Sears files for Chapter 11 amid plunging sales, massive debt

Sears files for Chapter 11 amid plunging sales, massive debt
U.S. Sears files for bankruptcy protection amid plunging sales, massive debt
Sears has filed for Chapter 11 bankruptcy protection, buckling under its massive debt load and staggering losses.

Sears once dominated the American retail landscape. But the big question is whether the shrunken version of itself can be viable or will it be forced to go out of business, closing the final chapter for an iconic name that originated more than a century ago.

As of May, it had fewer than 900 stores, down from about 1,000 at the end of last year. The number of stores peaked in 2012 at 4,000, including its Sears Canada division that was later spun off. Sears Canada closed its final stores in January.

For decades, Sears was king of the American shopping landscape. Sears, Roebuck and Co.s iconic catalogue featured items from bicycles to sewing machines to houses, and could generate excitement throughout a household when it arrived. The company began opening retail locations in 1925 and expanded swiftly in suburban malls from the 1950s to 1970s. But the onset of discounters like Walmart created challenges for Sears that have only grown. Sears faced even more competition from online sellers and appliance retailers like Lowes and Home Depot. Its stores became an albatross.

The U.S. company, which started out as a mail order catalogue in the 1880s, has been on a slow march toward extinction as it lagged far behind its peers and has incurred massive losses over the years. The operator of Sears and Kmart stores joins a growing list of retailers that have filed for bankruptcy or liquidated in the last few years amid a fiercely competitive climate. Some like Payless ShoeSource have had success emerging from reorganization in bankruptcy court but plenty of others haven't, like Toys R Us and Bon-Ton Stores Inc. Both retailers were forced to shutter their operations this year soon after a Chapter 11 filing.

"The problem in Sears case is that it is a poor retailer," he wrote. "Put bluntly, it has failed on every facet of retailing from assortment to service to merchandise to basic shop keeping standards. Under benign conditions, this would be problematic enough but in todays hyper-competitive retail environment it is a recipe for failure on a grand scale."

"This is a company that in the 1950s stood like a colossus over the American retail landscape," said Craig Johnson, president of Customer Growth Partners, a retail consultancy. "Hopefully, a smaller new Sears will be healthier."

The company has racked up $6.26 billion in losses, excluding one-time events, since its last annual profit in 2010, according to Ken Perkins, who heads the research firm Retail Metrics LLC. Its had 11 years of straight annual drops in revenue. In its last fiscal year, it generated $16.7 billion in sales, down from more than $50 billion in 2008.

Given its sheer size, Sears' bankruptcy filing will have wide ripple effects on everything from already ailing landlords to its tens of thousands of workers.

The filing, which is happening ahead of the crucial holiday shopping season, comes after rescue efforts engineered by its CEO and chairman Eddie Lampert have kept it outside of bankruptcy court — until now. Lampert, the largest shareholder, has been loaning out his own money for years and has put together deals to prop up the company, which in turn has benefited his own ESL hedge fund.

Real estate experts believe that Sears move to further shutter stores as part of its restructuring would be a mixed blessing for landlords. For the healthy malls, landlords would welcome a Sears departure, allowing them to cut up the space and fill it with several smaller successful stores that combined would bring in higher revenue.

Last year, Sears sold its famous Craftsman brand to Stanley Black & Decker Inc., following its earlier moves to spin off pieces of its Sears Hometown and Outlet division and Lands' End.

In recent weeks, Lampert has been pushing for a debt restructuring and offering to buy some of Sears key assets like Kenmore through his hedge fund as a $134 million debt repayment comes due on Monday. Lampert personally owns 31 per cent of the companys shares. His hedge fund has an 18.5 per cent stake, according to FactSet.

In recent weeks, Lampert has been pushing for a debt restructuring and offering to buy some of Sears' key assets like Kenmore through his hedge fund as a $134 million US debt repayment comes due on Monday. Lampert personally owns 31 per cent of the company's shares. His hedge fund has an 18.5 per cent stake, according to FactSet.

John Germann, 46, works full-time and makes $14 per hour as the lead worker unloading merchandise from trucks at the Chicago Ridge, Illinois store, which has been drastically reducing its staff since he started nine years ago. Germann now has only 11 people on his team, compared with about 30 a few years ago.

"It is all well and good to undertake financial engineering, but the company is in the business of retailing and without a clear retail plan, the firm simply has no reason to exist," said Neil Saunders, managing director of GlobalData Retail, in a recent analyst note.

Sears' stock has fallen from about $6 over the past year to below the minimum $1 level that Nasdaq stocks are required to trade in order to remain on the stock index. In April 2007, shares were trading at around $141. The company, which once had 350,000 workers, has seen its workforce shrink to fewer than 90,000 people as of earlier this year.

The bleak figures are an outlier to chains like Walmart, Target, Best Buy and Macys, which have been enjoying stronger sales as they benefit from a robust economy and efforts to make the shopping experience more inviting by investing heavily on remodeling and de-cluttering their stores.

