Thursday, February 7, 2019

One More Year for a Smaller Sears

Sears will exit bankruptcy, but in a state at least as precarious a year ago.

A bankruptcy court today approved the sale of Sears to its CEO’s hedge fund in the hope that this arrangement would temporarily save the jobs of the retailer’s employees. The new Sears and Kmart will have 425 stores, though observers expect store closures to continue at a rate of roughly 4 per month. The same as a year ago, the company faces a cash crunch and a load of liabilities that it cannot reasonably expect to ever pay. It is a company operating at a loss. The losses between now and the end of 2019 are likely to be in the neighborhood of $1 billion, a sum that would use up cash on hand and available credit. Even though it is exiting bankruptcy, it still looks like Sears and Kmart are probably heading for liquidation within a year when cash runs out.

The new Sears and Kmart will face new challenges that result from the current bankruptcy. Employees now know for sure that their pensions will not be funded. They have little incentive to stay with a doomed company if they can find an equivalent job anywhere else. As always, it is the most skilled employees who will leave most easily. Suppliers that were not paid when Sears went into bankruptcy will be in no position to extend credit to a company that remains desperately short of cash, so Sears and Kmart stores will have even less to sell in 2019 than they had in 2018. Shoppers will have little reason to return to the stores knowing that the company is on its last legs and the merchandise they are looking for in the store is not likely to be found. The world continues to turn away from department stores in general. It is a retail category that has been in decline since the late 1980s even as retail in general has boomed. Sears and Kmart have done worse than the category they are in, and now they need to do better than average just to survive.

Just to make it through 2019, Sears needs big changes. The company knows its stores are too large, and it will continue to shrink some stores in place and move others to smaller locations. At the same time, it desperately needs new investors to keep operating and pay for the costs of these changes. That will be hard to arrange; investors usually like to bet on a growing company rather than one that must shrink to survive.

Sears needs a business plan that will allow it to make a profit. It needs to reclaim its identity and present a reason for shoppers to go into the stores. As a first step, Sears and Kmart need to cut back on their clothing offerings. Sears could even abandon clothing entirely. Sears was never a fashion name, and for Kmart, that is a history from so long ago that most shoppers have forgotten.

To accomplish any of this, Sears and Kmart need new management. A management team that could not manage a single change to the business plan in five months of bankruptcy can hardly be expected to turn the two retail chains’ business models upside down in the ten months that remain before cash runs out.

Let’s assume for the sake of discussion that both retail chains go into bankruptcy again in 8 to 13 months, as analysts expect. The current bankruptcy can be seen as a restructuring of liabilities mainly for the purposes of the second bankruptcy. The biggest losers this time around are employees, suppliers, lenders, landlords, and stockholders. A year from now, it may be the same story again.