Sears Canada

Sears closures a ‘positive break’ for some owners

Tuesday, June 27, 2017

Last week, Sears Canada announced it is closing 59 of its 255 stores, including 20 full-line department stores, and cutting 2,900 staff positions across its workforce. Unlike Target’s departure two years ago, which left an unexpected void in the Canadian retail landscape, many retail owners have been prepared for some time.

“This comes as no surprise,” says John Williams, senior partner with the retail consulting firm, J.C. Williams Group. “The handwriting has been on the wall for at least a decade that a traditional full-line department store as an anchor is not performing a very important function anymore.”

Among the group of big box department stores, Sears Canada, he notes, has generally been a poor performer, with consistent and significant decreases in revenue, so most developers have a plan B or may have potential tenants already lined up.

According to the latest Colliers’ National Retail report, shopping malls across Canada have been struggling for some time. With or without Sears as an anchor, all malls must now evolve or face demise.

Simpsons-Sears was founded in 1952 as a mail-order business. Williams reflects back to when it evolved into bricks-and-mortar stores. It was blocked out of downtown locations across Canada and able to acquire very good suburban locations.

“They were a much sought-after anchor, and most Sears locations are really good, which is a big plus,” he adds. “Because they were in the game early, their rental rates are very low; consequently, for many developers and landowners, this is a positive break. They will be able to replenish that space with much higher revenue rates.”

Smaller malls might feel stronger effects. For RioCan Real Estate Investment Trust (RioCan), Canada’s largest retail owner, the Sears departure is expected to leave “minimal impact.”

“The announcement by Sears is a much different situation for RioCan than when Target announced their filing in 2015,” said RioCan CEO Edward Sonshine in a statement released yesterday. “Our exposure to Sears is far lower, and we have been preparing for just this situation at many of these locations for some time now.”

Seven RioCan locations in Canada were included in the Sears announcement. These seven stores represent $4.7 million of annualized rental revenue or 0.4 per cent of RioCan’s total annualized rental revenue with an average base rent per square foot of $9.33 as of March 31, 2017.

“In all but one case, these are smaller retail stores that will not require redevelopment as was the case with Target,” Sonshine adds.

Sears was granted temporary court protection from creditors under the Companies’ Creditors Arrangement Act last week. For the past 18 months, the retailer has revamped its product offerings and brand and plans to keep reinventing itself. However, it hasn’t made further progress due to ongoing liquidity pressures and legacy components of its business.

As it stands, RioCan has nine Sears locations, which overall, represent $6.3 million of annualized gross rent. Most of RioCan’s exposure to Sears is through the Sears Home banner, with an average store size of 40,000 to 45,000 square feet. To RioCan, this does not present the same challenges to backfill as a full department store.

 

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