This week we learned that Sears (ticker: SHLD) is closing its stores at the Westfield Galleria in Roseville and the Sunrise Mall in Citrus Heights. The closures are expected to happen in July.
The news should come as no surprise, as Sears had already slated 166 stores for closure this year. It is a surprise to see the Galleria store among them as the Roseville mall is quite healthy despite troubles at many malls in the region and nationally. I suspect the store will turn over quickly, however.
The stores are not owned by the malls, but are owned by Seritage Growth Properties (ticker: SRG), a REIT spun off from Sears in 2015. Seritage purchased Sears’ real estate and leased it back to the retailer as part of Sears’ slow-motion liquidation. Some investors, including Sears CEO Eddie Lampert, have long believed that Sears’ brands and real estate are worth more than the retail operations. Lampert’s hedge fund ESL owns significant stakes in Sears and Seritage. Seritage has been taking back the real estate as Sears has terminated leases and is releasing the properties to other tenants to monetize the assets.
Considering the common ownership between Sears and Seritage, I suspect that the Roseville closure has less to do with troubles at that particular store and more to do with what Seritage can do with the real estate given the strength of the mall.
Eventually, however, all Sears stores will close. Many blame online retailers like Amazon for Sears’ demise, but the truth is Sears has been mismanaged for years. Sears has produced losses and negative free cash flow since 2011 with no end in sight. CEO Lampert has been so obsessed with the asset value of Sears that he neglected the operations. He has stripped the retailer for parts while failing to invest in updating stores, and the results are as sad as they were inevitable. The retailer is too far gone to be saved now.
The stock has plunged from a high of $145 in 2007 to $3 today. Much of the value has been siphoned off in spinoffs such as Seritage and Land’s End (ticker: LE), although some spinoffs were less successful, such as Orchard Supply Hardware which declared bankruptcy in 2013 less than two years after becoming a stand-alone company. Any future value is unlikely to come from Sears retail stores, but instead will come from Seritage if they can successfully release the properties. This is why I believe we will hear about a new tenant in Roseville soon.
Online competition is a huge factor in Sears’ demise, of course, yet many other brick and mortar retailers are learning to survive and thrive in the new environment. However, there is no room for companies that fail to invest and fail to change while the world changes around them.