Sears Canada’s future unsure amid rebranding efforts
Speculation includes restructuring and liquidation
Sears Canada’s stock price continued to slide Wednesday, following reports that it is preparing to file soon for creditor protection, which could see the retailer slim down and restructure or sell everything off and shutter the chain.
The retailer’s stock price has dropped 26 per cent in the last five days, after the company reported dismal first-quarter earnings that included a significant doubt warning about the future of the company.
That slide continued Wednesday, when the stock dropped $0.18, or 22.5 per cent, to $0.62. That’s down more than 72 per cent over last year.
Sears did not immediately respond to requests for comment. The company employs about 16,000 people across Canada, at 94 department stores, 23 Sears Home stores and 10 outlets.
Many of the department stores anchor prominent mall properties in Canada, including CF Fairview Mall, Scarborough Town Centre, Pickering Town Centre, Erin Mills Town Centre, Oakville Place Mall and Oshawa Shopping Centre.
Among the malls with Sears stores are many that struggled to fill spaces left by the abrupt departure of Target Canada in 2015, less than two years after launch.
Lawyer Lou Brzezinski, a partner in the commercial litigation group at Blaney McMurtry LLP that represents eight Sears Canada landlords and several suppliers, says he considers Sears a better candidate for liquidation than restructuring.
The big difference between U.S. department store Target’s 2015 departure from the Canadian market and a possible Sears restructuring or liquidation is the element of surprise, according to Jeffrey Berkowitz, president of Aurora Realty Consultants Inc., a retail tenant consultancy firm with offices across Canada and internationally.
“Target had much more of a shock effect on the market because it was not widely expected that they would file and close at such an early stage in their development in Canada, so contingency plans were not in place,” Berkowitz said.
“With Sears, contingency discussions have been going on with landlords for some time.”
Berkowitz said it’s highly unlikely that, should a liquidation take place, the Sears stores would be bought up as a whole. He expects most Sears spaces that hit the marketplace would be broken into smaller pieces, as happened with Target spaces that weren’t taken over by retailers such as Walmart.
“I would be very surprised if there would be somebody willing to step in and take over all the Sears locations,” Berkowitz said.
Prior to Wednesday’s decline, Sears Canada Inc. stock had already been listed at less than $1 (U.S.) a share for more than 30 days, triggering a warning letter from the Listing Qualifications Department of the Nasdaq Stock Market LLC.
The Nasdaq requires listed companies to maintain a minimum bid price of $1 per share. The company has 180 calendar days to regain compliance.
In the first quarter reported last week, revenue at Sears Canada was down $90 million (Canadian), or 15 per cent, to $505.5 million, and the company pointed to conditions raising “significant doubt as to the company’s ability to continue as a going concern.”
The company has posted recurring operating losses and negative cash flows from operating activities in the last five fiscal years, with net losses beginning in 2014.
Retailers that cannot meet their financial obligations can seek protection from creditors under the Companies’ Creditors Arrangement Act (CCAA) while they restructure. Filing allows them to continue operating as they take actions to try to return to profitability, which can include selling assets, closing or selling unprofitable stores, laying off staff, and typically paying suppliers and other creditors a percentage of what they are owed.
Sometimes the result is a complete closure — as in the case of Target, which liquidated its inventory and shuttered133 stores. In other cases, it can leave the company leaner and more competitive, albeit with a smaller number of stores.
Even if Sears does file, it would likely want to continue honouring the commitments it has made to consumers to preserve its goodwill and brand, according to Robert J. Drake, a member of the restructuring and insolvency group at Goldman Sloan Nash and Haber LLP.
“It would be a death spiral if tomorrow they said, ‘We’re going to cancel our Kenmore warranties’ because then no one is going to buy a Kenmore appliance,” said Drake, who believes Sears is a candidate for restructuring.
“Without people buying Kenmore appliances, you’re just further starving Sears of any money going toward it and its possible restructuring.”
Not honouring its obligations to customers would also undermine the company’s ability to sell off pieces to a private equity group or other potential purchaser, Drake said.
“The massive goodwill that Sears has as a brand strikes me as something that shouldn’t be squandered,” he said.
It’s possible the scenario could be different if a customer has ordered an item that is not in stock and not a Sears brand, according to experts.
“Suppliers will certainly be nervous and a prudent supplier will want to know where their guarantee of payment is coming from, since Sears has announced it can’t get enough financing to carry on business,” said Ira Smith, an insolvency and restructuring expert and founder of Ira Smith Trustee & Receiver Inc.
Amid the sea of red ink in the first quarter earnings report at Sears Canada was a beacon of hope — same-store sales were up 2.9 per cent, a sign that efforts to streamline and rebrand the chain under executive chairperson Brandon Stranzl are resonating with consumers.
“We have monumentally improved the stores at Fairview, Promenade, Lime Ridge, Mapleview, Guelph, Newmarket and Oshawa, with others in the greater GTA in process. Sears.ca is totally revamped and modernized,” according to spokesperson Vince Power in a recent email exchange.
“Sears is committed to its customers, and we will continue to keep them and the commitments we make to them as top priorities.”
“Sears is committed to its customers, and we will continue to keep them and the commitments we make to them as top priorities.” VINCE POWER SEARS SPOKESPERSON