Sears sees more small stores in its future. Here's what that would look like

Key Points
  • Sears said Thursday it plans to open more "innovative concept stores" in the future.
  • The department store chain has already begun opening appliance and mattress stores, and DieHard-branded locations, across the U.S.
  • Sears and its landlords are splitting the big anchor boxes the department store has often occupied and divvying them up among more tenants.
A recently opened Sears concept store in Hawaii.
Source: Sears Holdings

With six years of shrinking sales and a wave of maturities coming due in 2018, Sears is in a fight for its life.

Earlier this year, the department store chain cautioned it may not be able to continue as a going concern. But despite that warning — and a widening gap between its assets and liabilities — Sears has made some aggressive moves to reimagine its future. The big bet has been on getting smaller.

"Innovative smaller-format stores continue to showcase our company's unique integrated retail capabilities by combining new technology, our strongest categories and in-store experts," Chief Financial Officer Rob Riecker said Thursday on a prerecorded conference call.

"We intend to open similar innovative concept stores moving forward as we sharpen our focus on new ways to best serve our members," Riecker explained.

Given its steep losses and a widening deficit — which mushroomed to more than $4 billion in the third quarter from $3.4 billion a year ago — to some degree, Sears has little choice but to whittle itself down. But the smaller format stores also may be just the right size for today's shoppers.

Other retailers, including Target and Nordstrom, are also experimenting with scaled-back spaces that can be more profitable per square foot. The tight space forces retailers to make smarter inventory choices, and still can serve as a place to pick up or return online orders.

Sears operates roughly 1,100 locations nationwide. That's after it shuttered about 330 stores so far this year; another 100 are slated to close by the end of the fiscal fourth quarter.

Appliances and mattresses

Amid the closures, Sears opened its first branded appliance and mattress store in Texas earlier this year. Similar locations sprouted up in Colorado, Pennsylvania and Hawaii.

This first-of-its-kind store concept showcases appliance brand Kenmore, alongside mattresses from Tempur-Pedic, Beautyrest and other well-known labels. Mattresses and appliances have long been key to Sears' assortment, and they're items many of its veteran employees grew up selling.

A Sears appliances store in Fort Collins, Colorado.
Source: Sears Holdings

"Even though the stores just feature appliances ... you can order anything online and pick it up in [those] stores," Leena Munjal, senior vice president of Sears' customer experience and integrated retail divisions, told CNBC.

Shoppers visiting the Texas store have bought everything from jewelry to toys to apparel and bath towels, according to Munjal. The venture has allowed Sears to reopen in communities where it once was, tapping into a customer base that still values the brand. And instead of regularly keeping aisles of shelves stocked, inventory can be shipped on demand, only once an order is placed.

"Our overall principle is really about serving our members, and making an experience that is channel agnostic," Munjal said. "And we know our customers prefer a blend of [shopping] online and offline."

Sears is also leveraging its DieHard automotive battery brand by opening DieHard Auto Centers in Texas and Michigan. As Sears' bigger, anchor stores close, many of the Sears Auto Centers are being redeveloped into movie theaters and restaurants, according to multiple mall owners.

A DieHard store in San Antonio, Texas.
Source: Sears Holdings

The DieHard-branded shops provide oil changes, tire replacement and vehicle repairs. Unlike the traditional Sears Auto Center, DieHard shops aren't typically located near Sears stores. The refreshed logo could invite new visitors who aren't familiar with the brand's affiliation to Sears.

According to Munjal, Sears wouldn't count out opening other types of concept stores in the future, for example one dedicated to Kenmore or the Sears Home Services business. The retailer also owns a third-party logistics service known as Innovel Solutions.

Trimming mall stores

In another approach, Sears and its landlords, which include real estate spinoff , are trimming Sears' existing stores down, instead of shuttering those doors altogether. This leaves the retailer with a refined assortment of goods, a modern paint job and stocked shelves.

Inside a redeveloped Sears store in Danbury, Connecticut.
Source: Sears Holdings.

New Jersey's Willowbrook Mall, which is owned by General Growth Properties, has a "Next Generation" Sears store. The freed-up space will be filled with one of the area's first Dave & Buster's arcade restaurants, along with a handful of other tenants that haven't yet been announced.

In pursuing this redevelopment, GGP will be able to boost a key "sales-per-square-foot" metric at Willowbrook, and likely all other malls where the revamps take place.

"Seritage, Simon and GGP have been at the forefront of redeveloping Sears' anchor boxes," Boenning & Scattergood analyst Floris van Dijkum told CNBC. "And they've been achieving high returns."

In its fiscal third-quarter release, Sears said its efforts have led to improved financial performance. Next year, the company said it expects to reach positive adjusted earnings before interest, taxes, depreciation and amortization.

Still many have their doubts. Neil Saunders, managing director of GlobalData Retail, called Sears "a dying business."

"For all the criticism we throw at Sears, it is only fair to give praise to the initiatives the group is taking to try and bring itself back," he said. "While we do not have much faith that these things will be sufficient to revive the company's fortunes, it does not mean to say that they are entirely without merit."

A redeveloped Sears store in West Jordan, Utah.
Source: Sears Holdings

Recently, Sears said it agreed to pay $407 million on its pension plan in return for the removal of 140 stores from a so-called ring fence agreement. This could lead to more closures and redevelopments down the road, though Sears hasn't offered a timeline regarding that deal.

Out of the company's roughly 570 full-line Sears-branded stores, Sears has reconfigured or trimmed the size of nine this year, a spokesperson confirmed to CNBC. Much of the other redevelopments have been spearheaded by real estate investment trusts, such as Seritage and GGP, with GGP having redeveloped about 115 Sears boxes since 2011.

Sears' shares rallied Thursday morning, on the heels of the company's results, but the stock ended the day down 3 percent, and the shares have lost more than 50 percent in 2017.

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