Sears gains off-mall momentum

DSN Retailing Today, July 19, 2004 by Laura Heller

HOFFMAN ESTATES, ILL. -- Sears switched its off the mall expansion into high gear this month with the acquisition of 61 stores that the company hopes will accelerate the initiative to grow the chain beyond the regional mall.

Although details of the transaction have yet to be released, the company announced plans to acquire ownership or leases in up to 61 units, 54 Kmart stores and seven former Wal-Mart locations, for approximately $620 million in cash.

"These transactions will jump start our strategy to grow the Sears brand off-mall, increase our points of distribution, and acquire well-located real estate at a fair value in key markets for Sears," said chairman and ceo Alan Lacy. "The acquisitions will allow us to quickly open more stores and significantly boost our off-mall retail presence in priority markets that have synergies with our existing mall-based stores."

Moving off the mall has been a mantra at Sears for years, but with the credit operation sold and ancillary businesses such as National Tire and Battery gone, stepping up the pace has become an imperative. The Great Indoors was viewed as a vehicle for this growth, but recently the retailer has developed Sears Grand to better compete.

Sears Grand is similar in many ways to a discount store. It features all the categories that Sears is known for, adds new ones, and combines them all in a single story, 200,000-square-foot building complete with a centralized checkout and services up front.

"The real issue with [the acquisition] is the timing," said Neil Stern, retail consultant with McMillan/Doolittle. "Sears has not perfected the Grand format yet. It sounds good in theory but it hasn't been proven." Sales at Sears Grand stores are running about 30% ahead of full-line stores, according to Lacy. But the company has just two stores open, both for less than a year, with a third location set to soft open at the end of this month in Las Vegas. Four Sears Grand stores are expected to be open by the end of the year and 12 to 14 units by the end of 2005.

But this real estate transaction doesn't mean that Sears is ready to pull the trigger on its new Grand concept. The company plans to convert just three of the former Kmart units to the Grand format, and these units will be much smaller in size as the average acquired store is 100,000 square feet or less. Lacy told reporters at the company's annual shareholder meeting in May that a smaller scale "Grand lite" may be in the company's future. The acquisitions may be just that.

What's more likely is a hybrid of formats. The company said the majority of new units will be converted to just that: Full-line stores in a single story with a racetrack design, centralized checkout and pantry items, in addition to the retailer's traditional lines.

"The design will allow more efficient store operations and a significantly increased ratio of selling to gross square footage," said Lacy.

But some question the wisdom of expansion when the company has yet to hammer out its merchandising problems. Sales at Sears' full-line stores have been running below plan. In May, sales weakened in its core home categories and apparel, a trend that continued in June with comp-store revenues at domestic stores declining 3.1%, and total domestic store revenues down 4.4% compared with the five weeks ended July 5, 2003.

Erik Gordon, marketing professor at Johns Hopkins University, believes Sears' real estate acquisition may be more of an attempt to distract Wall Street than a signal that it's serious about moving off the mall. "If you can get people looking at the new idea, you don't have to talk as much about the operations of the old idea," he said. "It's an old marketing trick, if you have a product that isn't moving, you start talking about the next product."

The acquisitions also give Sears more urban locations. "This does get Sears to places their competitors are not. Sears has historically done extremely well with ethnic locations," said Stern.

Sears will fund the purchase of the stores from available cash and final details have not yet been released. The company will pay a maximum purchase price of approximately $620 million in cash for up to 54 Kmart stores, plus the assumption of existing leases. Sears will make lease payments to Wal-Mart under subleases for the seven Wal-Mart stores. The acquisitions include real estate and Kmart store fixtures, but exclude inventory and liabilities not related to leases. Sears expects to take possession of four stores in this year, up to 55 stores in '05 and the remaining two stores in '06.

Sears plans to invest approximately $200 million to remodel and refixture the stores, and expects to complete conversions of the majority of the locations by 4Q '05. The acquisitions are expected to be accretive to earnings in the first full year of operation, 2006.