The company has racked up $6.26 billion in losses, excluding one-time events, since its last annual profit in 2010, according to Ken Perkins, who heads the research firm Retail Metrics LLC. It's had 11 years of straight annual drops in revenue. In its last fiscal year, it generated $16.7 billion in sales, down from more than $50 billion in 2008.

"It is all well and good to undertake financial engineering, but the company is in the business of retailing and without a clear retail plan, the firm simply has no reason to exist," said Neil Saunders, managing director of GlobalData Retail, in a recent analyst note.

In a March 2017 government filing, Sears said there was "substantial doubt" it would be able to keep its doors open — but insisted its turnaround efforts would mitigate that risk.

Holdings will also close 142 unprofitable stores near the end of the year. Liquidation sales at these stores are expected to begin shortly. This is in addition to the previously announced closure of 46 unprofitable stores that is expected to be completed by November 2018.

But its losses continued into this year. In the fiscal second quarter ended Aug. 4, net losses in the quarter swelled to $508 million, or $4.68 per share, compared with a loss of $250 million, or $2.33 cents per share in the same quarter a year ago.

Such financial woes contrast with the promise that Lampert made when he combined Sears and Kmart in 2005, two years after he helped bring Kmart out of bankruptcy. Back then, it operated 2,200 stores in total.

Lampert pledged to return Sears to greatness by leveraging its best-known brands and its vast holdings of land, and more recently planned to entice customers with a loyalty program. But it struggled to get more people through the doors or to shop online.

Lampert pledged to return Sears to greatness by leveraging its best-known brands and its vast holdings of land, and more recently planned to entice customers with a loyalty program. But it struggled to get more people through the doors or to shop online.

Jennifer Roberts, 36 of Dayton, Ohio, had been a long-time fan of Sears and has fond memories of shopping there for clothes as a child. But in recent years, she's been disappointed by the lack of customer service and outdated stores.

"My mom had always bought her appliances from Sears. That's where my dad got his tools," she said. "But they don't care about their customers anymore."

She said a refrigerator her mother bought at Sears broke after two years and it still hasn't been fixed for almost a month with no help from the retailer.

The retailers last profitable year was in 2010. It rang up less than $17 billion in sales in fiscal 2017, half of the roughly $40 billion in revenue it brought in five years earlier, according to FactSet.

"If they don't value a customer, then they don't need my money," said Roberts, who voiced her complaints on Sears' Facebook page.

Sears Holdings plans to file for bankruptcy protection after midnight in the East Coast, culminating the collapse of what was once Americas largest retailer, people familiar with the situation tell CNBC.

Sales at the company's established locations tumbled nearly four per cent during its fiscal second quarter. Still, that was an improvement from the same period a year ago when it fell 11.5 per cent. Total revenue dropped 30 per cent in the most recent quarter, hurt by continued store closings.

The bleak figures are an outlier to chains like Walmart, Target, Best Buy and Macy's, which have been enjoying stronger sales as they benefit from a robust economy and efforts to make the shopping experience more inviting by investing heavily on remodeling and de-cluttering their stores.

Sears will aim to stay in operations through the holidays, during which it will seek a buyer. That buyer could include its CEO, Eddie Lampert, or others that wish to make a higher bid.

For decades, Sears was king of the American shopping landscape. Sears, Roebuck and Co.'s iconic catalogue featured items from bicycles to sewing machines to houses, and could generate excitement throughout a household when it arrived. The company began opening retail locations in 1925 and expanded swiftly in suburban malls from the 1950s to 1970s. But the onset of discounters like Walmart created challenges for Sears that have only grown. Sears faced even more competition from online sellers and appliance retailers like Lowe's and Home Depot. Its stores became an albatross.

The retailer has secured roughly $500 million to support its holiday operations, the people said. As of Sunday evening, negotiations were ongoing, two of the people said.

Store shelves have been left bare as many vendors have demanded more stringent payment terms, says Mark Cohen, a professor of retailing at Columbia University and a former Sears executive.

It is a priority for CBC to create a website that is accessible to all Canadians including people with visual, hearing, motor and cognitive challenges.

Sears Holding Corporation more than a century ago pioneered the strategy of selling everything to everyone.

For many years, it was a favorite corporate guessing game: What is Edward Lamperts ultimate plan to reinvigorate Sears? Its time to consider the possibility that he really didnt have one.

But it has long since given up that mantle as a retail innovator. It was overtaken first by big-box retailers like Walmart Inc. and Home Depot Inc., and then, by Amazon.com, Inc. as the go-to shopping destinations for clothing, tools and appliances.

In the last decade, Sears had been run by hedge fund manager Edward S. Lampert who sold off many of the companys valuable properties and brands, but failed to develop a winning strategy to win back consumers who increasingly shop online.

The result has been a long, painful decline. A decade ago, the company employed 302,000 people. Today, there are less than 89,000 people still working at Sears and Kmart Corporation, which Mr. Lampert also runs.

