Amazon and Sears: Strange Bedfellows or a Match Made in Heaven?

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sears (NASDAQ: SHLD) is struggling to be a relevant and profitable retailer. Its quarterly sales have decreased steadily for 24 consecutive quarters. Sears most recently reported a $247 million loss of $2.63 per share for the quarter ending May 3. The company's SEC filings reveal a significant amount of debt, as well as substantial pension fund liabilities. Sears still controls valuable consumer brands:  Craftsman, DieHard and Kenmore as well as the Lands End clothing line. These brands have been "walled off" as a separate legal entity from Sears and remain a valuable bargaining chip for the company moving forward. (NASDAQ: AMZN) ripped a page from Sears Roebuck's old mail- order business model and successfully transformed an Internet "book selling" enterprise into a disruptive retail giant. In contrast to Sears, sales growth at Amazon has been impressive during the same reporting periods. 

A Forbes article highlighted that during 2011, Wall Street rewarded Amazon's visionary CEO Jeff Bezos with a staggering 55% increase in stock valuation. Amazon's detractors are quick to point fingers at the stocks hefty P/E ratio being an Achilles heel.  Regardless, Sears is shrinking and losing money, while Amazon is growing and beginning to show that its business model can be profitable. 

A quick peek at "clicks:" 

Sears established its Shop Your Way rewards program in 2009.  Since then, it has done a very credible job of growing its online sales component, even though its total retail sales have been shrinking. Last quarter, Shop Your Way members accounted for over 50% of retail sales. This key component of Sear's customer base can now be targeted and products promoted to them -- based upon their individual buying preferences. 

Sears now sits at 126 on Alexa’s list of most popular U.S. websites.  This metric is noteworthy because Sears ranks ahead of Macy’s, Kohl’s and J.C. Penney.  Amazon dominates this list being the fifth-most-popular Internet destination overall, and continuing to grow.  Sears' CEO and majority shareholder Eddie Lampert recently said:  "We are becoming a company focused less on products and less on stores and much more on members."  Is Mr. Lampert beginning to sound a bit more like Mr. Bezos -- or is that just my imagination? 

What does Sears have that could interest Amazon?  Bricks.

Sears real estate footprint is shrinking at an accelerated rate. It has spun off 91 Orchard Supply Hardware Stores and 1,253 franchisee-managed Sears Hometown & Outlet Stores in the past two years, along with prime pieces of Sears Canada. During the past two years, over 500 K-Mart and Sears locations have been shuttered. Sears still has a real estate portfolio of around 240 million square feet including:  750 owned and 1,520 leased Sears, K-Mart and Sears Canada stores. 

Amazon has a growing global real estate footprint to support its core business including:  fulfillment centers, data centers, "Cloud" storage facilities, and office space.  Amazon CEO Jeff Bezos recently announced the company's entry into the grocery business. This new business initiative will certainly require additional facilities and boots on the ground.   Amazon is currently a significant tenant for datacenter REIT Digital Realty Trust (NYSE: DLR), leasing 448,895 square feet in six properties.  Why is this important?

According to the Wall Street Journal, analysts are concerned about rising capital expenses and declining rent at data-center REITs.  Digital Realty's stock is currently the target of a Highfields Capital Management short squeeze.  This past May, Digital Realty's stock took a dive, but did so along with data center REITs:  DuPont Fabros Tech and CoreSite Realty.  Fellow Motley Fool blogger Brendon Marasco points out that as a result, Digital Realty is currently paying a 5% dividend to compensate bullish investors for these risks. 

Analysts also worry that technology companies such as Amazon and Google are increasingly building their own data centers rather than renting space from REITs.  In the future, these REITs will also be in competition for site locations with some of their key tenants. Digital Realty and other companies focused on this space can now deal with a new kid on the block -- a kid with a unique and rather large toy chest.

New kid on the block

Sears has taken the first steps to implement a comprehensive real estate strategy. SHC Realty was launched in 2010 to conventionally market available properties in an attempt to create value for stockholders by selling and leasing them.  

Earlier this year, Sears launched Seritage Realty Trust as a "nationwide developer of commercial real estate" to help oversee a Sears portfolio containing over 200 properties in 33 states and totals over 18 million square feet.  Most recently, Sears has launched a new business unit Ubiquity Critical Environments, with the mission of converting some of the more than 330 closed Sears and Kmart stores into facilities for data warehousing, network co-location centers, and business continuity operations. Ubiquity is also spearheading a new initiative to lease cell-towers to be built at existing Sears facilities.

What does this mean moving forward?

Sears is in the early rounds of evaluating and extracting the value locked in its vast legacy real estate holdings.  It is in the middle rounds of a difficult fight to create a profitable, customer focused retail operation. Sears is currently valued around $5 billion. Amazon is currently valued around $125 billion. I am not currently advocating or trying to make a case for Amazon to acquire Sears. However, I do believe there is a compelling case to be made that Sears is significantly undervalued at the present time. Sears' vast portfolio of real estate certainly contains pins in the map that could be ideal for Amazon's expansion plans. Could Amazon's growth be a key to unlocking Sears' real estate vault?  If so, that would certainly be ironic.

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