Sears May Be Leasing Out Its Future

Updated from 12:23 p.m. EST

NEW YORK ( TheStreet) -- Exclusivity has become the golden gem for retailers, with companies scrambling to form branded partnerships, acquire unique merchandise and localize their products. But in true Sears' ( SHLD) fashion, billionaire Edward Lampert is doing the complete opposite.

The flailing department store is allowing other retailers to sell its storied brands like DieHard and Craftsman. Shoppers no longer even need to step into a Sears store to pick up what are still considered high-quality brands. Craftsman tools can be found in Ace Hardware and Costco Wholesale ( COST), while DieHard car batteries can be found at Meijer.

There's also talk that Sears is looking to sell secondary Kenmore products at Costco. This would be the first time in the brand's 84-year history that it would be carried at a retailer other than Sears and Kmart.

Our strategies for "externalizing" the brands center on reaching new customers and generating new brand enthusiasts who will fully realize their loyalty and commitment to our brands at Sears," said Sears spokesperson Chris Brathwaite.

Sears has also taken to leasing out space in its massive fleet of 3,700 department stores to retailers like Forever 21, Whole Foods Market ( WFM), Edwin Watts Golf Shops and Work 'N Gear, as wells as grocery and fitness clubs. It is marketing its real estate portfolio online at SHCRealty.com.

"The ISL in-store lease program is an opportunity for Sears Holdings to optimize the customer shopping experience and leverage our valuable real estate portfolio by providing third-party tenants with the opportunity to lease selling floor in SHC's retail real estate holdings," Brathwaite said.

While less than 1% of Sears' square footage is being leased out, the company is making more money on a per square-foot as a landlord than as a retailer, said Craig Johnson, president of Customer Growth Partners.

In the near-term, these moves are expected to boost earnings and cash flow to Sears, which reported a wider-than-expected loss in its third quarter as sales slipped. But ultimately, this could turn out to be just a short-term fix that will only speed up what appears to be the company's deep descent into irrelevance.

"It's a move of a raving lunatic," said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm. "In the near-term it will help sales and earnings, but for the long-term it is a disaster."

By allowing other retailers to sell its storied brands, Sears is giving up the opportunity to capture shoppers dollars on other products they may purchase when coming to the store for Craftsman and Kenmore products.

"Sears has a strong legacy of power brands," Johnson said. "If they market these brands externally and shoppers can get them elsewhere, they are taking away the biggest reason to go to Sears and makes the stores even less relevant than they are already."

Sears once dominated as a retailer for major appliances, holding a 41% market share in 2000, Johnson said. That share has fallen to 20% and is heading south, he estimated.

Leasing out its brands also raises the question, what happens when Costco undercuts Sears on price, Davidowitz said.

As Sears contracts its space and brands, rivals Macy's ( M), J.C. Penney ( JCP) and Kohl's ( KSS ) are forming exclusive partnerships with popular brands.

J.C. Penney recently purchased Liz Claiborne brands following an exclusive licensing agreement, while Kohl's continues to expand its private label offerings with names like Simply Vera Wang and Rachael Ray. It's these brands that have allowed these retailers to survive amid the economic downturn.

So far, Sears' efforts haven't proved effective. The company reported a third-quarter adjusted loss of $2.57 per share on revenue of $9.56 billion. Analysts were calling for a loss of $2.29 per share on revenue of $9.6 billion.

Sales at Sears Holdings have dropped every year since it was created in 2005.

Gross margin also fell to 25.6% from 26.4%, pressured by higher costs at Kmart.

-- Reported by Jeanine Poggi in New York.

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