As the financial condition of Sears Holdings (NASDAQOTH:SHLDQ) deteriorates, it will find more vendors trying to put some distance between them and the troubled retailer. For the second time, Sears was forced to turn to the courts to prevent a supplier from bailing on it, and it may soon become commonplace.
Yet like the previous dispute with One World, which Sears says it has subsequently resolved amicably, chairman and CEO Eddie Lampert is not wrong in trying to compel its suppliers to comply with the terms of their contracts. The problem is it shows just how dire Sears' situation is.
Not an ideal situation
Earlier this month Sears sued Ideal Industries to force it to continue shipping Craftsman tools. Sears has a better than 50-year relationship with Western Forge, which was acquired by Ideal Industries in 2010, but their agreement expired in April. Though the retailer claims it had received numerous written and verbal assurances the contract would be extended, Ideal abruptly ended their agreement and only supplied it with more product for one month rather than the six months as called for in their contract.
Moreover, Ideal reportedly said it would continue supplying Sears with Craftsman product, but "only if Sears agrees to onerous payment terms that were not part of the agreement and that were unilaterally imposed by Ideal."
While Sears is actively looking for a replacement supplier, it wants the courts to compel Ideal Industries to continue shipping product through the end of October as it's supposed to. And if those really are the terms of the agreement, then you can't fault Lampert and Sears for trying to make the vendor live up to the contract.
Left holding the bag
Yet it's not a surprise either that suppliers are trying to wriggle out of their contracts with the retailer. As Sears' financial woes mount and it has to increasingly turn to one-time sources of cash to keep operating, vendors don't want to be the one left without a chair when the music stops. If Sears is forced into bankruptcy, they may get little or nothing on the product they shipped.
Children's clothing retailer Gymboree filed for bankruptcy this month and detailed how vendors had squeezed it for better terms in the months leading up to its declaration. They wanted cash on delivery, or worse, upfront, and also refused to extend it credit as would ordinarily occur. By tightening the screws on Gymboree, the retailer's problems mushroomed and the situation only grew direr. That's what's seemingly happening to Sears now and why Lampert is responding so forcefully.
Yet vendor worries are also beginning to snowball. Over the past several years Lampert has had to tamp down fires that erupted with its suppliers, including accelerating payments to some of them to keep them in line ahead of the holidays, as well as lending Sears financial assistance to ease concerns vendors had that they wouldn't be paid. Now the brush fires are spontaneously combusting more frequently, and it coincides with Sears widening losses.
At a loss
The profit it supposedly generated last quarter, the first time in several years a quarter had ended in the black, only happened because of the one-time infusions Lampert is famous for. This time around it was selling Craftsman to Stanley Black & Decker (NYSE:SWK). Instead of the $244 million it reportedly earned, it was actually a $230 million loss once the non-recurring revenue was stripped out, worse than the $199 million it lost last year.
Some analysts predict Sears will have little choice but to declare bankruptcy soon because it is burning through the little cash it has left on the balance sheet. In fact, they say it could come as soon as next month. Of course, that doesn't take into account Lampert digging once more into his own deep pockets to bail the retailer out again, but as Sears circles the drain faster, more vendors will seek to separate themselves.
Keeping them on board may ultimately be as futile as trying to herd cats with a broom. Lampert needs to try, but they'll eventually scatter the first chance they get and that will mark the end of this once wonderful company.