23 Mar

Sears has ‘substantial doubt’ about its future

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Posted by: James Moysey

In this Feb. 22, 2012 file photo, shoppers enter a Sears department store location in Dedham, Mass. (AP Photo/Steven Senne, File)

Anne D’Innocenzio and Hannah Weikel, The Associated Press
Published Wednesday, March 22, 2017 7:30AM EDT
Last Updated Wednesday, March 22, 2017 5:30PM EDT

NEW YORK — Sears, a back-to-school shopping destination for generations of kids, has said that after years of losing money that there is “substantial doubt” it will be able to keep its doors open. But it also insisted that its actions to turn around its business should help reduce that risk.

It was still a dramatic acknowledgment from the chain that owns Sears and Kmart stores, which has long held fast to its stance that a turnaround is possible, even as many of its shoppers have moved on to Wal-Mart, Target or Amazon.

Sears has survived of late mainly with millions in loans funneled through the hedge fund of Chairman and CEO Edward Lampert, but with sales fading it is burning through cash. Sears Holdings Corp. said late Tuesday it lost more than $2 billion last year, and its historical operating results indicated doubt about the future of the company that started in the 1880s as a mail-order catalogue business.

At a largely empty Sears store in St. Paul, Minnesota, where the available parking far outstripped the number of cars in the lot, 85-year-old Jack Walsh and his 82-year-old wife, Mary Ann, said they have shopped at Sears their entire lives, buying items from curtains and window treatments to tires and tools.

“I bought my tools from Sears and I’ve still got them,” Jack Walsh said.

The company known for DieHard batteries and Kenmore appliances has been selling assets, most recently its Craftsman tool brand. But it says pension agreements may prevent the sale of more businesses, potentially leading to a shortfall in funding.

“It’s a sad story. This is the place that created the first direct to consumer retail, the first modern department store. It stood like the Colossus over the American retail landscape,” said Craig Johnson, president of Customer Growth Partners, a retail consulting firm. “But it’s been underinvested and bled dry.”

Company shares, which hit an all-time low last month, tumbled more than 13 per cent Wednesday. Sears tried to soothe investors’ fears, saying in a post on its site that it remains focused on “executing our transformation plan” and that news reports miss the full disclosure that it’s highlighting actions to reduce risks. It also said that the comments made in the filing were in line with “regulatory standards.”

Lampert combined Sears and Kmart in 2005, about two years after he helped bring Kmart out of bankruptcy. He pledged to return Sears to greatness, leveraging its best-known brands and its vast holdings of land, and more recently planned to entice customers with its loyalty program. The company, which employs 140,000 people, announced in January said it would close 108 additional Kmart and 42 more Sears locations, and unveiled yet another restructuring plan in February aimed at cutting costs and reconfiguring debts to give itself more breathing room.

But it has to get more people through the doors or shopping online for what it’s selling. Sears, like many department stores, has been thwarted by a new consumer that has ripped up the decades-old playbook that the industry has relied upon. A plethora of new online players have also revolutionized the market.

Sears has upped its presence online, but is having a hard time disguising its age. Its stores are in need of a major refresh as rivals like Wal-Mart and Target invest heavily to revitalize stores. Sales at established Sears and Kmart locations dropped 10.3 per cent in the final quarter of 2016.

Industry analysts have placed the staggering sums of money that Sears is losing beside the limited number of assets it has left to sell, and believe the storied retailer may have reached the point of no return.

The company has lost $10.4 billion since 2011, the last year that it made a profit. Excluding charges that can be listed as one-time events, the loss is $4.57 billion, says Ken Perkins, who heads the research firm Retail Metrics LLC, but how the losses are stacked no longer seem to matter.

“They’re past the tipping point,” Perkins said. “This is a symbolic acknowledgement of the end of Sears of what we know it to be.”

For Sears to survive, Perkins believes it would need to do so as a company running maybe 200 stores. It now operates 1,430, a figure that has been vastly reduced in recent years. As for Kmart, Perkins does not see much of a future.

For decades, Sears was king of the American shopping landscape. Sears, Roebuck and Co.’s storied catalogue featured items from bicycles to sewing machines to houses, and could generate excitement throughout a household when it arrived. The company began opening retail locations in 1925 and expanded swiftly in suburban malls from the 1950s to 1970s.

“When I first got married at 19 or 20, we bought our first set of kettles from Sears,” said Darla Klemmensen, who was shopping at the St. Paul store on Wednesday. “We still have some of those.”

Klemmensen says Sears has been part of her life since she was a child watching her grandmother order stockings and garters, and she remembers flipping through Sears catalogues as thick as her forearm, full of appliances, clothing and kitchen wares.

But the onset of discounters like Wal-Mart created challenges for Sears that have only grown. Sears faced even more competition from online sellers and appliance retailers like Lowe’s and Home Depot. Its stores became its albatross, many of them looking shabby and outdated. The company, based northwest of Chicago in Hoffman Estates, Illinois, lost $607 million in the most recent quarter and revenue fell.

“They’ve been delusional about their ability to turn around the business,” said Perkins.

Johnson, though, believes one avenue for Sears could be returning to its roots as a direct-to-consumer company, only using the internet versus the old catalogue. He believes the Sears name still stands for something for the 40-plus customer.

“It has a lot of good memories,” he said. “It stands for being dependable and reliable.”

Weikel reported from St. Paul, Minnesota. AP Business Writer Michelle Chapman contributed to this report from Newark, New Jersey.

