Sears files for Chapter 11 amid plunging sales, massive debt

Sears files for Chapter 11 amid plunging sales, massive debt
Sears, the original everything store, nears a bankruptcy filing to cut debts
Sears Holding Corporation more than a century ago pioneered the strategy of selling everything to everyone.

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.

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.

U.S. Sears files for bankruptcy protection amid plunging sales, massive debt

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.

Sears ready to file bankruptcy later tonight as former US retail giant tries to stay alive

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.

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.

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.

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.

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.

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.

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.

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 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.

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.

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.

"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.

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.

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.

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 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 havent, 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 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.

"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."

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

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.

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 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.

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.

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.

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.

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.

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.

Sales at the companys established locations tumbled nearly 4 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.

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.

The people, who requested anonymity because the information is confidential, cautioned no plan is definite until the retailer formally submits its bankruptcy paperwork. Sears did not immediately respond to comment.

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.

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.

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.

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.

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.

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.

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.

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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.

It is unclear how the closures would impact Sears workers, which totaled roughly 90,000 in February 2018.

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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