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The Stock Picker’s Guide To Sears Canada

I might be dating myself here, but does anyone remember buying stuff from the Sears (TSX:SCC) catalog?

Every year, my Grandmother would have me flip through the Wish Book, take a mental note of what got me a little worked up, and buy my Christmas present from Sears. She’d order from the catalog, go a couple weeks later down to the local Sears store – which in our town only sold appliances and other big items – and pick up the order. Sears wasn’t alone in offering a catalog, but it was the biggest, by far. It was a good business to be in.

And then, the Internet happened.

Sales have been steadily declining for years, even in the company’s department stores. Competitors like Walmart and Target entered and further cemented their status in Canada’s retail market. Things got so bad for Sears that it elected to shut its prime location in downtown Toronto’s Eaton Centre.

Things aren’t all bad for the company though. In 2013, the company finally decided to get some value out of their vast real estate portfolio, selling 50% of 7 properties for $315 million. Sears also took advantage of early lease termination incentives at 7 more locations, netting $519 million in the process. It’s currently looking to sell some land it owns in Burnaby to local condo developers. The company also tightened its belt and managed an additional cost savings of $98 million in decreased expenses.

Thanks to those one time items, Sears had a profit of $4.38 per share in 2013. Shareholders were rewarded with a special dividend of $5 per share, which mainly went to line the pockets of the company’s American parent, Sears Holdings (NASDAQ:SHLD). Considering the parent company’s similar problems, the cash infusion from its 73% owned subsidiary was helpful.

Sears Canada is struggling with lagging sales. Same store sales were down 5.6% in 2012 and an additional 2.7% in 2013. It’s also struggling with decreased gross margins, decreased net profit (once you exclude the one-time items), an image problem, and the perception that all the tasty bits are being carved out and sold.

And yet, the stock is still up 76% in the last 52 weeks, and that’s not even including the special dividend, which would bump it to more than a double. Why would such a stock be up so much?

There are a few reasons. The company still has a bunch of additional real estate on the balance sheet, and is currently exploring ways to monetize it. Sears is also continuing to aggressively cut costs, like shutting down its Regina distribution center and announcing a new, state of the art distribution center in Calgary, which is expected to increase efficiency. Since Sears has a history of paying special dividends whenever it sells assets, current investors may be buying the stock in anticipation.

Still, Sears is undoubtedly struggling. Sales of home and hard lines products were down more than 15% in 2013, which is one of the strengths of its competitor, Canadian Tire (TSX:CTC.A). Any retail analyst will tell you Sears has stale products, nonexistent customer loyalty, and stores that aren’t great–even after a recent revamp. The company is closing stores every year, and will eventually run out of prime assets to sell.

Foolish bottom line

The bottom line is Sears just isn’t a very good retailer. There are still some interesting real estate plays for the company to explore, but those will run out at some point. The company still owes $800 million in debt, yet has paid out huge special dividends. It almost looks as it the parent company is using Sears Canada as its own personal ATM, using these special dividends to shore up its own balance sheet, at the expense of the long term health of the subsidiary. I’d avoid Sears Canada, especially after such a huge run up.

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Fool contributor Nelson Smith has no position in any stocks mentioned in this article.

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