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HOFFMAN ESTATES, Ill. - Sears, Roebuck and Co. here has agreed to acquire ownership or leasehold interest in up to 61 off-mall stores in key Sears markets from Kmart Holding Corp. and Wal-Mart Stores, Inc. for approximately $620 million in cash.
The majority of the stores are expected to be converted by fourth quarter 2005 to Sears' nameplates, including a new midsize format modeled on Sears Grand, Sears' answer to supercenters. In addition to products found in a typical Sears store, Sears Grand also stocks a "convenience" area featuring 10 aisles of groceries, frozen foods, dairy, pet food, and household cleaners.
The 54 Kmart stores are located primarily in large urban markets with home, family, and income demographics similar to Sears'. The seven Wal-Mart stores are located in midsize markets that also fit well into Sears' market and demographic profile.
"These transactions will jump-start our strategy to grow the Sears brand off-mall, increase our points of distribution, and acquire well-located real estate at a fair value in key markets for Sears," said the company's chairman and c.e.o., Alan J. Lacy. "The acquisitions will allow us to quickly open more stores and significantly boost our off-mall retail presence in priority markets that have synergies with our existing mall-based stores."
Sears plans to increase the pace of growth for its Sears Grand format, targeting three of the newly acquired Kmart locations for conversion to Sears Grand stores. Including the previously announced four Sears Grand stores expected to be opened by the end of 2004, the company expects to be operating 12 to 14 Sears Grands at the end of 2005.
The portfolio of stores to be acquired average 110,000 gross square feet and 84,000 selling square feet, compared with an average of 90,000 selling square feet for Sears' current full-line stores. Most of the new stores will be converted to the new midsize format, modeled on Sears Grand. The new stores will offer a relevant subset of traditional categories, including apparel, home appliances, home electronics, home improvement, and home fashions, along with consumables and transactional items, including a pharmacy in certain locations. The floor design of the new stores will be on one level, employing a common layout similar to the open-racetrack design of existing Sears Grand stores, with exit cashiering near the door. The design will allow more efficient store operations and a significantly increased ratio of selling to gross square footage.
"Almost 60 percent of these new locations will be in the top 15 DMAs and will significantly increase our store coverage in the nation's largest markets, filling in our footprint and supplementing our mall-based stores by providing customers with the convenience they need," Lacy said. "Starting with a 'Best of Sears' assortment tailored for specific markets, we will employ many of the successful merchandising and design elements of Sears Grand in the midsize floor plan of the new format. These new off-mall stores will have improved operating efficiency, and leverage our supply chain and marketing expenses."
Sears will fund the purchase of the stores from available cash. The company will pay a maximum purchase price of about $620 million in cash for up to 54 Kmart stores, as well as the assumption of existing leases. Sears will make lease payments to Wal-Mart under subleases for the seven Wal-Mart stores. The acquisitions include real estate and Kmart store fixtures, but exclude inventory and liabilities not related to leases. Sears expects to take possession of four stores in 2004, up to 55 stores in 2005, and the remaining two stores in 2006. The acquisitions are subject to customary closing conditions.
Sears plans to invest approximately $200 million to remodel and refixture the stores, and expects to complete conversions of the majority of the locations by fourth quarter 2005. The acquisitions are expected to be accretive to earnings in the first full year of operation, 2006.