Checking In On A Sears Property Slated For Possible “Box Split”

Sears doesn’t have a sales problem, it has a profit problem. Whether you agree or not (my personal view is that a sales problem both contributes to, and serves to exacerbate, an underlying profit problem), that’s the conclusion drawn by CEO Eddie Lampert. As a result, he is closing dozens of stores and trying to figure out ways to make others smaller (and therefore perhaps more profitable).

In fact, Sears has a relatively new subsidiary called Seritage Realty Trust that has been given the task of managing (read: restructure and/or redevelop) about 10% of Sears’ locations. Seritage has its own web site, with many of its projects listed. Included on that list are locations tagged for a “box split,” which means they would like to subdivide the current store and rent out space to another retailer. The thesis is that Sears will make more in rental income from the subleased square footage than it did using it to sell Sears’ inventory. In addition, they could see sales per square foot increase in the Sears store that remains open by rationalizing their product selection. Overall, it’s an interesting strategy with potential, but since it is early in the process it is also largely unproven.

There are only 9 “box split” store candidates listed on the Seritage web site and it just so happens that one of them (the Alderwood Mall store in Lynnwood, WA) is only about 30 minutes north of my home in Seattle. This past weekend my wife and I drove up there to check out a new mall (we’ve only lived here for about 6 months) and see what, if anything, of note was happening at the Sears store. Perhaps not surprisingly (given that we are talking about Sears after all), there were some good things, some bad things, and some strange things going on.

First, some good things if you are rooting for Sears to find its footing:

1) The Alderwood Mall is a high-end mall (owned by GGP) located in a suburb of a relatively wealthy city. Sears owns the store outright (it’s not leased). The two floors are 82,000 square feet each, excluding a 13,000 square foot Sears Auto Center attached. You might not think the fact that the mall is high-end jives with the core Sears customer (and I would not disagree), but the real value here is in the fact that the real estate is owned and high end mall space is worth top dollar.

2) This store (not surprisingly given it was selected for Seritage’s portfolio) appears to be an excellent candidate for a “box split.” At ~165,000 square feet it has more floor space than Sears really needs (you should see how many clothes this place is stocking), and it has two exterior entrances but just one mall entrance. This means Sears could split the box in such a way that another retailer could occupy half of the first floor (40,000 square feet) and have a dedicated entrance from the parking lot, while Sears could retain one exterior entrance as well as a mall entrance. Here’s a map of the mall:

There are exterior entrances on both the east and south sides of the Sears box, but only one mall entrance in the northwest corner, so Sears can easily split the box into a “north” and “south” section.

3) Despite Sears being known for skimping on capital expenditures since Eddie Lampert took over as Chairman, this store was not falling apart like many others. In fact, it appeared to be in very good condition despite being built in 1979. It’s good to see that capex reductions are not happening at the “best of the best” locations in the Sears property portfolio.

So that’s the good news. But it’s not all good, especially considering that this idea is still very much a development concept. There were no signs of any construction or preparation work being done in the store that would lead one to believe any tenant is close to signing a lease at this location and has asked Sears to get the ball rolling.

You can probably guess what kinds of things stood out as being “same ol’ Sears.” My biggest gripe with the chain has always been that Sears stores are almost always terribly disorganized, making for a miserable shopping experience. It boggles my mind when I go inside one because all I can think to myself is, “has a senior manager ever walked this store, and if they have, how could they not realize that if you simply cleaned up the clutter and organized the inventory in a better way, you would likely see better sales production?” It really doesn’t take much money (or any) to focus on organizing stores better, it’s just time and effort.

How bad was it? Well, how about some pictures:

I don't know about you, but when my wife is in the market for handbag, she definitely wants to find a new tax preparaer and grab a stuffed bear all at once...
I’m not the person to ask obviously, but I don’t think experienced merchandisers would say that handbags, stuffed animals, and tax services go well together. Needless to say, the Macy’s store did not look like this.


As for Jackson Hewitt, that’s not the only place they are advertising; they are also targeting shoppers before they even get to Sears:

That's the floor of the main mall area, a few hundred yards away from Sears...
That’s the floor of the main indoor mall area, a few hundred yards away from Sears. No idea if this works, but even if it did, I’m not sure there would be any way to track your return on investment…


We also checked out the Lands End section. This is a case where not only does the merchandise they pair with the men’s clothing section make absolutely no sense, but I question why Sears even carries the products at all (stuffed bears in the kid’s section at least would make sense).

Fake tattoos and mustaches to go with your new dress shirt and pants?
Looking for new dress shirts and pants for a new job? Why not add a fake tattoo and mustache to impress your new boss?


My wife was actually looking for Lands End socks, but couldn’t find any on the floor, so we asked one of the dedicated Lands End employees for assistance. Despite the fact that she only works in a small section of the store (Lands End shops in Sears stores average 7,400 square feet, which is less than 10% of the first floor of this particular store), she didn’t even know if they had any socks in stock. “It’s really hard to keep track of where things are,” she said. “They move everything around so much.”

So not only is the store disorganized for shoppers, but the Lands End employees can’t even keep tabs on their own inventory. Again, management here is a serious problem. Sears gets called out for skimping on store upkeep, but this is simply an organizational and inventory management issue having nothing to do with money. We finally found maybe 10 pairs of women’s socks on display after wandering the department for a few minutes. None of them were black (a common sock color!?), the color my wife was looking for, so we left the Lands End department empty-handed.

