The Latest Sears Saga: The Company Is Suing a Supplier

Don't think that just because Sears Holdings (SHLD +0.00%) reported a profit last quarter, its vendors are any less nervous about doing business with the retailer. One-time cash infusions still mask the real and growing deficit it produces.

Yet just because the troubled retailer is still having financial difficulties doesn't mean Chairman and CEO Eddie Lampert is wrong about one of its suppliers trying to use the environment of fear to finagle better terms for itself. Not that you can blame the vendor, but Lampert has sunk a lot of his hedge fund's capital into the business to keep it afloat as a means of ensuring its suppliers will be paid, and contracts need to be honored.

Image source: Sears Holdings.

A bad case of the jitters

Vendors have become increasingly nervous that Sears' financial condition will leave them holding the bag. Revenues have plunged year over year as the retailer closes ever more stores in a bid to rein in its far-flung footprint to one more commensurate with the level of customer traffic it attracts. At the end of April, the company had 1,275 Sears and Kmart locations that generated $4.3 billion in quarterly sales. That's down from the more than 1,600 stores it had a year ago that produced almost $5.4 billion in revenue. 

While store closures play the biggest part in the drop, that's followed very closely by plunging same store sales, which were down by double-digit rates at both brands. Fewer stores accounted for $557 million of the lower reported sales, but lower comps represented another $417 million, and it's that number that has to be worrying its suppliers, not to mention adjusted losses widening to $222 million.

Sears reportedly lost a big account last year after toymaker JAKKS Pacific mentioned it stopped shipping product to a large, financially troubled retailer. That was followed by more reports that half a dozen other vendors had sharply curtailed shipments to Sears.

Image source: Sears Holdings.

Stripped to the bone

To his credit, Lampert has dug deep to keep everyone in line, loaning Sears money through his ESL Investments hedge fund and arranging financing packages from deep pocketed investors, including Bruce Berkowitz and Cascade Investment, the investment company controlled by Bill Gates.

Yet in addition to the loans to keep it solvent, Lampert has also stripped Sears of virtually everything of value, spinning off or selling concepts like Sears Hometown & Outlets Stores and Land's End, and more recently, selling off the Craftsman brand to Stanley Black & Decker.

Although he has taken more innovative approaches with the remaining Kenmore and DieHard brands, licensing out the former's name to a third party gas grill manufacturer while rebranding at least one auto service center with the name of the latter, it's gotten to the point where there's just not much left to draw customers in. And now one supplier seems to be using the situation to get out of its contract with the company. 

Kicking while he's down

One World, a subsidiary of Chinese conglomerate Techtronic Industries (TTNDY +0.01%), reportedly threatened to sue Sears if the retailer didn't allow it to back out of its commitment to provide it with various Craftsman power tools. 

In a blog post on Sears' website, Lampert excoriates One World for trying "to embarrass us in the media to force us to let them out of their contract," but he remains unbowed and fired back that the vendor wanted out of its Sears contract so it could make more tools for competitors on the cheap, using existing Sears capacity so it wouldn't have to expand or build more facilities.

Sears sold Craftsman to Stanley earlier this year for $900 million, a deal that also gives Sears the right to continue selling Craftsman products made by its existing suppliers royalty-free for 15 years. Letting One World back out would put Sears at a competitive disadvantage.

Lampert goes on to note Sears has had a nine-year relationship with the supplier and always paid its bills on time. While it will continue to do so and is fully capable of it, he's not about to let One World just walk away from its obligations. Instead, he has filed a lawsuit against the vendor to force it to abide by the supply agreement.

"Fighting like hell"

Of course, Sears has given vendors like One World a bit of ammunition to try such shenanigans when it included a "going concern" notice in its filing saying there was substantial doubt as to its ability to survive. While it was mostly regulatory boilerplate language the retailer was obligated to include, it does give suppliers like One World reason to try to back away.

Lampert has said he's "fighting like hell" to keep the company afloat, and certainly letting one vendor walk away would invite others to try as well. Soon the drip-drip-drip of supplier exits would become a deluge, so suing One World to force it to live up to its end of the deal is a necessity, not to mention the right thing to do. There are a lot of things Lampert and Sears have done wrong or could have done better over the years, but keeping its vendors in line and making them live up to their end of a bargain isn't one of them.