Sears’ bankruptcy filing came with an unusual clause describing financing to be arranged later. I originally thought that the bankruptcy financing would have to be worked out by the beginning of November for the retail giant to avoid Christmas-season liquidation, but that date has passed and there is no sign of the money needed to keep Sears and Kmart stores operating through the end of the year. Last weekend there were whispers of a deal to rescue the Sears retail chain, but apparently financing remained an obstacle and that deal did not come through. Without the planned financing, Sears shelves could be half bare by the time Christmas is here, and mall owners might start proceedings to evict the retailer after rent goes unpaid. Already things are looking desperate on the shelves at Kmart stores according to multiple published reports and video posted online.
There is a second problem. Creditors have asked for a formal review of insider deals at Sears over the last few years. There have been many insider deals between Sears and other companies controlled by its majority owner, deals worth billions of dollars, and some of the deals could end up being reviewed in bankruptcy court. In the worst case, if an investigation reveals an active coverup surrounding the transactions, that could lead to criminal charges against officers at Sears and its counterparties. As unlikely as that scenario might sound, merely raising the possibility of wrongdoing by officers makes it harder than it was already for Sears to arrange financing of any kind or make the kind of large-scale deal that could rescue the company from bankruptcy. Even a delay of a few weeks while the court considers these questions could ruin a deal.
In a practical sense, it is probably already too late to close the remaining Sears and Kmart stores before Christmas. The Christmas shopping season is already well underway, and it reaches its high point in barely three weeks on Black Friday. But a move to put the remaining stores into liquidation after Black Friday, while there are still some Christmas shoppers to sell to, does not seem particularly unlikely. Much depends on the cash flow at Sears stores. In theory, if traffic and sales were strong enough, the company would not need any further financing. But if shoppers stay away, worrying that Sears is not functioning normally or mistakenly believing stores have already closed, Sears will run out of cash before Black Friday, and then there will be no legal mechanism available to stop an early liquidation. Unfortunately, the latter scenario is more likely than the former.
I still believe that removing Sears’ executives provides the only plausible hope of having the company make its way through bankruptcy. Creditors, lenders, and investors have no reason to place any faith in the current management team, the same people who ran two legendary retail names into the ground. The sooner current management can be removed, the better the chances of salvaging something of Sears and Kmart. But so far, there aren’t any moves in that direction.
Update, Friday, November 9: Sears has announced 40 more store closings. The new list is concentrated on the East Coast and includes 29 Sears stores and just 11 Kmart stores. At a glance, it seems fair to guess that these stores are low-performing stores that were mistakenly left off the original list. It could be that the company thought it could find a buyer for some of these stores in bankruptcy because of their favorable locations.
The original store closing list is now said to be closing “in 2018,” which I think in practice means the two weeks after Christmas. Stores on the new list are expected to close “February 2019,” which will surely be January in a few cases. No one should be surprised if 100 more stores are added to this new list. At this point, closing all stores in February would not be a big surprise.
The new store closings do little to close the funding gap. Sears still needs a loan of well over $100 million just to keep the doors open through Christmas, and it is hard to imagine any large bank putting that amount of money at risk just so a failed retailer can keep doing what it was doing already. The only scenario I can imagine is a consortium of five or more banks and hedge funds, but lenders would require a substantial change in management, probably larger than Sears can stomach. Bankruptcy financing deals are not very complicated — the loan contract can be as simple as a two-page memorandum — so if such a compromise were possible and made business sense, the company should have arrived at it by now.
Update, Tuesday, November 13: CNN reports a filing by creditors to put Sears into liquidation. Creditors can hope to get about 4 percent of what they are owed if Sears is liquidated, but fear there will be nothing left if stores stay open for a few more months. The motion apparently originated with mall owners and represents the view of only a small fraction of Sears’ creditors, but it has an immediate legal impact nonetheless. Sears now has to persuade the court that the bankrupt company’s plan works out better for creditors. In that connection, the liquidation filing puts more pressure on Sears to show that it has the financing it needs to stay open through the end of the year. A ruling on the motion to liquidate could happen this week, or the court could decide to wait for Cyber Monday so it can consider the impact of Black Friday revenue.
Update, Thursday, November 15: Bankruptcy court, in a hearing today, has put off a decision on liquidating Sears for one month. Yesterday, Sears obtained a $350 million line of credit which, even if sales are disappointing, should allow it to stay open into January. Realistically, Sears needs to show a reasonably strong holiday season to avoid a liquidation order in December.
