Los Angeles Times

Sears' shares up on Kmart buzz

Tribune staff reporter

Sears, Roebuck and Co. stock rose 5.5 percent Tuesday on speculation that the Hoffman Estates department store chain might buy some stores from or even invest in Kmart Holding Corp., which saw its shares climb nearly 7 percent.

The buzz behind the stock run-ups of the two retailers is largely due to the recently announced sale of as many as 24 Kmart stores to Home Depot for about $365 million, said Art Hogan, chief market analyst for Jefferies & Co. in Boston.

"There are several different levels to the chatter, like Sears may purchase some interest in Kmart or purchase [stores] from Kmart," said Hogan, who said the latter deal is more likely.

Both stores have been struggling. May sales in Sears stores open at least a year dropped 3.7 percent. Kmart's sales were down 12.9 percent for the quarter ended April 28.

Besides lousy financial results, Sears and Kmart share something else that's fueling the speculation: a key investor.

ESL Investments Inc., a Greenwich, Conn., hedge fund, is Kmart's majority owner. ESL's Edward Lampert also is chairman of the retailer. And Lampert owns nearly 14 percent of Sears, making him its biggest investor.

For more than a year, Sears watchers have wondered if Lampert will nudge the two into a marriage or at least some business arrangement.

Kmart has one thing that Sears wants: freestanding stores. Sears wants to expand its network of off-mall stores, which sell everything from milk to appliances. It has only five Sears Grand stores open or planned now, but a Sears executive recently said the company believes there's the potential for up to 500.

At least one retail expert says Kmart's sale of stores to Home Depot suggests a liquidation mindset.

"They're not selling bad stores to Home Depot. They're selling stores," said Howard Davidowitz, of New York retail consulting firm Davidowitz & Associates.

"They realize the value of their real estate and are trying to become some sort of investment company because they also realize being a retail venture is impossible."

Davidowitz said it makes no sense for Sears to merge with Kmart. First, Sears doesn't need the cash that Kmart is piling up. Second, Kmart, as a retailer, is a "cadaver," he said.

"Kmart is hopeless. Sears has a tremendous amount of work to do, but it's not hopeless," Davidowitz said. If Sears were to buy Kmart, "what it would get with that money is a terrible business that can never compete."

Sears watchers pointed out Tuesday that if Sears were eyeing Kmart for a takeover, Sears' stock would likely sink.

Sears' stock closed up $2.11 to $40.41 a share on Tuesday. Kmart rose $4.33 to $66.33.

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