It may seem far-fetched that a retailer as massive as Sears, Roebuck and Co. could ever be dismantled to tap the underlying value of its real estate.
After all, the Hoffman Estates-based company is an American icon. It has $9.5 billion in market value, $31 billion in 2003 merchandise sales and $2.7 billion in cash on hand to play with.
Vornado Realty Trust revealed that it had quietly amassed control of 4.3 percent of the company's stock, it highlighted a fundamental shift in the way the market values retailers. The move puts heavy pressure on Sears Chairman Alan Lacy to justify the company's weak profits and outmoded merchandizing strategies.
According to interviews with retail and real estate experts, opportunistic investors like Vornado Chairman Steven Roth and Edward S. Lampert, who separately owns 15 percent of Sears stock, might be able to make more money by selling many of Sears' poorly performing but well-located stores to more successful retailers. And Sears itself might be more viable as a smaller chain with a tighter focus.
While Lacy is intent on making Sears grow, Roth or Lampert may see more profit in forcing it to shrink. Sears is unlikely to disappear altogether, but many experts believe this could catalyze a major restructuring.
"If you can make the retail company work, and unlock a lot of the value in the real estate at the same time, there's money to be made," said George Good, a senior vice president with real estate firm CB Richard Ellis Inc.
Lacy's inability to turn Sears around after four years of trying has run smack into a powerful real estate trend that has created heavy demand for just the kinds of properties that Sears has in abundance.
That's why Sears' stock soared 23 percent after the Vornado announcement on Nov. 5 and another 5 percent on Thursday when Robert Ulrich, chairman of Target Corp., told analysts his company is open to the idea of buying prime mall-based properties.
Over the last few years, new mall construction has slowed to a crawl, about 1 percent growth annually versus 5 percent a year in the 1980s. Growing retailers like Target and Nordstrom Inc. can't find enough space for new stores, especially in urban and suburban markets where property is at a premium.
Older, ailing retailers like Sears, Kmart Holding Corp. and Mervyn's LLC have lots of stores in attractive locations that might be used more profitably by some of these potent competitors. That has created a value vacuum that is beginning to make investors question whether sluggish stores could be sold for a rich profit.
"A retailer will keep an underperforming store open," said Louis Taylor, a real estate analyst at Deutsche Bank Securities Inc. in New York. "A real estate guy will say. `Hey, look, if you're doing $100 a square foot [in sales], I'll buy it from you and lease it to a tenant that's doing $300 to $400 a square foot.' Until now there's been no pressure on retailers to change."
Pressure started building on Lacy in 2002 when Lampert, the 42-year-old chairman of a Connecticut hedge fund called ESL Investments Inc., began collecting a 15 percent stake in the retailer. Lampert has so far been a passive voice among Sears' major shareholders. But he has proven already how hot the market is for recycled retail real estate by selling more than $1 billion worth of assets at Kmart.
Lampert took control of Kmart out of bankruptcy in early 2003 and began spinning out properties. Earlier this year, he sold 50 stores to Sears for $576 million and 18 others to Home Depot for $271 million. Some observers have questioned the wisdom of downsizing the huge retailer, but others note that Lampert has already raised more money than anyone else had thought possible.
"People are looking at what happened at Kmart and thinking, `Oh, my God!'" said one investor in similar deals who has worked closely with Sears. "A lot of people misunderstood the asset values. Lampert didn't."
Because Roth, Vornado's hard-nosed chairman, has also made a career out of acquiring distressed real estate and spinning it into gold, few industry experts expect him to sit still. Neither Roth nor Lampert have signaled their intentions regarding Sears, and both declined requests for comment for this article. But they are known as aggressive investors, and together their investments represent almost 20 percent of Sears' stock. That alone would give them a firm platform from which to pressure Lacy together if they chose.
Lacy also declined a request for an interview. A Sears spokesman issued a statement saying, "We are pleased that Vornado sees value in our stock." In late October, Sears shares were down 29 percent from a year earlier.
A source close to the board said Lampert "has been very supportive of what Alan has been doing." The source added that the board is not yet aware of whether ESL is working with Vornado, or what their plans are.
Mervyn's deal offers hints
Vornado's intentions, however, may be revealed by a deal it didn't do: the $1.2 billion purchase of Mervyn's, a 257-department store chain based in Hayward, Calif., that was previously owned by Target. Vornado was outbid by a group that included Florida retail investment firm Sun Capital Partners Inc., New York hedge fund Cerberus Capital Management LP, and a joint venture of Chicago's Klaff Realty LP and Philadelphia-based investment fund Lubert-Adler Management Inc.