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.
The Booming Canadian Dollar
The Canadian dollar has risen from around 62 cents U.S. in 2002 to around $1.03 U.S. at present. What this means is that, from the perspective of international retailers, we're spending a lot more in stores. Colliers Canada reports that <a href="http://www.collierscanada.com/en/News/2012/Canada-Still-Magnet-for-Foreign-Retail" target="_hplink">Canadian shopping malls brought in 50 per cent more in sales, per square foot, than their U.S. counterparts</a> in 2011. While U.S. malls earned $400 U.S. in revenue per square foot, at Canadian malls it was around $600 U.S.. That's a powerful magnet for U.S. retailers looking to expand.
Our Existing Stores Are Disappearing
Remember Zellers? How about Eaton's, or <a href="http://en.wikipedia.org/wiki/F._W._Woolworth_Company" target="_hplink">Woolworth's</a> or <a href="http://en.wikipedia.org/wiki/Simpsons_(department_store)" target="_hplink">Simpsons</a>? <a href="http://en.wikipedia.org/wiki/A%26A_Records" target="_hplink">A&A Records</a>, anyone? Those are just a few of the retail names that have disappeared or are disappearing from Canada's street fronts and malls. With traditional retailers fading, U.S. retailers are seeing opportunity left and right. They are also seeing vacant space they can easily convert to their own stores, as <a href="http://www.huffingtonpost.ca/2012/08/22/target-canada-zellers-protest_n_1822223.html" target="_hplink">Target Canada is doing with Zellers locations</a> and <a href="http://www.huffingtonpost.ca/2012/09/11/nordstrom-canada_n_1874734.html" target="_hplink">Nordstrom Canada is doing with Sears stores</a>.
Our Retail Sector Is Growing Fast
Growth in Canada's retail sector was <a href="http://www.nasdaq.com/article/the-promise-of-the-canadian-retail-market-20120914-00599" target="_hplink">34 per cent faster than it was in the U.S. between 2004 and 2008</a>, according to data from the Retail Council of Canada -- and that's before the financial crisis sank the U.S. into an economic no-man's-land. The Council's data also shows that retail grew 96 per cent faster than the Canadian economy as a whole during that period.
There Are Too Many Stores In The U.S., And We Have Room For Growth
In the U.S., retail supports one-quarter of all jobs and accounts for about 18 per cent of the country's economic activity. By comparison, Canadian retail supports only about one-eighth of all jobs in the country, and retail accounts for just more than six per cent of all economic activity, <a href="http://www.nasdaq.com/article/the-promise-of-the-canadian-retail-market-20120914-00599" target="_hplink">according to a report at Nasdaq.com</a>. This would suggest that the U.S.'s retail market is saturated, while there is plenty of potential growth in Canada.
More Of Us Have Disposable Income
The U.S.'s persistently high unemployment rate in recent years has left many Americans with little cash for buying anything beyond the basics. Data from WSL/Strategic Retail shows that <a href="http://www.businesswire.com/news/home/20120914005044/en/Canada-Land-Retail-Opportunity-WSLStrategic-Retail" target="_hplink">only about 50 per cent of Americans have disposable income</a>, but the same is true for 64 per cent of Canadians.
Less Competition From Online Shopping
Canadians often complain that our options for online shopping are more limited than in the U.S., and that seems to show in our shopping habits. Research on women's shopping habits finds that <a href="http://www.businesswire.com/news/home/20120914005044/en/Canada-Land-Retail-Opportunity-WSLStrategic-Retail" target="_hplink">only about half of Canadian women shop online</a>, compared to 75 per cent of American women. That means more opportunity for brick-and-mortar stores planning to move into Canada.
We're Not As Big On Bargain-Hunting
The <a href="http://www.businesswire.com/news/home/20120914005044/en/Canada-Land-Retail-Opportunity-WSLStrategic-Retail" target="_hplink">same study of female shoppers</a> found that, while 68 per cent of American women use coupons when shopping, only 55 per cent of Canadian women do. Half of Canadian women look online for coupon opportunities, compared to 61 per cent of Americans, and 57 per cent of Canadian women pick up in-store circulars, while 71 per cent do so in the U.S. This lack of hunger for bargains translates into bigger profit margins for retailers.