Despite bad news from Sears Canada, one portfolio manager isn’t selling.
Richard Fortin says today’s announcement that the retailer is closing its flagship location in Toronto’s Eaton Centre, as well as four other stores, “confirms our long-held view that the value of the underlying assets significantly exceed the share price.”
But Fortin, a Calgary-based portfolio manager at Franklin Bissett, adds, “This doesn’t change the fact that the company still faces operating challenges. It brings into question the long-term sustainability of business model. The announcement makes it more difficult to attract talent and turn around the business.”
Read: High-conviction investing
For instance, Calvin McDonald, the retailer’s former CEO, abruptly resigned last month for a job at North American beauty giant Sephora.
Sears is selling the leases on five department stores in a $400-million deal, its largest sale in recent history.
Fortin says the move increases the likelihood that Sears will issue another special dividend, after issuing a $3.50/share dividend in September 2010 and a $1/share dividend in December 2012.
“Before this announcement, net cash on the company’s balance sheet was just under $2.60/share,” he says. “And pretax proceeds from today’s sale would be roughly $3.90/share. We think a portion of that will be paid to shareholders by way of a special dividend.”
Read: 5 consumer trends to watch
About 965 employees across the company’s operations will affected by the move, although Sears Canada said employees who are laid off from closing stores can apply for other jobs within the company.
This development signals the board is “getting closer to a decision point – either you’re a going concern, or you’re going to wind up the business,” says Fortin, noting there are “execution risks” with trying to turn the business around.
On the other hand, if Sears does wind up, there are “further below-market leases to be crystallized,” along with a portfolio of owned real estate, and appliance, trucking and Internet businesses. “There’s inherent value in those assets,” he adds.
Under today’s sale agreements, store leases for Sears locations at Sherway Gardens in Toronto, the Markville Shopping Centre in Markham, Ont., London-Masonville Place in London, Ont. and Richmond Centre in Richmond, B.C. will be sold back to mall operator Cadillac Fairview and its partners.
Read: Commercial property offers returns
“Our initial retail thesis has evolved into a special-situation type of investment,” says Fortin. And he’s not ready to sell. “The margin of safety has come in nicely to protect the downside. We think there are further gains to be had.”
Some of Sears’ previously divested locations have already been picked up by U.S. high-end retailer Nordstrom, which used them to launch its first stores in Canada. That has prompted speculation that Nordstrom may also be eyeing the Eaton Centre or Sherway stores, which are seen as prime real estate for retailers.
In Canada, Sears will leave most of the stores by Feb. 28, 2014, but will continue to operate its headquarters on the top four floors of its space in the Eaton Centre. Sears opened at the Eaton Centre in 2000.
The stores in Markham and Richmond will be vacated before Feb. 28, 2015.
After the latest round of lease sales, which are expected to close Nov. 12, Sears will have 111 department stores across the country.
CEO Doug Campbell said in a release the closures were in line with Sears’ ongoing strategy, since “unlocking the value of assets is one of the three levers we have said we will use as a way to create total value for the company.”
Sears Canada has been closing some of its most prominent locations and reducing the number of employees in hopes that it can lower its expenses and improve its overall business as part of a three-year turnaround plan to respond to intense competition within the retail sector because of new entrants such as Minneapolis-based discount retailer Target, and increased pressure from known rivals Wal-Mart Canada Corp. and Hudson’s Bay.
Read: Retail sales key to U.S. growth
In August, the company announced plans to lay off 245 employees primarily at its head office in Toronto, with most of them in technical support and finance.
Sears Canada also recently sold leases for several prominent stores, including Toronto’s Yorkdale Shopping Centre and Square One Shopping Centre in Mississauga, Ont. Those were in addition to leases sold last year, including one at Vancouver’s Pacific Centre.
In its most recent quarter ended Aug. 3, Sears Canada reported that revenue fell 9.6 per cent for a year earlier, while it would have reported an $11 million loss when factoring out benefits from recent lease sales.
At the time, the company noted it was gaining traction in sales of apparel, but that big ticket items were weaker.