Sears Holdings Corp., the parent company of the Sears and Kmart nameplates, on Monday filed a voluntary Chapter 11 petition seeking bankruptcy court protection in White Plains, N.Y. Also filing Chapter 11 petitions were 49 affiliates, including Kmart Holding Corp. The petition lists total assets of $6.94 billion and total liabilities of $11.34 billion.
For now, Sears has $300 million in debtor-in-possession financing from its senior secured asset-based revolving lenders. The company said it is also in negotiations with ESL Investments Inc., a hedge fund, for an additional $300 million junior DIP facility. Sears will close 142 unprofitable stores near the end of the year.
Edward S. Lampert, chairman of Sears and chairman and chief executive officer of ESL, said, “The Chapter 11 process will give [Sears] Holdings the flexibility to strengthen its balance sheet, enabling the company to accelerate its strategic transformation, continue right sizing its operating model and return to profitability. Our goal is to achieve a comprehensive restructuring as efficiently as possible, working closely with our creditors and other debtholders, and be better positioned to execute on our strategy and key priorities.”
Sears said it “intends to reorganize around a smaller store platform of EBITDA-positive stores.” The retailer added that it “believes that a successful reorganization will save the company and the jobs of tens of thousands of store associates.”
In addition, the retailer said it is in discussions with ESL regarding a stalking-horse bid for the purchase of a large portion or the company’s store base.
As part of the restructuring, Lampert has stepped down as ceo of Sears, although he remains its chairman. The retailer’s board has created an Office of the CEO for the management of day-to-day operations. The new Office of the CEO will be comprised of Robert A. Riecker, chief financial officer; Leena Munjal, chief digital officer, customer experience and integrated retail, and Gregory Ladley, president of apparel and footwear. The retailer’s board has also formed a restructuring committee. The committee is comprised of independent directors, and includes Alan J. Carr, Paul G. DePodesta, Ann N. Reese and William L. Transier. Carr was appointed to the board last week, while Transier, ceo of Transier Advisors, is the most recent addition. Both Carr and Transier have restructuring backgrounds. In addition, Mohsin Y. Meghji, managing partner of M-III Partners, was named chief restructuring officer.
The filing was not unexpected.
Word surfaced on Wednesday that a bankruptcy filing was imminent, particularly because of a $134 million debt payment slated for Monday. The big concern then was whether the filing would allow the company to continue in operations and attempt to reorganize or would entail an outright liquidation of the business. Credit analysts said it is rare for retailers to file a petition that moves them directly to a liquidation. The fact that it was even considered indicates the financial stress Sears has been under.
By Friday, individuals familiar with the matter said the retailer was close to an agreement with lenders to provide up to $500 million debtor-in-possession financing. DIP financing is key for any debtor, particularly retailers because they need funds to maintain the inventory flow and keep their store shelves stocked. In the case of Sears, many vendors still willing to ship to the company over the last few months had tightened their terms by shipping a smaller amount of inventory, requiring a cash payment, and demanding shorter time periods in which to make those payments. The agreement with lenders at least gives the company the ability to get inventory into its Sears and Kmart stores through the holiday selling season. One credit analyst told WWD that Sears has typically been “cash-positive” during the weeks from Thanksgiving weekend to Christmas Day. That’s cash that can help it fund part of its bankruptcy.
For Sears, the road to ruin — in effect, its long goodbye — began years ago. Some might argue in hindsight that it began when Lampert in 2004 masterminded the $11 billion merger of Kmart Holding Corp. and Sears, Roebuck & Co. The merger was finalized in 2005.
Lampert, through his hedge fund ESL Investments, acquired the debt of Kmart Corp., then took the company out of bankruptcy proceedings in 2003 and renamed the newly restructured discounter Kmart Holding Corp. Given his success then, and the expectation that the merger of the two retailers would create a combined entity with annual revenues projected at $55 billion, some thought he was an investment genius. What Lampert didn’t have was experience as a retailer, and he certainly wasn’t a merchant.
Following the financial crisis of 2007, shoppers began shifting their buying behavior toward online shopping. While that certainly hurt some of the spending at brick-and-mortar stores such as Sears and Kmart, what hurt more was Lampert’s lack of investment in the stores themselves. In short, Lampert didn’t really give anyone a reason to want to be inside a Kmart or Sears. And with Amazon growing in force, and the big discounters such as Walmart and Target providing better values, consumers went elsewhere to do their shopping. Even a Home Depot or Lowe’s began to take business away from Sears, once the go-to place for home improvement and appliances for its Craftsman and Kenmore brands.
The last time Sears posted a profitable quarter was in 2010. Lampert’s response to curtailing the red ink was to sell off the company’s assets to raise cash to keep operations afloat. Along the way, the ongoing extraction of value from Sears’ assets became the equivalent of a slow liquidation of the company.
The better real estate assets were sold to create real estate investment trust Seritage Growth Properties. Sears’ Lands’ End business was spun off, as was its Orchard Supply business. The three brands known as the crown jewels — Craftsman tools, Kenmore appliances and Diehard automotive batteries — have seen better days. Craftsman was sold to Stanley Black & Decker in 2017 for $900 million. Lampert, as chairman and ceo of ESL, has pegged the value of Kenmore and its business at $400 million, and is trying to buy the Kenmore brand. Kenmore, along with the Sears home improvement and services businesses and some real estate, are assets that Lampert in the summer proposed to buy for $1.47 billion as part of an ESL bailout plan.
Sears’ independent board wasn’t so keen on the bailout plan, nor were the lenders. The plan also called for creditors to exchange part of their debt to equity, even though it is known that equity holdings get extinguished in the event of a bankruptcy filing.
There are also the remaining Kmart and Sears stores. At the time of the merger in 2005, there were more than 3,500 stores. Lampert has closed hundreds over the last few years, and at the end of August, the company operated just 866 locations. Additional stores were slated for closure in November, leaving the company with less than 700 stores in operation at the time of its Chapter 11 filing.
Sears, which began operations as a catalog company in 1892, opened its first store in February 1925 in Chicago. Sears began trading publicly in 1906. The stock was a component of the Dow Jones Industrial Average from 1924 to 1999. As the company began closing stores, Sears in April announced the shuttering of its last Chicago store located at the area known as “Six Corners, the intersection of Milwaukee, Cicero and Irving Park Roads. The Chicago store that closed was opened 80 years ago in October 1938.
Kmart’s roots go back to 1899 under the name S.S. Kresge Corp. It was listed on the New York Stock Exchange in 1918. The first store under the Kmart nameplate was opened in 1962 in Garden City, Mich. The company was renamed Kmart Corp. in 1977. Kmart filed for Chapter 11 bankruptcy court protection on January 2002. Kmart emerged from bankruptcy court protection in May 2003.