Alarm Bells for Sears?
Closings loom as iconic retailer continues to struggle amid declining sales

Elaine Misonzhnik / National Real Estate Investor

While the retail industry’s attention recently has been focused on Borders’ Chapter 11 filing, another retail giant with a massive store portfolio that may be raising alarm bells in the near future.

For years, Sears Holdings Corp. has reported declining sales at its Sears and Kmart stores. In fiscal 2010, same-store sales fell 1.6 percent—dropping 3.6 percent at Sears and rising 0.7 percent Kmart. In 2009, same-store sales fell 5.1 percent. In 2008, sales fell 8%. Meanwhile, Sears Holdings’ net sales dropped from $53 billion in 2006 to $43.3 billion last year.

The firm survived the recession while many others failed. But the two brands have continually struggled to find a niche in the retail sector and ceded market share for years.

Observers questioned the tie-up of the two firms from the beginning and many still wonder if the brands can survive long term. That might depend on what Sears Holdings decides to do with its real estate, according to retail and retail real estate consultants.

Despite its lackluster performance, the Sears chain has several things going for it: a well-known name and respected consumer brands, including Craftsman tools and Kenmore appliances.

If Sears Holdings puts more emphasis on its hard goods and cuts down or improves its apparel offerings, it has a good chance of reinventing itself, says Craig Johnson, president of Customer Growth Partners, a New Canaan, Conn.-based retail consulting firm. But in order to do so, Johnson notes that Sears would have to shed about a third of its stores.

There appears to be less hope for the Kmart chain, which has failed to gain any market share in the discount game over the past decade against formidable competitors like Target and Walmart. Overall, Sears Holdings ranks as the ninth largest retailer in the U.S. by annual revenue—a steep drop after occupying the No. 1 slot for many years up to the 1990s.

As of January 2011, Sears Holdings operated about 3,500 stores in the U.S. The most valuable of these include 908 so-called “broadline” Sears stores based in some of the country’s best malls. In addition, the company operates 1,287 specialty Sears stores, which are either freestanding or located in neighborhood shopping centers, and 60 Sears Essentials stores, also a freestanding concept.

Across the U.S., Guam, Puerto Rico and the U.S. Virgin Islands, there are about 1,306 Kmart stores. Kmart stores are usually one-level freestanding buildings averaging 93,000 square feet in size. Unlike Sears stores, most of the Kmarts are positioned in weaker locations in secondary markets, notes Jeff Green, president of Jeff Green Partners, a Phoenix-based real estate consulting firm.

The consensus among the experts is that this portfolio is too large to allow Sears Holdings to run a profitable retail operation going forward. The good news is that observers believe a sizable portion of the stores can be subleased. The firm occupies locations at some of the best malls in the country. Sears Holdings owns many of the sites outright and has long-term leases at below-market rents on others.

“They have very desirable real estate, there is no question about that,” says George Whalin, founder of Retail Management Consultants, a Carlsbad, Calif.-based consulting firm. “When they started building those stores in the late 1950s and early 1960s, there were spaces available that aren’t available today. That real estate will be very desirable for retailers that are looking to expand.”