Shares of Sears Canada dropped more than 13% Thursday after its U.S. parent announced plans to dramatically reduce its holdings in the troubled department store chain and to consider divesting its entire stake.
Sears Canada shares were down $1.75 at $11.40 in late morning trading on the Toronto Stock Exchange.
About 95% of the common shares of Sears Canada are currently owned by Sears Holdings Corp., which also owns the Sears, Kmart and Lands’ End department store chains in the United States.
Sears Canada announced Thursday that it had been informed that Sears Holdings planned to reduce its holdings to 51% by transferring stock to its shareholders and may then sell some or all of the rest.
The proposed spinoff is expected to close this year, with Sears Canada continuing to be listed on the Toronto Stock Exchange.
The move by Sears Holdings to divest part of its stake in the Canadian-based company is likely part of a strategy to keep the U.S. parent company funded as it reworks its operations, said Toronto-based retail analyst John Williams of J.C. Williams Group Ltd.
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“Sears Holdings continues to announce plans of changes and upgrading to their stores and Sears Canada is a pretty small portion of the total company,” he said in a phone interview.
Sears Canada does “have some great assets – long-term leases or property and some of their brands have a good equity in them.”
The announcement came a day after the Canadian retailer announced it had a profitable first quarter, eliminating a year-earlier loss through cost-cutting and downsizing measures.
Included in earnings for the quarter was a $164.3-million pre-tax gain on lease terminations of stores in Vancouver, Calgary and Ottawa announced March 2.
With the help of the special items, Sears Canada earned $93.1 million or 91 cents per share, compared with a net loss of $47 million or 45 cents per share for the same period last year.
However, revenue in the quarter slipped 7.8% from a year earlier to $915.1 million from $992.5 million.
Sears Holdings announced a similar return to profitability on Thursday, with the Hoffman Estates, Ill.,-based company saying it earned US$189 million, or $1.78 per share, for the period ended April 28. It lost $170 million, or $1.58 per share, a year ago.
Sears Canada president and chief executive Calvin McDonald said his company is looking forward to working with Sears Holdings on the partial spin-off.
“While we have benefited from a close relationship with Sears Holdings, we believe this distribution would provide an increased focus on our performance as an independent company and enhance the liquidity of holders of Sears Canada’s common shares,” McDonald said in a statement.
Sears currently has more than 3,900 stores in the U.S. and Canada.
