Will anything change for Sears after Chapter 11?

Discussion
Photo: Getty Images
Oct 15, 2018
George Anderson

If there was any surprise in Sears Holdings’ bankruptcy announcement it was that the retailer had decided to reorganize under Chapter 11 protection rather than liquidate the business under Chapter 7. After all, what chance does the retailer, which last turned a profit in 2010, have coming out of a reorganization? To many, the announcement seems as though Sears is just kicking the can down the road, giving Edward Lampert and his hedge fund, ESL Investments, more time to extract financial gains from the company before turning the lights out for good.

Some of the biggest news coming out of Sears with the announcement is that Mr. Lampert has stepped down as CEO of the company. He will remain as the board’s chairman. No announcement has been made on who will serve as CEO. Mohsin Meghji, managing partner of M-III Partners, has been named as chief restructuring officer to take Sears through the process of reorganization.

In its filing, the parent company of Kmart and its namesake chain, announced it will close 142 unprofitable stores by the end of the year. These will be in addition to 46 stores that are slated to be closed next month. Going forward, the retailer plans to focus on “EBITDA-positive” locations.

Sears has negotiated an additional $300 million in loans with banks to keep it operating and is in the process of trying to work out a similarly-sized deal with ESL. The hedge fund is also exploring potentially making a bid to buy “a large portion” of the retailer’s stores while Sears is going through Chapter 11.

“Over the last several years, we have worked hard to transform our business and unlock the value of our assets,” said Mr. Lampert in a statement. “While we have made progress, the plan has yet to deliver the results we have desired and addressing the company’s immediate liquidity needs has impacted our efforts to become a profitable and more competitive retailer.”

Mr. Lampert maintained that reorganizing under Chapter 11 will give the retailer the needed financial flexibility to execute on its strategy going forward.    

“As we look toward the holiday season, Sears and Kmart stores remain open for business and our dedicated associates look forward to serving our members and customers,” he said. “We thank our vendors for their continuing support through the upcoming season and beyond.”

DISCUSSION QUESTIONS: What is your take on Sears Holdings and its prospects during and after Chapter 11?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"This is, quite simply, an American retail tragedy."
"Sears may be holding on in order to give its loyal employees one more Christmas season before closing all stores."
"The saga that never goes away. The store that never dies. What happens when they come out of Chapter 11? They are still going to be Sears."

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24 Comments on "Will anything change for Sears after Chapter 11?"


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Bob Amster
BrainTrust

The stores are in dire need of upgrading. Much of the heretofore loyal base of customers has gone elsewhere to shop. How can a new Sears secure the funding necessary to renovate stores and pay people well enough to stick around a sinking ship? All too iffy to bet in their favor.

Paula Rosenblum
BrainTrust

Well, first of all, I have never heard the term “EBITDA positive locations.” I’ve heard of “Store Contribution greater than X%” but I’ve never heard that one. Stores have to throw off cash to contribute to home office and distribution expense. This is not rocket science.

Second of all, I seem to be the only person suggesting they would have been better of, shareholder-wise, going directly into liquidation sale mode. Remember way back when Circuit City declared right before the holiday season? No one was going to buy electronics and big ticket from a company they were unsure would be around and the company failed.

That’s different from saying “Okay, hand this thing over to liquidators.” They tend to charge more for product in the first few weeks than they might during a sale, and there is no customer expectation of support post-sales.

This is, quite simply, an American retail tragedy. Thanks for unlocking the value in all those assets, Eddie. Well-done. Sheesh.

Cathy Hotka
BrainTrust

Knowing that he’s profiting from Sears’ spiral is so very depressing…

Neil Saunders
BrainTrust

Given that Sears has been in restructuring for at least the past 15 years, it is hard to see how yet more restructuring will create a viable business. Sure, loss-making stores can be shuttered and debt can be reorganized, but that still leaves the problem of a tarnished brand that has no purpose. To me, this is just another twist in the long running saga that should have ended years ago.

Ken Lonyai
BrainTrust

Chapter 11 probably gives the appearance of more stability and a chance at a future versus Chapter 7 (fire sale) which may matter for brand valuations as Lampert sells off Kenmore and any other remaining brand assets.

Richard J. George, Ph.D.
BrainTrust

Sears and Kmart will disappear from the retail landscape. Sadly, Sears will be where America used to shop. The situation is somewhat analogous to Toys “R” Us. A retailer that failed to change in the face of disruptive competitors. The only difference may be that Eddie Lampert will make out quite well financially — thank you very much!

Paula Rosenblum
BrainTrust

Actually, the analogy is interesting. Toys “R” Us actually went down under the debt burden created by its PE owners. Sears went down because of the greed and asset sell-off of its CEO and owner.

Tom Dougherty
BrainTrust

Sears is dead in the water. They will not successfully emerge from this bankruptcy filing. The brand has taken the easy road for more than a decade and now it would require too much to catch up. The brand is not worth the investment.

