Sears says 61 new stores won't compete with mall sites

The 61 standalone stores that Sears, Roebuck and Co. is buying from Kmart Holding Corp. and Wal-Mart Stores Inc. are an average of eight miles away from its traditional mall stores.

That distance, Sears says, assures there'll be little sales erosion at the existing 870 mall locations.

But it does raise the question: Where will the freestanding Sears stores take business from?

"The hope is they will take sales away from Wal-Mart and Target," Carol Levenson, analyst for Gimme Credit Publications Inc., said in a July 1 note on the $620 million deal.

"Good luck," she added.

The bond analyst wonders why Sears "wants to go head-to-head against the kings of the big-box retailers, especially after witnessing Kmart's dismal failure with these same locations."

Also, while the deal represents an immediate 7 percent increase in the number of Sears' stores, it will have less of an impact on the company's sales.

The 61 stores have average annual revenues of more than $20 million, or about $1.22 billion. Had they been on Sears' books in 2003, they would have increased sales of the Hoffman Estates retailer by only 3 percent.

But in a conference call with Wall Street analysts last week, Sears Chief Executive Alan Lacy expressed confidence that the new off-mall stores will pay off. They're about the same size as Sears' mall stores, he said. And early results at Sears' first two off-mall stores--200,000-square-foot Sears Grand stores in Utah and Illinois--are promising.

"We think we've got a good handle on the economics," Lacy said.

The 61 stores, which each have about 84,000 square feet of selling space, will sell products that traditional Sears stores carry, such as refrigerators. But they will also stock the convenience foods that Sears Grand carries.

Lacy was asked which product lines would get the heave-ho now that Sears is squeezing consumables such as milk into the new stores.

"I'm not prepared to go public on those today," he said.

Lacy also was asked whether it might have been more prudent for Sears to have bought Kmart assets while it was still in bankruptcy court.

Kmart filed for bankruptcy in early 2002 and re-emerged in spring 2003 to become a retail high-flier, at least in the stock market.

Lacy divulged that it was late 2001 that Sears began hatching its plan to open full-blown Sears stores away from malls.

"It has been on the agenda for a long time," Lacy said. But "for us to have tried to step into the Kmart bankruptcy situation would have been quite a task" since Sears didn't cut the ribbon on its first freestanding full-line store until fall 2003.

Sears ended up paying a fair price for the 54 stores, he added. Seven of the 61 stores come from Wal-Mart.

Sears also noted that the $200 million that will be spent to remodel the new stores will be diverted from plans to remodel existing stores. The 61 stores are, on average, six years younger than the typical Sears store.

Sears has no plans to sell any of its mall stores, Lacy said.

"Our mall-based portfolio is a very profitable portfolio. We just want to have more stores."

Separately, Sears said last week that June sales were softer than expected, although sales of appliances and electronics are up year-to-date.



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