Sears: The Winners And Losers
With 866 stores still in operation, a Sears bankruptcy would have a major impact on the retail sector.
The end of the line looks nearer than ever for Sears Holdings Corp.
The long-suffering retailer’s stock plummeted Wednesday on reports that it was finally preparing for bankruptcy before a $134 million debt payment Monday, with an adviser on deck and debtor-inpossession financing in the works.
As the company hunkered down — a spokesman did not respond to a request for comment — the rest of the industry tried to gauge the potential impact of bankruptcy at the company, which after years of cuts still has 866 stores and logged apparel and soft home sales of $4.28 billion last year (a 23.1 percent decline from 2016).
The early read is that the bankruptcy
would come down hard on vendors that have been rolling the dice and shipping goods to Sears, even on a month-to-month basis, without the financial protection of a factor as a go-between. Landlords might also find themselves with suddenly open spaces while stores from other failures like Toys ‘R’ Us and Bon-Ton are still dark.
There are also hopes — that a bankruptcy at the company would be fertile with opportunities for competitors looking for sales and new customers and malls trying to reinvent.
Shyam Gidumal, leader of the consumer products and retail segment at Ernst & Young, said a Sears bankruptcy would “accelerate the transformation that’s going on in retail.”
Gidumal said the biggest change flowing from a Sears bankruptcy would be in mindset, with the failure solidifying the notion that the old model doesn’t work anymore and that old line retailers need to get moving.
“They’re going to have to transform,” he said. “They have to transform to be relevant for the retail [landscape] three, four, five years out.”
The process would also change Sears itself. Gidumal said the company still has a core of good assets, but that its future would still be in doubt even without a massive debt load.
“Is that core going to be strong enough and do they have the financial resources to have it succeed is an open question,” he said.
Just how a bankruptcy would play out for Edward S. Lampert is another open question.
Lampert orchestrated the $11 billion 2005 deal that brought Sears, Roebuck & Co. together with Kmart to form the company’s modern incarnation.
In bankruptcy court, he would occupy nearly every seat — except that of judge.
For the first time in a long while, he would not have the final word on the company’s future. Lampert is not just chief executive officer, but also the company’s larger shareholder and a major creditor, having routinely bailed out the firm’s finances with interest-bearing loans.
Most recently, Lampert proposed a deal to cut $4.35 billion of Sears’ debt load, suggesting the company could go bankrupt if it didn’t accept. Under that plan, his investment firm, ESL, would buy $1.47 billion in Sears assets that includes its Kenmore brand and the Sears home improvement and services businesses.
Even if Sears did take that offer, there are doubts that the company could make a real go of it.
Consultant Jonathan Low, partner at Predictiv, said: “I don’t think a Sears bankruptcy will have much of an impact. It has been a basket case for years, a depressing, slow-motion failure that has only gotten worse in the past few years. Eddie Lampert has milked it dry, earning a return on his original investment by selling off prize assets including some of its iconic house brands as well as its real estate — a strategy many predicted would happen. To be fair, Sears was hit with the double whammy of e-commerce and outmoded store and product concepts.”
Worries that a filing was days away proved too much even for Sears’ battletested investors. The company’s stock fell as much as 39 percent Wednesday and closed down 16.8 percent to 49 cents, leaving the company with a market capitalization of just $44.6 million.
The decline came amid a sharp drop on Wall Street, where investors cycled out of tech stocks and fretted over how long economic growth can keep up. The Dow Jones Industrial Average fell 831.83 points, or 3.2 percent, to 25,598.74.
That rout hit the luxury sector particularly hard, but retailers seen as beneficiaries of a potential Sears implosion were among the very few gainers. J.C. Penney Co. Inc.’s stock jumped 6 percent to $1.78, while Kohl’s Corp. rose 1.1 percent to $71.73.
Some experts think Sears waited too long. “The company would likely go in as a Chapter 11 filing [to reorganize],” said attorney Patrick Dinardo, a partner at Sullivan & Worcester. “Unfortunately these days, most retailers are not able to reorganize. In this instance, the whole point in a Chapter 11 is a reorganization around a valuable core. I think most of the core has been hollowed out. Kenmore is pretty much the last piece. Maybe there’s enough of the company that’s left that has value in the assets they have control over, but if I were a betting man, I would be against a reorganization.”
If the company did file for bankruptcy and that turned into a liquidation,
Dinardo said some of its recent transactions would be more carefully scrutinized. Real estate transfers and other financial maneuvers to keep Sears afloat would come under a microscope.
