Street Cold on Sears' Canadian Exposure

Credit analysts see little long-term value at Sears Canada after the sale of its credit card operations. S&P analyst Don Povilaitis cut his debt rating on the company to junk in September, saying he did not expect that Sears Canada would be able to improve its long-term operational performance or market position.

"Sears Canada's retailing operations had shown lackluster earnings thus far in 2005 and we believe that the curtailing of the company's capital expenditure program illustrates that while a focus on profitability is important, growing revenues of the core department store business through new store concepts is not a priority for the company," S&P said in a release.

Sears Holdings noted Monday that the Canadian unit faces an increasingly competitive retail environment, one that it can better navigate with a wealthy parent.

"Sears Canada has long been an important part of the retail landscape in Canada and, with our shared brand name, is strategic to Sears Holdings. With the benefits that will accrue from 100% ownership, we believe we will be able to provide Sears Canada's associates and customers with the opportunity to continue their relationship with this Canadian institution," the retailer said.

Credit Suisse First Boston analyst Gary Balter said in a research note that Sears Holdings doesn't need to own the entire unit to control the operations of Sears Canada, so it "must have another reason" for the acquisition.

"While the receivables have been monetized, Sears Canada may have underlying real estate value that has not been recognized," Balter said. "Last time we visited up north, that economy was much stronger than this one, and real estate values have risen significantly."

Balter also speculated that another party may have expressed interest in buying Sears Canada for a price tag that the parent viewed as unacceptable. Also, he said, there may be a tax benefit to reinvesting the proceeds from the dividend back into Canada or the company.