Suppliers prepare for the worst
Suppliers demand better payment terms
Suppliers to Sears Holdings Corp told Reuters that were doubling down on defensive measures, such as reducing shipments and asking for better payment terms, to protect against the risk of non-payment as the company warned about its finances.
“The company’s disclosure turned the focus to its vendors as tension is expected to mount ahead of the key fourth-quarter selling season amid rising concern about a potential bankruptcy,’’ they said.
The storied American retailer, whose roots date back to 1886, said in its annual report for the fiscal year ended Jan 28 on Tuesday that “substantial doubt exists related to the company’s ability to continue as a going concern.”
The company lost $2.22 billion in the year. Since 2013 it has accumulated $7.4 billion in losses and seen revenue fall 44% to $22.1 billion.
During that time, Sears cut the number of its US stores by nearly a third, reduced holdings in Sears Canada, and spun off the Lands’ End clothing chain.
Its total liabilities stand at $13.19 billion. The managing director of a Bangladeshbased textile firm said his company was using only a handful of its production lines to manufacture products for Sears’ 2017 holiday sales.
Last year, nearly half of the company’s lines in its four factories were producing for Sears.
“We have to protect ourselves from the risk of non-payment,” said the managing director, who declined to be identified for fear of disrupting his company’s relationship with Sears.
Mark Cohen, the former chief executive of Sears Canada and director of retail studies at Columbia Business School in New York City, said vendors would keep a close eye on Sears’ finances.
“Whatever vendors continue to support them are now going to put them on even more of a short string. That means they’ll ship them smaller quantities and demand payment either in advance or immediately upon delivery.”
He added: “Sears stores are pathetically badly inventoried today and they will become worse.”
Jason Hollar, Sears’ chief financial officer, said in a Wednesday blog post that Sears’ move to raise capital in recent months was helping strengthen the company’s balance sheet.
“Sears is a viable business that can meet its financial and other obligations for the foreseeable future,” he said.
Hollar cited a $1 billion increase in liquidity from a new secured loan facility and a new asset-based loan that provided $250 million more in “financial flexibility.”
Still, Sears’ cash position has shrunk dramatically in recent years. The company had $286 million in cash on hand, down from $609 million in 2012.
Retailers in distress often use their accounts receivable to finance operations, and Sears had $466 million in receivables, down from $635 million in 2012.
Another supplier to Sears, Arnold Kamler, CEO of New Jersey-based bicycle manufacturer and importer Kent International Inc, said he was not surprised by Sears’ Tuesday announcement.
He said he noticed a warning sign last year when Sears pushed to increase its purchases, which occurred “because a lot of their current suppliers were either cutting them off or limited them on credit.”
Kamler said he declined to sell Sears more product and that he received a report once a week from his accounting department because of concerns around billing, payments and deductions.
The Bangladesh-based clothing supplier said Sears’ announcement was making him re-evaluate accepting new orders.
“So far there was only speculation that they would declare bankruptcy in 2017. But now they are acknowledging it, which definitely complicates our relationship with them and our decision to accept future orders from Sears,” the executive said.
A second clothing supplier from Bangladesh who did not wish to be named said he renegotiated payment terms with Sears a year ago and was being paid within 15 days of sending a shipment, compared with the traditional 60 days.
He is considering asking the company for an advance payment on orders going forward.
Neil Saunders, managing director at retail research firm GlobalData, said tension “will grow as the year goes on.’’
“As we move towards the last quarter, I think we’ll find there are more and more suppliers that are not necessarily willing to engage with Sears and will demand cash up-front.’’
Another sign of Sears’ weakness is that insurance companies that once provided policies to Sears vendors — insuring against non-payment for their goods — are no longer doing so.
Doug Collins, regional director for risk services at Atradius Trade Credit Insurance, said his firm has stopped providing insurance to Sears vendors.