Please ensure Javascript is enabled for purposes of website accessibility

Sears Holdings Chooses Downsizing Over Bankruptcy (for Now)

By Adam Levine-Weinberg - Jul 10, 2017 at 8:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Sears Holdings is now set to close more than 300 stores in 2017 as part of a desperate attempt to avoid bankruptcy.

For months, many pundits have speculated that Sears Holdings (SHLDQ) would file for bankruptcy in July -- or shortly thereafter. That's because two years ago this month, Sears spun off a large portion of its valuable real estate assets as Seritage Growth Properties, an independent REIT. This transaction could have potentially been reversed as a "fraudulent conveyance" if Sears had filed for bankruptcy within two years of the spinoff.

However, while Sears Holdings may theoretically have a clear path to file bankruptcy now, CEO Eddie Lampert seems determined to stave off that outcome. Instead, the company continues to downsize its operations at a frantic pace.

Sears is closing more stores than ever before

2016 was a busy year for downsizing at Sears Holdings, particularly for the Kmart chain. At the beginning of last year, the company operated 941 Kmart stores and 705 full-line Sears stores. By year end, it was down to just 735 Kmarts and 670 full-line Sears stores.

In 2017, Sears has accelerated its downsizing initiative. In early January, Sears announced that it would close 150 unprofitable stores during its first fiscal quarter. In the following months, Sears quietly decided to close an additional 30 locations. Furthermore, in early June, it made plans to shutter another 65 stores (excluding auto centers) by the end of September.

The exterior of a Sears store

Sears and Kmart will close hundreds of stores this year. Image source: Sears.

Just in the past few weeks, Sears has added to its store closure tally again. In late June, it marked 20 more stores for closure. And just last week, Sears Holdings announced that it will close yet another 43 stores by early October.

Overall, Sears Holdings is set to close more than 300 stores this year, more than half of which have already closed. This will slash its store base by more than 20%.

Store closures will keep Sears Holdings on life support

Sears Holdings' store closures certainly don't inspire confidence that the company has a long-term future. However, they may help it to survive for another couple of years.

First, most of the stores Sears is closing are unprofitable. Shutting them down will allow the company to improve its long-term cash flow performance -- although it remains far from breakeven.

Second, closing these stores will provide a one-time cash windfall as Sears liquidates their inventory. The company has been forced to self-finance most of its inventory in recent years because of vendor skittishness. During fiscal 2016, Sears reduced its net inventory investment by nearly $700 million, driven in part by its store closures. The company may be able to make a similar reduction this year, as it continues to close stores at a rapid pace.

In some cases, Sears also owns the real estate for the stores it is closing (or has favorable lease terms). That provides yet another avenue for the company to generate cash as it closes stores.

Is the Sears of the future a small-format store?

In a blog post announcing the most recent round of store closures, Lampert noted that Sears Holdings is on track to reduce operating expenses by $1.25 billion this year. He also touted some recent progress in improving Sears' liquidity by selling real estate and increasing its borrowing capacity.

Lampert also highlighted the two small-format "concept stores" that Sears has opened in 2016 and 2017. He stated that Sears plans to open more small-format stores in the coming years, while reducing the number and size of its larger stores.

Small-format stores allow Sears to focus on its strongest product categories while exiting lines of business where it can't operate profitably. So far, the company has been pleased with the results of its two test stores.

Five years ago, transforming Sears to focus on a few key categories like appliances, hardware, and mattresses in smaller stores might have been a good idea. Today, Sears is hemorrhaging money so quickly that it may not matter. Sears will burn so much cash as it works to slim down its legacy store portfolio and headquarters staff that it will likely be forced into bankruptcy -- presumably followed by a liquidation -- by 2020 at the latest.

In this scenario, it would be nearly impossible to find a buyer for a handful of small-format concept stores -- even if they show some promise. In the long run, downsizing is likely to be a prelude to bankruptcy for Sears, not an alternative.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Sears Holdings Corporation Stock Quote
Sears Holdings Corporation

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.