The bankruptcy filing everyone saw coming finally arrived. Sears Holdings (NASDAQOTH:SHLDQ) announced early Monday morning it was seeking Chapter 11 protection and had arranged financing that would allow it to keep operating, at least through Christmas. The goal is to reorganize around a few hundred profitable stores that the company hopes will allow it to achieve the turnaround that has eluded the bigger business for nearly a decade.
While other businesses have reorganized and emerged successfully while under the protection of the bankruptcy courts, including retailers like Payless ShoeSource, True Religion, and Gymboree, don't expect the same of Sears. The key difference between it and these others that survived their brush with death is they still retained some brand value. Customers still want to shop their stores, and their brands have an enduring appeal to consumers.
Not so with Sears. Under the tutelage of CEO Eddie Lampert, whatever value was once there has been all but eliminated, stripped bare from Sears as it sold off or spun out almost every asset that could be monetized. Orchard Supply, Sears Hometown and Outlet, Lands' End, and Craftsman tools are all gone. What remains is a shell of the former titan.
Slow descent into decay
Many call Sears the Amazon.com of its day, the place where consumers could shop for almost anything they needed, including flood, clothes, appliances, furniture -- even houses. Like the big-box stores of today, Sears sought to bypass the local general store with its catalogs that offered farmers and others a way to directly buy all that they needed.
But the change in consumer shopping habits brought on first by the rise of discounters like Walmart and Target, which made competing on price a prime strategy, and then by Amazon, which made shopping from home convenient, was too much for a retailer that would not or could not respond.
It was only because Sears had its vast legacy real estate holdings -- about 3,500 stores around the time Lampert's Kmart chain acquired Sears in 2004 -- that it was able to forestall for years what eventually occurred this week. Instead of investing in his stores, Lampert chose financial maneuvers to sustain the business, which often gave the appearance of health, but allowed the underpinnings -- selling goods -- to erode away. As a result, Sears was a slow-motion train wreck that survived longer than many suspected it could.
Although Lampert is gamely going to try to rebuild the facade of a viable retailer while in bankruptcy protection, it likely will crumble again.
A smaller, slimmer Sears
At the end, Sears had $11.3 billion in liabilities and only $6.9 billion in assets. It has arranged $300 million in debtor-in-possession financing from its existing lenders with Lampert's ESL Investments hedge fund in negotiation with the retailer to supply it with an additional $300 million. Lampert is Sears' largest investor but also its biggest creditor.
Lampert served as both chairman and CEO, but will now give up the latter position to a three-person committee. Mohsin Meghji, the managing director of M-III Partners, the corporate advisory firm Sears hired to advise it on the bankruptcy, will serve as chief restructuring officer.
As part of the restructuring, Sears will sell off approximately 150 of its remaining 700 stores by the end of the year, with an eye on shedding an additional 250 locations, leaving a core 300 stores to survive, which ESL might end up buying anyway. It also made a bid to buy the Kenmore appliance brand earlier this year.
New boss same as the old one
Sears' creditors had originally been pushing for liquidation, and that may still occur, though much will depend on the company's ability to make it through the holiday season. Lampert has told employees the company needs to make "material progress over the next few months" if Sears is to avoid liquidation, but unfortunately, that's probably not going to happen.
Customers have been fleeing the retailer, it doesn't offer compelling merchandise, and its stores suffer from neglect. It hasn't reported a profit since 2010, and sales have been plummeting. Worse, Lampert is still in control of the business, and according to billionaire investor and former board member Bruce Berkowitz, he wields too much control over the bankruptcy process.
That means there's unlikely to be any real difference in how things operate. Sears will still be beset by the forces that swirled around the retailer before the Chapter 11 filing, and there's no reason to think consumers will suddenly decide now is the time to start shopping its stores. Any resurrection of this retailer that may happen won't last very long.