has risen 246% since 1993.
Any spinoff of Sears's real-estate holdings might intrigue Vornado Realty Trust, the New York-based real-estate investment trust led by Chairman Steven Roth. In 2004, Vornado took a big position in the stock of what was then Sears Roebuck & Co. Many analysts then believed Vornado was trying to force Sears to unlock the value of its real estate holdings. Vornado, which also took a position in Sears Canada, eventually sold both positions.
Sears further outlined its reorganization plan after the Journal's report Saturday. The company's new structure will consist of five units: operating businesses; support; brands; online; and real estate. Sears said each unit will have a designated leader and an advisory group of senior Sears Holdings executives.
Operating businesses will consist of Sears's current lines of business such as home appliances, electronics, and apparel. The support unit will include functions that provide operational and administrative services to the operating unit, such as marketing, customer strategy and finance. The brand units will be responsible for growing the value of Sears's brands such as Craftsman and Kenmore.
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Adam Edelman and Jennifer S. Forsyth contributed to this article.
