The end could very well be near for Sears Holding Corporation (NASDAQ:SHLDQ).
On Wednesday, The Wall Street Journal reported that the ailing retailer's suppliers have begun to tighten the terms under which they provide merchandise. This is a troubling development that often presages a retailer's demise.
According to the article:
Suppliers of tools and other goods have begun asking for sweetened payment terms to compensate them for the risk of shipping to the troubled retailer, people familiar with the situation said.
Sears has offered to pay some vendors within 15 days, faster than its normal terms of up to 60 days for suppliers of apparel or hard goods, in return for a discount of around 3% to 5%, one of the people said.
The faster payments tie up more of Sears's cash, increasing the risk and complexity of basic functions needed to keep its business going. It has little choice but to bear those costs, however, after a dismal holiday season that rattled its vendors.
Reading between the lines
At first glance, the length of time that Sears has to repay its suppliers may seem like a nuance. After all, what's the difference between 15 and 60 days in the whole scheme of things?
But aside from the fact that each of those reduced days ties up an estimated $48 million in Sears' increasingly scarce capital, the more critical point is what it telescopes about the company's ability to stock its stores during the upcoming holiday season. Not to mention, given Sears' performance over the past few years, evidenced by a long pattern of declining same-store sales, it would be illogical to assume that its vendors will do anything but continue to tighten these terms.
We've seen this before
It's worth noting that a similar loss of confidence among suppliers led to the downfall of Circuit City in the lead-up to the 2008 holiday shopping season. On Nov. 3, 2008, the now-defunct electronics retailer issued a press release stating:
Following the company's second quarter results announcement, the company's liquidity position and the sharply worsened overall economic environment led some of Circuit City's vendors to take restrictive actions with respect to payment terms and the credit they make available to the company. ... As a result of this and other considerations, certain of the company's vendors have set more restrictive payment terms than in previous quarters, including in some cases requiring payment before shipment. Vendors also have limited the credit available to the company for purchases, including in some cases not providing customary increases in credit lines for holiday purchases.
Exactly one week later it filed for bankruptcy, citing its deteriorated relationship with vendors as the primary culprit:
Despite aggressive efforts to secure vendor support, vendor concerns about the company's liquidity and ability to pay for its purchases in this difficult economic climate have escalated considerably since the company provided a liquidity update on November 3, 2008, further impairing the company's ability to conduct business and provide service to its customers. Faced with the need to secure ongoing vendor support and to ensure adequate merchandise flow to stores during the important holiday season, the company has determined that it would be in the best interest of its stakeholders to file for reorganization relief under Chapter 11.
The issue in instances like this is that suppliers fear they won't be compensated for the merchandise they provide. Two years after Borders filed for bankruptcy protection in 2011, for instance, Penguin Putman, Hachette Book Group, and Simon & Schuster were collectively owed more than $80 million for books that they had shipped to the bookstore chain on credit.
It's not over for Sears just yet
This isn't to say, of course, that Sears is necessarily destined to failure. I believe it is, but there are rumors that it could raise as much as $2 billion by spinning off as many as 300 of its best stores into a publicly traded real estate investment trust. If it's able to do so, that'd provide a critical source of funds that could see it through the year, if not longer.
But the problem with this strategy is that it presupposes that investors will be receptive to such a REIT on sufficiently palatable terms to Sears and its creditors. I, for one, struggle to understand how anyone could even remotely consider buying shares in such a company. If Sears ends up going under, releasing those locations will take a herculean effort, with many bound to remain vacant.
My point is that Sears is descending further and further into a financial abyss from which it will be increasingly difficult to emerge absent a miracle. But while we've known this for some time, it wasn't until this week that the acuteness of its troubles were on display for all to see.