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5 Mar

Canada seen as safe haven in uncertain times

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Posted by: James Moysey


Canada remains a relatively stable investment market even as geopolitical and economic uncertainty in many parts of the world, combined with dramatic technological advances, make for a rapidly changing globe.

CBRE Market Outlook“Skittish capital is being driven to Canada,” CBRE Canada executive vice-president and executive managing director Paul Morassutti said in delivering an overview of the real estate industry to open the RealCapital conference at the Metro Toronto Convention Centre on Tuesday.

“Investment activity was at record levels in 2016, when every asset class outperformed its 10-year average. This activity included a record level of foreign investment, the vast majority of which was Chinese.”

Morassutti said the ongoing appetite for risk-averse assets has pushed capitalization rates for trophy properties in Vancouver and Toronto to record lows, and they now resemble yields in cities such as Paris, New York and London.

REITS and pension funds

Canadian real estate investment trusts made a strong comeback last year from a weak 2015 and vastly outperformed the global market, delivering an unprecedented 18 per cent return. However, Morassutti pointed out the REIT industry is maturing and changing.

“After more than two decades of being almost exclusively asset acquirers, REITs are now focused on capital recycling, strategic development and de-risking their distributions and portfolios.”

While domestic pension funds and their real estate arms are selectively buying properties that rarely come to market, according to Morassutti, they’re also taking a similar approach as REITs.

“For the most part, rather than chasing acquisitions in a frothy environment, they have principally chosen to squeeze out higher yields by developing brand new product and repositioning assets.”

Widening gap in retail

Morassutti stressed e-commerce and online shopping aren’t the biggest stories in retail, but the widening gap between strong and weak assets, retailers and owners is.

“Tier one flagship malls are performing extremely well. Virtually every major mall in Canada has recently renovated or expanded, while B- and C-class malls in tertiary locations are struggling, and some of them may not ever recover.”

Several top retailers are reducing their physical store counts and format sizes and focusing on their best locations, which is hurting malls in weaker areas and increasing the adverse impact of e-commerce on such sites.

One of the ways in which shopping centres are trying to lengthen customer dwell time is through increased experiential retail — including entertainment and food offerings — that can’t be replicated online.

Morassutti pointed out that Canada has considerably less mall space and its shopping centre productivity is well ahead of the U.S., so the former doesn’t have the “dead mall phenomenon” that plagues its southern neighbour.

Industrial has major role in retail

The retail and industrial sectors are becoming more intertwined, especially as consumers demand ever-faster product delivery and logistics facilities gain in importance. Morassutti said online retailers need three times the amount of distribution centre space as brick and mortar retailers.

“For every $1 billion in online sales, an incremental one million square feet of distribution space is required. This has delivered an additional wave of demand to a sector that was already very stable.

“It’s not just mega distribution facilities that I’m talking about. It’s now evolving into a broader spectrum of space requirements, including smaller local fulfillment buildings located within close proximity to urban centres as last mile delivery becomes ever more crucial and as the logistics of dealing with returns — which can be three times higher than the return rate at physical stores — becomes ever more important.”

Office sector will see more changes

While the technology sector has been the biggest driver of office space demand, Morassutti cited a study that said automation will kill back office positions in the financial services industry. That, however, should be offset by new jobs in software development, data science, digital media and creative industries.

“Finance and technology are increasingly becoming more integrated and the finance sector is expected to act much more like technology firms in terms of innovation, employee retention and attraction, and workplace services,” said Morassutti.

“The challenge for office owners probably won’t be that you won’t have any tenants, it’s that tenants may not want space the way you want to give it to them.”

Don’t count out Alberta

Oil prices are firming up, the unemployment rate is dropping and confidence is gradually rebuilding in Alberta, according to Morassutti, who mentioned that the Canada Mortgage and Housing Corporation is forecasting a decline in residential vacancies through 2018.

“The energy sector does look to be firmly back on the path to recovery, but the path is proving to be a long and bumpy one. The impact of that on the office sector will be minimal, as both hiring and leasing will lag just as we’re adding an additional three million square feet.

“So while there is still clearly risk, don’t write off Alberta. If there’s one place left in Canada where there’s real value and where an investor can hit a home run, it’s Alberta — especially in the office sector.”

Multi-family on the rise

Younger Canadians are foregoing home ownership because of affordability issues or lifestyle choices, while retiring baby boomers who need the equity from their homes downsize from houses to rental accommodations. As a result, Morassutti expects that the recent sharp upturn in the construction of purpose-built rental apartments will only increase.

“Condos have been the de facto rental product in most cities, but there’s now a growing cohort who would prefer to be in a professionally managed building rather than dealing with a condo owner in another country where you have no security of tenure in a building that quite often resembles a frat house.”

New type of approach needed

“Since the mid-1990s we’ve seen stronger ownership, lower levels of debt, capital market discipline, et cetera,” Morassutti said while wrapping up his presentation. “The net result is that real estate has evolved into a much stronger and less volatile asset class.”

He warned, however, that the combination of a slow growth environment, political unrest and accelerated technological change is introducing a layer of risk and uncertainty that the Canadian real estate industry hasn’t before seen to this extent.

“I’m not trying to be an alarmist. My point is simply that we are witnessing an acceleration of big changes, both positive and negative, that will produce both winners and losers. More than ever, you need to understand these shifts in order to develop appropriate strategies.

“Gone are the days where you could be a passive owner. Today you have to have deep sector expertise and you really have to understand your tenants. You have to have a well-informed and holistic view of the market and access to excellent research. These are the things which will help insure success or, at the very least, survival.”

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