This brings up another issue, because a big part of Eddie Lampert’s “integrated retail” strategy involves carrying less inventory in the actual stores, but installing kiosks that allow you to order online while in the store, in case you need a size they don’t have, or one of the various colors that they don’t stock in physical stores at all. In one of the rare interviews he agreed to do, Lampert explained his thinking to the Chicago Tribune:

“The integrated retail part of our strategy is really about how you work between online, mobile and store, not just from a customer standpoint, but from a supply-chain standpoint,” Lampert said. “If we have a shirt in the store in four colors, we might have that shirt in 10 additional colors online. To have 14 colors in the store may be too risky because what you don’t sell, you end up losing money on, (compared with) having a group of it online that serves all the stores so that if people want more variety, they can get more variety.”

This may sound like a good idea at first blush, but most people who prefer to shop online aren’t coming to your store to then order at a kiosk or their smartphone. More likely, they are in your store because they want to try on or see the actual item prior to buying. If you don’t have black socks in stock, and there 100 other stores in the mall, I think that customer is more likely going to go buy from a competitor. Contrary to what Lampert seems to think, ordering online from an actual store is not always convenient for the shopper. If they wanted to order from your web site, they never would have driven to the mall. And if they wanted to buy a physical product from a store, they are likely going to find better selection elsewhere in that very same mall.

In addition, I am baffled as to why Lampert believes those extra 10 colors sitting in a warehouse awaiting an online order are any more profitable than those same colors sitting in the store awaiting an in-person buyer. Sure you could argue that warehouse space is cheaper than store space, but aren’t the odds higher that someone will see the product and make an unplanned purchase if the item is in a store and not sitting in a warehouse somewhere? Not to mention the fact that Sears shoppers tend to be older, so they are less likely to be avid technology users and more likely to prefer seeing and touching the product before buying it. I think Lampert’s integrated retail strategy might work better for some businesses than others, and I don’t think Sears is a good fit relatively speaking. Perhaps that is a contributing factor as to why sales trends are so poor right now.

Before heading out of Sears, I also checked out the hard lines department, the biggest segment for Sears. I was impressed with the hardware and tools section (one of the largest Craftsman selections I’ve seen) and then I ventured upstairs to check out appliances and electronics.

Appliance department is well organized and there were a couple salespeople ready to assist, but what's that in the background?
Appliance department is well organized and there were a couple salespeople ready to assist, but what’s that in the background?


I called this their "electronics jail" but it really reminded me more of a professional hockey or indoor soccer game. I guess they are having issues with theft...
I called this the “electronics jail” but it really reminded me more of a professional hockey or indoor soccer game. I guess they are having issues with theft…


This just felt strange. Not a very inviting shopping experience. There was one employee manning the jail, and I doubt it would deter you from browsing if you were looking to make an immediate purchase, but it just seemed so unneccesary, and the first of its kind I have seen. I’d be curious to see if shoppers are less likely to browse an enclosed area like this, assuming they weren’t looking for something specific, just because it would feel like the employees were more concerned with making sure you didn’t steal something, as opposed to enticing you to buy something. My wife and I had a good laugh (and we didn’t go inside, though we did have to raise our voice to ask the saleswoman through the glass where the nearest restroom was located).

All in all, it was an interesting trip. Nothing really has changed about my view of Sears though. They still don’t seem to know what they are doing when it comes to creating a positive shopping experience, relative to their competition, and although they aren’t skimping on upkeep at this valuable piece of real estate, they don’t seem to really be focused on maximizing the profits from the store either. The potential redevelopment opportunity from a real estate perspective is definitely there, but progress is slow. At a mall of this caliber (it’s a combined indoor-outdoor complex that very much represents the typical high-end GGP mall), you would think Sears could really turn their 165,000 square feet into something unique and profitable. Time will tell.

Full Disclosure: In order to attend the 2014 Sears Holdings annual shareholder meeting (Mr. Lampert rarely speaks publicly outside of this event and this year I decided to go) I am long a small “odd lot” (i.e. less than 100 shares) of SHLD stock. However, this is merely to permit me to attend the meeting and not for investment purposes. In addition, I am long Sears bonds as an investment. Positions may change at any time.

3 thoughts on “Checking In On A Sears Property Slated For Possible “Box Split””

  1. When you say that it doesn’t take money, just time and effort to reorganize store I think you are making a common mistake of failing to see how quality and quantity may swap places with the elementary growth, size-wise, of a relatively simple problem.

    Reorganizing one store may be a local management problem.

    Making a whole chain raise level in re-organization is a different beast altogether.

    I wonder how well paid are the Sears local managers.

    I wonder what stimulus they receive to be better at what they do.

    I wonder if any of them sees any prospects for future career growth.

    Hiring good resources and keeping them good can very easily take a good deal of money.

    Also related: I am ready to bet that money are also the reason behind placing seemingly unrelated items like mens’ clothes and gadgets.
    Perhaps Sears was just desperate enough for money to allow a poor mix like that…after all, they must have gotten paid for it.
    (assuming the mix was indeed poor, of course; they know best)

    1. You’re right, I highly doubt the incentives are there at the local store level, but it’s amazing to me that those at the corporate level can’t see/don’t care to change the problems. It might not be “free” but you can tie incentives to results and with 275,000 employees there have to be people who could help train lower level managers and reallocating some of their time wouldn’t cost anything. On an ROI basis (something Lampert focuses on in detail) it would likely be pretty attractive to implement some merchandising initiatives and not cost very much (relatively speaking) for a $30B/year in sales company.

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