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Why Bankruptcy At Sears Makes Sense For Its CEO

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Nothing is certain in retailing especially for a retailer with sales and earnings as poor as they have been for Sears Holdings. Observers suggest the company is heading toward oblivion. Closing about 150 stores including 92 underperforming Kmart stores, shutting down pharmacies, ceasing operations in 50 auto centers and reducing staff everywhere encourages such a conclusion. In addition, management has sold one of its jewels – Craftsman tools to Stanley Black & Decker for $525 million even though selling Craftsman tools will hurt Sears image. It certainly looks like Sears' management (a.k.a. Eddie Lampert) is monetizing Sears’ assets possibly before it files for bankruptcy and the courts then dictate what financial maneuvers management can and cannot make.

A counterpoint to this sad tale is the fact that Seritage Growth Properties, a REIT set up by Lampert, could benefit handsomely from a Sears Holding bankruptcy. Seritage has 266 of Sears' most attractive locations in its portfolio. Assuming that Sears Holding declares it is insolvent, the properties that now pay an average of $4 per square foot in rent might be reoccupied by new tenants that are ready to pay as much as $18 per square foot for the same space. That would dramatically improve Seritage’s profit profile, transforming it into a very valuable enterprise. According to David Englander, who wrote a brilliant article for Barron’s, Sears could break its leases with Seritage by paying one-year rent and tenant reimbursements. As Sears’ stores close, Seritage can redevelop and lease the properties to new occupants.

Seritage bought the Sears properties in a sale/leaseback transaction in 2015. It is a joint venture with Simon Property Group, GGP and Macerich. Many of the stores are in excellent regional malls. If reconfigured, the Sears space might be attractive to several tenants including Sephora, Primark, Lidl, Aldi, Whole Foods (365), Cinemark Holding, among others.

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Many retail chains are thinking twice about expanding given the current hostile retail environment, which means malls are having a tough time attracting new tenants. Competing for new tenants are locations being vacated by major retailers like Macy’s, J.C. Penney and others. Despite the growing glut, Seritage has been able to attract tenants for about 2.1 million square feet of its space, including signing Shake Shack as a new tenant last year.

Eddie Lampert, CEO of Sears Holding, Seritage, as well as ESL Holding is sure to gain from Seritage’s potential growth. Englander writes, “Seritage’s equity could be worth almost $13 billion in 10 years, more than eight times its current value. The shares, owned by Eddie Lampert, Bruce Berkowitz, Warren Buffet, and others, fetched $41.50 last week.” As the saying goes, one man’s trash is another man’s treasure. In the case of Sears Holdings, it is the same man.