BUSINESS

Sears Canada shares drop 13 per cent as U.S. holding company plans to cut stake

05/17/2012 07:13 EDT | Updated 07/17/2012 05:12 EDT
TORONTO - After several years of trying to gain a bigger stake of Sears Canada, its U.S. majority owner said Thursday it plans to cut its interest in the troubled department store chain as it deals with its own dwindling sales.

Sears Holdings Corp. (NYSE:SHLD), which also owns the Sears, Kmart and Lands' End department store chains in the United States, expects to reduce its stake in the Canadian company to 51 per cent by transferring 45.1 million shares to its stockholders.

The holding company, which currently owns about 95 per cent of the common shares of Sears Canada, could then choose to sell some or all of the rest of its stake.

Sears Holdings has been restructuring operations south of the border in an effort to regain profitability and market share.

In December, it announced it would close between 100 and 120 of its roughly 4,000 stores. And in February it said it would sell 11 stores to General Growth Properties for $270 million, as well as spin off its smaller Hometown and Outlet stores and some hardware stores in order to raise cash.

The parent company's move also comes as the Canadian retailer revamps many of its locations and slashes prices to contend with lagging sales. Sears Canada announced Wednesday a return to profitability in its most recent quarter, though it was driven by gains from the early termination of leases on three high-profile locations. It has also cut more than 1,000 jobs in recent months.

The U.S. company's decision, announced by Sears Canada, appeared to come as a surprise to investors. Sears Canada (TSX:SCC) stock fell nearly 13 per cent or $1.70 to close at $11.45 on the Toronto Stock Exchange.

At one time, Sears Holdings was beefing up its stake in the Canadian retailer, gradually boosting its investment from 55 per cent in 2004. Two years later, it made a failed attempt to take the company private at $18 per share, an offer that minority shareholders rebuked, saying the price was too low.

Keith Howlett of Desjardins Capital Markets said the transaction could provide Sears Canada with some newfound freedom to grow.

"While all options to realize value from Sears Canada still remain open to Sears Holdings, it appears to us that the new executive management of Sears Canada has been granted at least a couple of years to establish if its plan can turn operating results around," Howlett wrote in a note.

"This was not necessarily what minority investors in Sears Canada had expected. However, it should boost management and employee morale as the organization girds itself for battle with Target, Lowe’s and Walmart."

Sears Canada is preparing for heightened competition across the sector, as U.S. discount superstore Target Corp. launches early next year and Walmart expands some of its stores.

Control of Sears Canada would for now remain with Sears Holdings and its controlling shareholder, Edward Lampert.

After the shares are spun off, Lampert would control 27 per cent of Sears Canada, other public shareholders of Sears Holdings 17 per cent and minority shareholder of Sears Canada five per cent.

The strategy by Sears Holdings could also keep the U.S. parent company funded as it reworks its operations, said Toronto-based retail analyst John Williams of J.C. Williams Group Ltd.

"Sears Holdings continues to announce plans of changes and upgrading to their stores and Sears Canada is a pretty small portion of the total company," he said in a phone interview.

Sears Canada does "have some great assets — long-term leases or property and some of their brands have a good equity in them."

Sears Holdings announced a return to profitability on Thursday, with the Hoffman Estates, Ill.,-based company saying it earned US$189 million, or $1.78 per share, for the period ended April 28. It lost $170 million, or $1.58 per share, a year ago.

The current quarter included a $233-million gain on the sale of some U.S. and Canadian stores and leasehold interests. Excluding store closing costs and other items, Sears Holdings lost 31 cents per share from continuing operations. Analysts had expected a loss of 67 cents per share.

Sears currently has more than 3,900 stores in the U.S. and Canada.