Now, the retailer is preparing a Chapter 11 bankruptcy filing to cut its debts and keep operating at least through the holidays, according to two people briefed on the matter who spoke on condition of anonymity to discuss the companys plans.

As part of the reorganization plan, which is expected to be filed Sunday night, Sears will receive a large loan to help keep its shelves stocked and employees paid, these people said. The company is also planning to close as many as 150 additional stores as it tries to reduce costs and find some way forward.

Founded shortly after the Civil War, the original Sears, Roebuck & Company built a catalog business that sold Americans the latest dresses, toys, build-it-yourself houses and even tombstones. In their heyday, the companys stores, which began to spread across the country in the early 20th century, were showcases for must-have washing machines, snow tires and furniture.

Sears stores remain the centerpiece of hundreds of shopping centres across the United States and their decline has reduced traffic to many of those malls.

The company lost about $7.5-billion over the last five years and shut down more than 1,000 stores over the last decade. Many of the 700 stores that remain have frequent clearance sales, empty shelves and handwritten signs.

Running low on cash, the company has about $174-million debt payment due Monday. Its total debt stood at about $7.3-billion in late September.

Over the weekend, a group of banks were negotiating with Sears over the terms of a new loan, totaling more than $652-million, the people briefed on the matter said.

Reorganizing Sears will not be easy. The companys e-commerce business has only a tiny fraction of the sales of Amazon, one of the worlds most valuable companies. And bringing back customers to Sears stores will take investment that the company probably cannot afford.

The rise of e-commerce has contributed recently to a record number of store closings and retail bankruptcies including Sports Authority, Inc., Payless ShoeSource Inc. and Toys “R” Us Inc.

Like Sears, Toys “R” Us had tried to reorganize, but the company eventually shut down and laid off all of its employees in June when its lenders concluded that the business was no long viable.

Although Sears lost its competitive edge long ago, its impending bankruptcy represents a significant moment for its industry.

The company started out selling watches to railroad agents in 1886 and soon expanded into a vast mail-order business that sold clothing, tools, shoes and, at one point, even cocaine and opium, through catalogs that ran as long as 1,000 pages.

Sears was, in many ways, an early version of Amazon. It used the postal service to reach the most remote parts of a growing nation and stored and shipped products from a three-million-square-foot warehouse in Chicago.

After the Second World War, Sears stores served the needs of the countrys expanding middle class. Families came to have their childrens portraits taken, get their tires rotated and oil changed and to buy Kenmore refrigerators.

Sears is where you went to shop, said Barbara E. Kahn, a retail expert and marketing professor at the University of Pennsylvanias Wharton School. They sold fundamental products that consumers needed.

Through the 1960s and 1970s, Sears shared its success with employees at all levels of its corporate hierarchy. Cashiers, janitors and executives alike took part in profit-sharing and received options in the companys soaring stock.

As many as 100,000 retired Sears employees receive pensions, which are expected to emerge largely unscathed in the bankruptcy. As the company was bleeding cash and selling off assets in recent years, federal regulators required Mr. Lampert to inject cash into the pension plan. Other benefits for retirees like life insurance, however, could be in danger.

It is sad to see the company you really loved go down the tubes, said Ron Olbrysh, 77, who worked in Sears legal department for 24 years and now heads an association of retired workers.

A hedge fund manager and former Goldman Sachs Group Inc. banker with no experience running a large retail chain, Mr. Lampert took control of Kmart after it came out of bankruptcy in 2003 and then acquired Sears a year later. The companys board came to be dominated by other wealthy investors, including Steven Mnuchin, the current Treasury secretary who had been Mr. Lamperts roommate at Yale University.

Mr. Lampert says his strategy was to move the company away from its brick-and-mortar legacy into the digital era.

His plan was to use the money saved from closing stores and sell off assets to reinvest in the business. But the company never gained traction online.

Sears remains a publicly traded company, but Mr. Lampert exerts an enormous amount of control. Mr. Lampert is the chairman and chief executive, and his hedge fund ESL Investments is the largest shareholder and a major lender.

He orchestrated a series of deals that generated cash for Sears in the near term, but stripped out many of the companys most valuable assets – often selling them to companies that he also has a stake in.

Sears spun off Lands End, the preppy clothing brand, into a separate company, which Mr. Lamperts hedge fund took a large stake in. The market value of Lands End now dwarfs that of Sears.

In 2015, Sears sold off stores worth $3.5-billion to a real estate company called Seritage Growth Properties. Mr. Lampert is a big investor in that company as well as its chairman. Seritage is converting many of the best locations into luxury offices, restaurants and apartments.

Even in bankruptcy, Mr. Lampert will have great sway over the companys fate. His hedge fund owns about 40 per cent of the companys debt, including about $1.43-billion in loans secured by Sears and Kmart properties. As a result, he could force Sears to sell the stores or transfer them to him to repay that debt.

Lampert will make out, said Mr. Olbrysh, the retired Sears worker. There is no question about that.

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