Sears Canada not likely to die while it still has real estate to sell

TORONTO – So long as Sears Canada has viable property to sell – and management is able to keep shaving costs – the struggling retailer will likely stay alive despite posting many years of declining sales and substantial operating losses.

That’s the view of the new report from Desjardins Securities, which notes the department store’s management is not in a position to reduce its fixed and variable costs suddenly to pay for that company’s lower revenue productivity, even while it has closed unproductive locations and rebuilt some key product categories.

“As long as Sears Canada is constantly on the operate its retail business, it keeps alive the potential for selling additional under-market leases back to its landlords,” said the report from analyst Keith Howlett, who maintained his sell rating on the shares but slashed his price target around the stock to $4.75 from $8.50.

Sears Canada, that has for a long time raised cash by selling off plum leases to the landlords, needs to sustain its retail business “for a long number of years in to the future” if it is to inspire more landlords to pay the retailer to exit its most desirable leases, the ones that trade below current shopping mall lease rates.

“Once it ceases to operate, it is likely the leases will go back to being liabilities, and will also be reclaimed through the landlords, either contractually or pursuant to creditor proceedings,” Howlett said.

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“In our view, the objective is for Sears Canada to attain cash breakeven, or close thereto, creating the appearance that it will have the ability to continue to operate for many years to come. This would, in our opinion, elicit more lease buyout offers from landlords.”

Howlett estimates that the company’s residual owned real estate may be worth a lot more than $350 million.

The company’s balance sheet is in very good condition, strengthened by large cash holdings from real estate sales along with a termination payout from a former partnership credit card business with JPMorgan. Sears Canada had $314 million in cash at the end of fiscal 2015 and can collect one more $220.5 million this season from previously announced asset sales. The organization has no outstanding long-term or short-term debt, beyond $24.2 million of monetary lease obligations.

Still, to be productive, Howlett says, Sears Canada will need to further pare back fixed and variable operating costs due to its declining revenue per square foot, which fell to $185 in 2015 from $263 in 2009.

The analyst increased his forecast operating loss for fiscal 2016 to 66 cents per share from the prior projection of a loss of 25 cents per share. He also predicts an operating lack of 31 cents per be part of fiscal 2017. Achieving that forecast for fiscal 2017 requires further sales, general and administrative cost reductions during fiscal 2017 along with management’s stated $100 million to $127 million cost reduction target for 2016.

Financial Post

hshaw@nationalpost.com

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