Sears squandered one of the world’s great brands. Stubbornly holding onto old models and aging meanings. Retail is undergoing a revolution and I am afraid many will follow Sears to that grave.

What did Sears mean? Its only meaning today is deeply buried in nostalgia. Its brand is not vital. Sadly we can live without it. All they have had for a decade is vague memories of the Sears catalog and hopeful Christmas dreams. Sears was the Internet of the 1960s. Now it is a beached whale. Kmart won’t be far behind.

What’s changing? In a word — access.

Retail traffic is eroding, and many retailers face the double whammy of online competition and of a demographic change. Consumers rejecting dependence on malls.

Retail and online are the same noun today.

Bob Phibbs
BrainTrust

There are so many lessons for retailers of all sizes from the spectacle of Sears that I wrote about 5 Giant Takeaways To Heed From Sears Withering Bankruptcy Tale. One has to wonder if this really was the grand scheme after all. I’m sure shareholders and pensioners will file lawsuits, as Retail Dive noted; “around fraudulent transfers and other ownership conflicts as leverage or to recoup lost investments.”

Like Glenn Close’s character in Fatal Attraction, I fully expect Lampert to resurrect a version of the brand and continue to enrich himself at the expense of the many people who built that business into being our store; it’s a microcosm of what’s eating at the soul of America.

Jeff Sward
BrainTrust

Didn’t they open a new prototype store in Oak Brook just a couple weeks ago? That’s where any clues to new life will be. But where would the money come from to execute the new and improved Sears? Who’s going to make that bet? Lands’ End was a perfect apparel formula for Sears. Solid, everyday-wear aimed at the middle of the bell curve customer, and yet Lands’ End couldn’t wait to exit, even with some Lampert ownership. None of it adds up. I have said for a while, just let Amazon sweep in and buy the shell, change the name on the box, and let the transformation of that end of the mall begin, finally. A couple of the Sears brands can have a role in the new venture.

Frank Riso
BrainTrust

Sears may be holding on in order to give its loyal employees one more Christmas season before closing all stores. It also gives them more time to line up buyers for the stores, which are the real asset for the holding company. To see such an icon of U.S. retail be treated so badly!

Ricardo Belmar
BrainTrust

“… we have worked hard to transform our business and unlock the value of our assets,” Really? If unlocking means selling off anything of value to create temporary cash flow, then sure, they’ve been working very hard at that. What’s missing is a real strategy to bring back customers to their stores. Or how about a strategy that improves product assortment and actually considers how they sell online vs in-store and how they convert those online shoppers into more valuable omnichannel customers. I don’t see how a few more months of “restructuring” under Chapter 11 protection will help them now. Too little, too late. Whatever customers they had left will now see the Chapter 11 warning sign and go elsewhere for their purchases for fear that the retailers won’t be around post-holiday season to service them. It’s truly a tragedy and didn’t have to end up here. This now concludes the death spiral we’ve all been watching from the sidelines for so many years.

Steve Montgomery
BrainTrust

I agree with Paula. This is a tragedy. The beginning of the end was when Mr. Lampert elected to run the company rather than simply manage his investment in it. He fell victim to his own ego and it has taken what was an iconic business down to a point that it will not recover from. The rationale for Chapter 11 is it provides time to monetize the remaining Sear brands before shuttering the doors for good. It will be interesting to see if Sears sell off its brands to companies controlled by Lampert.

Lauren Goldberg
BrainTrust

Sears is limping towards their eventual demise. When you look at all of the assets they had and the inability of management to capitalize and evolve, I don’t see how a few more months will make a difference. My father was an Allstate insurance agent and worked out of a Sears store in Miami when I was growing up. I have fond memories of going to visit my dad at the store. In addition to products there were so many customer-driven services — this is what big box stores today strive for. Just so many missteps along the way. I’m sure Eddie Lampert will profit nicely — I hope they are able to take care of their employees as well.

Mohamed Amer
BrainTrust
Mohamed Amer
Independent Board Member, Investor and Startup Advisor
1 year 6 days ago

Sears’ trajectory has gone from retail innovator to debt accumulator. From catering to all the needs for the home and farm to “unlocking” value from real estate and brands. From merchandising prowess to financial (re)engineering. The die was cast years ago and every roll comes up snake eyes.

Dick Seesel
BrainTrust

It’s hard to picture a long-term survival strategy for Sears, if it manages to emerge from Chapter 11 with only a few hundred stores. While individual locations may be profitable, there is nothing to suggest that the brand is relevant enough to be sustainable on a national basis. (Especially with its prized brands being sold elsewhere.) This has been the issue for Sears for many years, not just during the Lampert era — but putting two weak brands together in 2004 did not make for one stronger outcome.

I mentioned in a comment on a WSJ story that some “retail history” is in order. Back in 1962, when Sears’ real estate division was rolling out dozens of regional malls as vehicles for its store expansion, three new retailers opened their doors and eventually caught on. (Walmart, Target and Kohl’s.) What these three stores had in common (and others that followed, like Home Depot and Best Buy) was a combination of value-added and cost-efficiency that Sears was too complacent to emulate.