Most factors, which provide vital trade financing in retail, stopped signing off on shipments to Sears over a year ago.
One factoring executive said: “I’m concerned. The company has stopped paying some checks.”
The financier said some clients have elected to ship to the company and take on the risk that they wouldn’t get paid. Another factoring executive said several months ago that most vendors have been aware of the risk that Sears is troubled, but have elected to do business on a month-to-month basis because they needed the business.
As for the impact on mall operators, or real- estate investment trusts, Edward Jones’ REIT analyst Matt Kopsky said “my belief is that Sears will eventually file for Chapter 7 liquidation like Toys ‘R’ Us and The Sports Authority.”
The analyst cited the lack of profitability at Sears since 2010, a continued decline in comparable-store sales and the sell- off of most of its brands. That includes the sale of its Craftsman brand and the Lands’ End spin- off.
According to Kopsky, “If Sears liquidates, power centers and malls may face co-tenancy issues in some cases. Typically, this is only the case if multiple anchor tenants are vacant, which is possible given the recent liquidation of Toys ‘R’ Us and BonTon and the likely future store closings of department stores, such as [ J.C. Penney].”
The analyst noted that the ones most exposed to a potential Sears liquidation would be the lower-tier malls and the subpar shopping centers that are owned by “small, private guys. A liquidation would be especially difficult for these spaces because it is very difficult to replace a tenant in a sub-par center as demand has shifted primarily to the best properties, there is a higher risk of breaching a co-tenancy clause, and smaller owners don’t have as much capital or access to capital to reinvest into the center to replace a big-box tenant.”
But Greg Portell, lead partner in the global consumer and retail practice of
A.T. Kearney, discounted the chances of a liquidation and projected opportunities for some landlords.
“It’s hard to see the Eddie Lampertcontrolled funds walking away with nothing,” Portell said. “You have to figure there’s some way to control the financial side of this so that when you come out of it, you still have a multi-billion dollar retailer.”
How the company views the goals of a bankruptcy could shape its future.
“Is it a chance to wipe off meaningful debt and thereby really take the handcuffs off the business to dramatically transform, or is it a way to just reset the clock,” Portell said.
More immediately, retail bankruptcies usually lead to store closures and in Sears’ case that could lead to opportunities for competing retailers and online merchants that would pick up other business.
And landlords might also have other plans for that space occupied by laggard Sears and Kmart doors.
“If we go with the belief that the traditional mall is fading away, then you could see landlords actually be happy to get that real estate back,” Portell said. “Trying to build a lifestyle store around a Sears store is hard. If I can now repurchase that and make it a 24-hour fitness [concept] and a retirement community and a climbing wall or a different set of stores, than I have a completely different real-estate profile.”
The long, drawn out decline of Sears is in part a function of just how far the company had to fall.
When Lampert first stitched together Sears and Kmart, the company had over
$50 billion in revenue and over 3,500 doors. Both nameplates were seen as beyond their prime and out-maneuvered by the likes of Walmart and Target, but there was a real business there.
But Lampert, who for a brief moment was seen by some as a latter-day Warren Buffett who would use cash flow from Sears to pay for other investments, came at the business with they eye of investor and not a retailer.
Sears management was repeatedly criticized for not investing enough in the stores and letting the experience suffer.
But Lampert often proclaimed himself a retail visionary, pointing to such initiatives as the Shop Your Way program. He also lauded his financial maneuverings, arguing in 2007: “We do not want to spend $1 too much or $50,000 too little on our stores. Unless we believe we will receive an adequate return on investment, we will not spend money on capital expenditures to build new stores or upgrade our existing base simply because our competitors do. If share repurchases or acquisitions appear to be more productive, then we will allocate capital to those options appropriately. We will seek superior returns, wherever they may be found.”
The Sears and Kmart businesses floundered — and when it came time to pivot to a new, much more digital and customercentric approach, the company did not have the wherewithal to reinvent the way that Walmart is with its string of acquisitions and more of a platform mindset.
Walmart, Target and others that have at least started to pivot now find they have a little more runway with a stronger economy.
“Retail is clearly undergoing a major reinvention today,” said Joel Bines, global co-leader of the retail practice at consulting firm AlixPartners. “And while some legacy retailers will be unable to adjust, the stronger economy and low unemployment are big tailwinds — which, among other things, could be capitalized upon to buy time for retailers of all kinds right now.”
“Sears was hit with the double whammy of e-commerce and outmoded store and product concepts.”
— JONATHAN LOW, PREDICTIV