The melting ice cube that is Sears – once a shining beacon of American consumerism – has finally dissolved.
After missing a $134 million Monday debt payment, as was widely expected, CNBC reported early Monday that Sears filed for Chapter 11 Bankruptcy protection in bankruptcy court in White Plains, New York. To be sure, filing for Chapter 11 protection is a victory of sorts for Lampert, who has managed to convince a coterie of Sears’ largest secured creditors, including Bank of America, Citigroup and Wells Fargo, into extending a $300 million debtor-in-possession loan that will allow Sears to continue operating (albeit in an even more limited form) through the end of the year (though, if we had to guess, we’d speculate that Lampert secured the loan by convincing these banks that it was in their best interest to allow Sears management to continue slowly stripping assets from the company instead of resorting to a bankruptcy firesale).
Lampert has also secured another $300 million from outside investment banks (a loan that, we imagine, is backed by Lampert’s assurances that he is shopping for a buyer for Sears’ popular Kenmore appliances brand, though that buyer could end up being ESL, which has the power to forgive Sears debt in exchange for assets).
By staving off Chapter 7 liquidation, Lampert has set up his fund, ESL Investments, as a stalking horse during the bankruptcy auction process. ESL and Lampert own a combined 50% of Sears shares, and ESL is one of its largest creditors. Lampert said Monday that he will step down as Sears CEO but remain on as chairman, while Mohsin Meghji, managing partner of M-III Partners, will step up as the company’s chief restructuring officer.
As part of the bankruptcy, some 142 stores are expected to close by the end of the year, along with 42 that were already in the process of closing, while the company’s remaining 500+ stores will continue operating.
In a statement to the media, Lampert insisted that was doing everything he could “to help the company” succeed, though analysts have disputed this claim, as most believe Lampert is merely staving off the inevitable to allow his firm enough time to continue stripping assets at the best possible price, allowing ESL (and by extension, Lampert himself) to preserve as much capital as possible.
“Everything I’ve done as an investor has been to help the company succeed,” Lampert said. Though, as CNBC pointed out, many analysts dispute that. Lampert first merged the two struggling discount stores more than a decade ago, hoping to strengthen their market position and, ultimately, save their brands.
As CNBC reminds us, Sears has been in survival mode for more than a decade.
Unable to rely on the Sears’ business to pay the bills, Lampert instead sold or spun off many of its most valuable stores and brands.
Since its merger with Kmart, Sears has spun off its Lands’ End clothing brand, sold the Craftsman tool brand to Stanley Black & Decker and closed hundreds of stores. It spun out 250 of its best properties into real estate investment trust offshoot known as Seritage.
In a jarring reminder of just how far the company had fallen, some vendors, wary of Sears’ future, have demanded tighter payment terms. Others, like Whirlpool, stopped shipping all-together. Until it emerges from protection (or is liquidated), Sears will be run by an Office of the CEO, and independent directors will oversee the restructuring.
According to Bloomberg, the retailer has listed more than $10 billion in debts and more than $1 billion in assets in its filing, and has said it hopes to reorganize around a smaller base of profitable stores. Sears and Kmart stores will remain open with help from $600 million in new loans, but the company will shut 142 unprofitable outlets near the end of the year, on top of 46 unprofitable stores already slated for closure by November.
While liquidation is not currently imminent, like Toys R Us, before it, the retailer’s chances of surviving bankruptcy as a going concern remain slim.
As CNBC points out, it’s difficult for a retailer to make investments that would help secure its survival (like building an e-commerce platform) while making its creditors whole. The company’s last profitable year was in 2010, and last year, it rang up less than $17 billion in sales, half of the roughly $40 billion in revenue it brought in five years earlier. The company has had little free cash to reinvest in strategies that could save the struggling business, and since Lampert took over in 2006 after impressing Wall Street with his successful turnaround of discount retailer K-Mart, an entire generation of Americans have never visited the company’s stores.
And with that, Sears 125-year history is nearing its inglorious end, as the merciless engine of capitalistic creative destruction chugs on and as iguana-eating, online-retailing monopolists have a hearty chuckle at the company that was once upon a time America’s first Amazon.
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