Nathanael Barnes
Guest

This is a great point that illustrates some of the long-term failings that have gripped Sears. While Sears bet on the viability of the mall as a driver for store traffic, Target, Kohl’s, and Walmart tended to stay away from those. I would guess that the initial strategy was more of a money issue as these were new retailers and mall space can be expensive.

Kohl’s, Walmart and Target have all seen some struggles in the post-2000s retail boom, but the big difference was they invested in technology and infrastructure processes that allowed them to remain flexible in changing times.

Kohl’s and Target used to open 100,000-foot stores when they were expanding but in recent years have realized that it is not cost effective from a sales per square foot perspective. The stores that they open now are much smaller scale and designed to take over spaces that were formerly retail spaces, saving money on construction costs.

Dick Seesel
BrainTrust

Yes, and Kohl’s (my former employer) is also “right-sizing” some of those 100,000 square foot stores — at the same time, they find a large number of physical locations is an omnichannel advantage.

Ed Rosenbaum
BrainTrust

The saga that never goes away. The store that never dies. What happens when they come out of Chapter 11? They are still going to be Sears. The customers have moved on. So should Sears. Eddie Lampert is the only winner going in or coming out of bankruptcy. Let’s move on.

Harley Feldman
BrainTrust

Good luck! Edward Lampert has been dilly-dallying for several years now and what has he accomplished? Losing money, selling real estate and slowly killing the Sears brand. No one knows what the Sears brand stands for anymore. Sears used to be the stalwart in appliances, had the best tool brand, Craftsman, and brought in well-recognized Lands’ End to extend their apparel line. None of this has worked, and the Sears brand has been diluted significantly. Unless there is a strategy to bring the Sears brand back in a world of the increasing diversity of brands with great customer service, Sears is destined to be on the ash-heap of retailers who did not recognize the retail industry’s fast moving trend changes.

Ananda Chakravarty
BrainTrust
Still remember when the whole family trekked down to Sears in our family best to have our pictures taken at the Sears photo studio. Will drop down to 700 stores after this upcoming “EBITDA” closings and plan. Not sure what has changed with a turnaround specialist (finance guy) at the helm — it goes back to cost cutting. The bankruptcy will impact the entire line of higher cost products. I would be hard pressed to buy a water heater, refrigerator, or washer/dryer from a store that might not be around for support/repairs — so that will be a blow to new revenue. It might be able to pull out of this, but much smaller. Without focus and more importantly, good leadership, the chances are poor. After Chapter 11, if it can avoid liquidation, it would be a different organization, nothing like it’s former self. Poor culture and leadership with even the best strategies will fail to succeed as a going concern — and I’m not sure how good they were in any of these.
Craig Sundstrom
Guest

Would it have worked under competent … well, let’s just say, “other” ownership? Perhaps, but remember that the whole reason this person got ahold of it was largely because it was already a mess.

I’m waiting for the book to come out, but my suspicions are that it’s “Mervyn’s” writ large: i.e. financial machinations destroyed whatever hope for survival that existed and allowed a few to benefit at the expense of the rest of the stakeholders; something of which Adam Smith would not approve … nor I.

Ken Wyker
Guest

The demise of Sears is something everyone, including I think Mr. Lampert, has seen coming for years.

I like Jeff Sward’s comment about Amazon sweeping in to buy the shell. Amazon doesn’t need the brands like Kenmore that Sears will try to sell, but they could use the locations with ample space and plenty of parking. I can’t easily think of many other buyers that would be interested in large mall sites, so I’m thinking they could get the locations for very little.

The Sears locations would likely not overlap what they have with Whole Foods very much, so the new sites could help with reaching more customers with pickup locations. The Sears sites will also have much more space for warehousing and handling of potentially larger inventory.

James Tenser
BrainTrust

I’m coming to the rather sickening conclusion that Mr. Lampert’s “unlock value” strategy has a great deal to do with escaping from the company’s massive pension obligation. That could certainly present a windfall for current Sears investors.

We have been witnessing the slow dismemberment of the Sears/Kmart real estate empire. Why prolong this suffering? I think because dumping all of that square footage onto the commercial market at once would create a glut that drives down the liquidation value of the properties.

Keeping many stores open with minimal inventory, skeleton staffing, and zero investment in the physical plant allows the company to stanch the bleeding while it waits for the right moments to turn over each asset for best total investor return.

Ch. 7 liquidation won’t allow that to happen. Reorganization under Ch. 11 allows the maneuvering to continue.

wpDiscuz
Braintrust
"This is, quite simply, an American retail tragedy."
"Sears may be holding on in order to give its loyal employees one more Christmas season before closing all stores."
"The saga that never goes away. The store that never dies. What happens when they come out of Chapter 11? They are still going to be Sears."

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