2018: The end of the road for Sears, Toys ‘R’ Us?
With debt piling up and stores bleeding cash, two iconic American retailers chose sharply divergent survival strategies in 2017.
Sears Holdings opted for a host of complex financial maneuvers, store closures and asset sales designed to stave off what many analysts say is now inevitable — a date with bankruptcy court.
But Toys “R” Us acknowledged it was unable to pay its bills without protection from its creditors and filed for Chapter 11 bankruptcy in September.
Their separate paths may yield different outcomes in 2018.
The future at Sears is more doubtful than ever as sales continue to plunge despite the company’s attempts to stabilize the business. Toys “R” Us is heading for a fresh start after likely closing unprofitable stores, shedding debt and thus freeing up cash to reinvest in digital infrastructure and re-establish trust with jittery suppliers.
“It may be that bankruptcy was always meant to sort out which businesses should continue and which we don’t need anymore,” said Melissa Jacoby, a bankruptcy law professor at the University of North Carolina. “So it is not necessarily a bad sign that some retailers don’t survive the bankruptcy process. That may well be the right economic result.”
For now, Sears continues shrinking. When Sears and Kmart merged in March 2005, they had a combined 2,350 stores. In 2017, the company announced several rounds of closures totaling more than 400 locations, leaving it with about 1,000 after the holiday shopping season.
The company sold off its prized Craftsman tool brand to Stanley Black & Decker to raise cash and engineered several debt maneuvers to tie additional assets to its loans, which could eventually lead to secured creditors collecting key Sears property in a bankruptcy.
When talking to analysts and others who closely follow Sears, there’s a common thread: The company has avoided bankruptcy largely because of one person: CEO and shareholder Eddie Lampert. He has invested several rounds of capital in the retailer to help keep it afloat.
But that’s not necessarily a good thing. Believers in the power of bankruptcy to provide a fresh start say the company must come to terms with its reality.
“I’m amazed that Sears is still around,” said Lauren Beitelspacher, a marketing professor at Babson College and expert on retail management and buyer-supplier relationships. “Right now it feels more like a property firm than an actual retailer.”
Lampert’s financial moves and investments have temporarily propped up Sears, said Stephen Opper, a distressed debt analyst at Reorg Research, which tracks ailing companies. But eventually, he’ll have to decide whether to extend unsecured credit to Sears, which is much riskier than secured loans that come with collateral.
One of Sears’ biggest challenges, analysts say, is that its brand has faded, and there is a perception that other retailers offer similar services or products, but with higher efficiency, lower prices or better quality.
“People that want the value buy are going to go to Walmart,” said Greg Luken, president of Franklin, Tenn.-based Luken Investment Analytics. “If they want the value buy with a little higher quality, they’re going to Target, and if they thought ahead, they ordered everything from Amazon . ... What is it that I can get at Sears that I can’t get somewhere else with a better experience, more convenience or (that’s) less expensive?”
Many shoppers also report poorly stocked shelves, limited product selection and insufficient help in the stores.
Ken Wyatt, 55, of Manchester, N.H., said he recently went to Sears shopping for an electric blanket and was disappointed at the condition of the store.
“There was no staff, the shelves were a mess, you could see they hadn’t been stocked properly,” he said. “I had a memory of what Sears looked like in the ‘70s, and I was just shocked at what it looks like today.”
Sears declined an interview request but issued a statement for this story reiterating Lampert’s May 10 assertion that “we are fighting like hell” to reinvent the company. Sears has bet heavily on a customer loyalty program, dubbed Shop Your Way, and various costcutting initiatives. The company also encouraged investors with a deal to sell its DieHard brand on Amazon.
“We will continue to sharpen our focus on our best Sears and Kmart stores, best categories, and best members, as we will build on the momentum of our actions to date and be better equipped to support our continued transformation,” Sears said in the statement.
Critical holiday season for Toys
For Toys “R” Us, which is aiming to restructure $5 billion in debt, analysts say the company has a better chance at survival because it can still deliver value to customers seeking a specific product and experience.
But this holiday season “could be critical for those stores that are on the fence,’’ said Perry Mandarino, a retail restructuring expert with financial services firm B. Riley Financial.
While the fourth quarter is always a crucial time of year for retailers, it plays an especially important role for Toys “R” Us, typically delivering more than 80% of its adjusted earnings each year, said Kirk Ludtke, a managing director and senior analyst with Cowen and Co.
“I think the outlook for the domestic business is uncertain,’’ Ludtke said. “This holiday season will determine the scale of the domestic business when it emerges from bankruptcy, which will be probably between the summer of 2018 and early 2019.’’
The company, which was the nation’s first big-box toy retailer, has failed to keep up with online threats such as Amazon and lost market share to physical competitors such as Walmart and Target, which often sell toys at a discount Toys “R” Us can’t afford because, unlike those chains, toys are its sole product.
Analysts at investment-bank UBS estimated on Dec. 19 that 183 locations — or roughly 21% of the company’s U.S. stores — could be shuttered next year. The analysts based their estimate on an analysis of Toys “R” Us and Babies ‘R’ Us stores located within a 15minute drive of yet another Toys “R” Us or Babies ‘R’ Us location.
In an interview Thursday, Toys “R” Us CEO Dave Brandon said “we’re doing a complete review of our real estate portfolio. Everybody understands that the Chapter 11 process puts us in a position where we can consider making changes to our fleet of stores. We’re going through that process, and we’ll have a lot more to say about it probably in the first couple weeks of January.’’
Now, under the shield of bankruptcy protection, Toys “R” Us has the leeway to reduce its debt, seek lower leasing costs and review relationships with vendors who can also breathe easier since the court filing puts them at the front of the line to get paid.