Sears' sale of mall leases to result in store closures

TORONTO -- Sears Canada Inc. (TSX:SCC) will be vacating at least two major Toronto-area stores and possibly a third in return for cash payments from its landlords, who, analysts say, will be able to offer the prime space to tenants such as Nordstrom and Holt Renfrew.

Sears, operator of a national chain of department stores, says it will receive $191 million cash for vacating its locations at Yorkdale Shopping Centre in Toronto and Square One Shopping Centre in Mississauga, Ont., by next March.

It could also receive up to an additional $54 million if the landlords exercise an option to have Sears withdraw from its location at Scarborough Town Centre within five years. That would include $1 million that Sears gets for the option.

Calvin McDonald, president and chief executive of Sears Canada, said the offer came from the landlord, Oxford Properties Group, who co-owns the properties with Alberta Investment Management Corp., the provincial pension fund also known as AIMCo.

"They obviously have their plans," McDonald said in an interview, but he would not speculate on what they are.

Ultimately, the amount of money Oxford offered for the leases far exceeds how much money Sears believes it can generate at those locations, said McDonald.

Analysts at RBC Dominion Securities and RBC Capital Markets said they think Nordstrom -- a Seattle-based chain -- will get the Yorkdale location while Montreal-based Holt Renfrew will lease the Square One space.

In a research note published Friday, the analysts say they think the landlords will shelve planned expansions at the malls.

"Our educated guess is that those expansions to accommodate another anchor tenant will be tabled and both Nordstrom and Holt Renfrew will enter the Sears Canada's location," they said.

"In fact, looking at the rendering for the Nordstrom location at Yorkdale, it looks like it is set to be positioned on the Sears Canada site."

That's good news for Hudson's Bay Company (TSX:HBC), a Canadian rival to Sears, because it means no new competition will result from the announcement, the analysts noted.

"Notwithstanding the entry of new competitors in those boxes, we believe HBC is well positioned to pick up (market) share, especially among the mid-tier consumer, during the period of dislocation," the analysts said.

Wendy Evans, president of Evans and Company Consultants Inc., said the deal with Sears is also good news for the shopping centres.

"The landlords will be very happy to have that space, because they'll be able to capitalize on greater lease rates from future tenants," Evans said.

It should also represent a benefit to Sears, said Evans, although the company still has a long way to go to turn its business around.

"Their place is not in the sophisticated urban markets," said Evans. "Their place is in the less sophisticated suburban, or less urban, markets."

McDonald said he believes Sears should be able to hold onto a "significant" portion of its sales despite closing three stores.

"Big ticket is a big part of our business and customers have a tendency to research and drive further for those destination businesses," he said in an interview, referring to items such as appliances and home furnishings.

Sears Canada, which is controlled by U.S. retailing company Sears Holdings Corp. (Nasdaq:SHLD), offers numerous services and merchandise across Canada through 181 corporate stores, 248 hometown stores, and through 1,400 catalogue and online pickup locations.

Sears agreed last year to sell back leases for three high-profile stores in Vancouver, Calgary and Ottawa at malls owned by Cadillac Fairview in return for $170 million.

Those three Cadillac Fairview malls, as well as Sherway Gardens in Toronto, will become homes for Nordstrom, which is moving into Canada for the first time.

Sears Canada, which has been refocusing its business amid intense and growing competitive pressure in Canada's retail sector, said it will offer all 435 employees at the stores continued employment within the Toronto area.

McDonald said the company was able to accommodate all of its employees when it closed three stores last year.

"Retail has a natural churn to it, and we still have a large number of stores in and around these locations, so we have no concern about our ability to take these great teams and share that talent across to our other stores," he said.