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Typical Sears mall store

Sears Not Llikely To March Aaway From Malls

If Sears, Roebuck and Co. is plotting a mass exodus from the nation's shopping malls after it merges with Kmart Holding Corp., then real estate executive Robert Michaels doesn't yet see it.

The General Growth Properties Inc. president said his company met with Sears recently to find out how serious the Hoffman Estates department store chain is about exiting some mall locations if it converts hundreds of freestanding Kmart stores to Sears stores.

"There are a number of Sears stores we'd like to get back," Michaels commented Jan. 16 at the National Retail Federation convention in New York.

Sears, however, didn't "have any stores that we were talking about that they wanted to give back," Michaels said. Sears' mall stores "do quite well," he added.

Any plans that Sears has to uproot itself from the traditional enclosed shopping mall would take a "a long time" to execute, he figures.

In Michaels' eyes, "an ideal tenant mix" includes Nordstrom Inc. and Target Corp. "I'd replace a number of department stores with Target all day long," he said.

Sears, whose merger with Kmart was announced in November and is expected to close in March, is a tenant in more than 100 of the 209 properties that General Growth has interests in, records show.

Michaels' comments dovetail with those made Friday by Deutsche Bank analyst Bill Dreher after rumors surfaced that Federated Department Stores Inc. and May Department Stores Co. were in early merger talks.

The Federal Trade Commission, Dreher explained, could force Federated and May to divest scores of stores to overcome antitrust hurdles. That, in turn, could result in the supply of available retail space outpacing demand, he said.

If such a glut were to occur in the retail industry, Dreher doubts that Edward Lampert, chairman of the merged entity that'll be known as Sears Holdings Corp., would also flood the market with property.

"While Sears has at least 200 stores, and likely closer to 300 stores, they'd like to get out of, we wouldn't expect Eddie Lampert to participate in a fire sale and instead wait for demand to catch up to supply," Dreher said in a Jan. 21 note to clients.



Marshall Field's, Chicago

M&A Talk

Less than a week before the rumors surfaced about Federated and May, the topic of retail mergers and acquisitions arose during a panel discussion Jan. 16 at the national retailers' meeting.

Goldman Sachs analyst George Strachan told the crowd that the rationale for the deal between Sears and Kmart had been fueled by Sears' desire to expand away from shopping malls and Kmart's willingness to sell excess real estate.

The deal's timing, he figures, was due to the Nov. 5 disclosure that Vornado Realty Trust had bought a 4.3 percent stake in Sears. "This is a one-off deal," Strachan said of Sears and Kmart. "It doesn't mean we'll see a waterfall of M&A activity in retail."

But another panelist, Mesirow Financial Chief Economist Diane Swonk, said she foresaw an acceleration of either deals or store expansion programs because many retailers had plenty of cash. The department store sector, she said, is particularly vulnerable to a retail industry shakeup.

"There are too many department stores out there," Swonk said.