Sears: The Win­ners And Losers

WWD Digital Daily - - Front Page - BY VICKI M. YOUNG AND EVAN CLARK

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

Ed­ward Lam­pert in 2004, when the deal to merge Kmart and Sears was re­vealed.

A Sears clos­ing in Mountain View, Calif.

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