What Sears can learn from Saks, Hudson's Bay

Sometimes real estate is more valuable than the retail business.

By InvestorPlace Jul 29, 2013 3:08PM
copyright Spencer Platt, Getty ImagesBy Alyssa Oursler

While there's big money to be made in retail, some companies in the sector can actually make more money by focusing on real estate.

Just ask 94-year-old department store Saks (SKS), which was just snatched up by Canadian company Hudson's Bay (HBAYF).

Saks rounds out a Hudson's Bay portfolio that already includes a chain of Canadian department stores, along with the higher-end U.S. brand Lord & Taylor.

Talk of such a move has been floating around for more than a month (InvestorPlace), but the deal finally broke Monday morning. The Wall Street Journal reports that Hudson's Bay is paying $2.4 billion in cash -- at $16 per share, that's a 4.5% premium to SKS' Friday close, and a profit of nearly 50% for anyone who bought in at Saks' lowest point this year.

One retailer at the other end of the spectrum -- Sears Holdings (SHLD) -- should be watching carefully.

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Both Saks and Sears, which cater to vastly different customers, have been far off their pre-recession peaks, as seen in the accompanying charts.

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Of course, it's important to note that much of Saks' more recent upward trajectory came largely on buyout speculation, while Sears spun off (InvestorPlaceOrchard Supply Hardware (OSHWQ) in December 2011, then Sears Hometown and Outlet Stores (SHOS) in October 2012 -- part of the reason for the falling value.

Nonetheless, the Saks move highlights Sears' potential salvation: namely, through realizing that while it could be waiting a long time for an economic recovery to boost spending enough to save its fortunes, real estate is valuable right now.

As the Journal noted, the Saks deal "not only adds a high-end luxury chain to [Hudson Bay Co.'s CEO Richard Baker's] collection of brands but also gives him a lot of real-estate options." "Saks still has a number of stores in unprofitable locations," according to the Journal. "By swapping Saks Fifth Avenue stores in lower-end malls for the more moderately priced Lord & Taylor, [CEO] Baker could alleviate Saks's real-estate problems at little cost, a person familiar with his plans said. [It could also' expand the Saks chain to Canada without signing expensive new leases by putting it into Hudson's Bay real estate."

Tally it all up, and Saks currently operates 42 Saks Fifth Avenue stores and 66 outlet stores, which were valued at $1.5 billion by Citigroup analyst Deborad Weinswig last year. Sears has an even higher pile of real estate, which, if used properly, could make an ever heftier profit.

In fact, late last year, InvestorPlace contributor Will Ashworth pointed to Hudson Bay Co.'s leasing of its real estate assets as a prime example of what Sears should be doing. He added that Sears "can repurpose its properties into some sort of multi-use redevelopment by subletting the space or selling the leases as the Hudson’s Bay Company has done."

He added: "Between Sears and Kmart, the company has 241 million square feet of retail space, 37% of it owned and the rest in long-term, below-market leases." Fund manager Bruce Berkowitz valued such real estate at $160 per share, or $17 billion, at the time, while Sears CEO Eddie Lampert (of course) valued the property higher as of May (DailyFinance), giving it a price tag north of $20 billion.

Considering Sears' entire market value is currently around just $4.6 billion, you can imagine what unlocking that real estate value would do.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

More from InvestorPlace

Jul 29, 2013 3:14PM
I don't feel sorry for Sears one bit. I've stopped shopping at this chain because they just don't get it. Lousy service from clerks with terrible attitudes (and language sometimes) and management who could care less. The merchandise is old and outdated and so are their policies. Bye-Bye. See you in Bankruptcy.
Jul 29, 2013 11:32PM
I like Sears. It's not perfect, but I'll never set foot in a Saks store.
Jul 29, 2013 11:27PM
Sears used to be good.  Men's clothing has taken a dive in quality, although, the price is still high enough to fake people into thinking they are getting quality.  What a shame to she Sears hit the toilet.
Jul 29, 2013 10:11PM
What do you think Sears is doing? Some investigation please, or not.
Jul 29, 2013 4:15PM

I took my daughter to sears to buy a washer and dryer for her condo. wow, what a mess. I went there for so many years, but I am throwing in the towel. P.A. MichB has pretty much got it right. you really have to work at it, to be that bad.

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