Sears Holdings Corp. seems set to live to see another day, but the retailer will have to overcome significant challenges in order to survive long-term.
The bankrupt retailer reached a deal in the early-morning hours Wednesday that would allow chairman Edward S. Lampert and his hedge fund ESL Investments to buy what’s left of Sears for more than $5 billion, according to multiple published reports. Representatives from ESL would not confirm or deny the reports.
While the exact terms are unknown, the deal is likely to include at least most of the 425 Sears and Kmart stores around the country, real estate and distribution centers, and the DieHard tool and Kenmore appliance brands. It would also save approximately 50,000 jobs, out of the roughly 68,000 workers Sears had as of October when the firm filed for Chapter 11 bankruptcy protection.
The deal saved Sears from the liquidators — a sign of just how sharp a fall the company has had. Sears was once America’s largest retailer with 3,770 stores nationwide. That number dwindled to fewer than 700 as of last fall, only to have multiple rounds of additional store closures later announced.
Creditors are still hungry for their money back, and if Lampert’s deal isn’t approved, the alternative is to sell off all of Sears’ assets. A bankruptcy judge will make the final decision whether or not to accept Lampert’s bid at a hearing on Jan. 31.
If the deal is approved, simply surviving bankruptcy won’t bring Sears back to its once-iconic status. Many companies have filed for bankruptcy protection only to be back in bankruptcy court in short order.
While Lampert has long been criticized for his stewardship of the firm, Sears has faced an unfavorable and shifting landscape that favors direct-to-consumer and e-commerce brands.
“Sears has a very severe form of the department store disease,” said Gerald Storch, chief executive officer of Storch Advisory, a retail advisory group. “It’s an aging customer that considers Sears relevant and the younger audience doesn’t even think about Sears.”
Storch, a retail veteran, who also served as the chief executive officer and chairman of the now-defunct Toys “R” Us and ceo of the Hudson’s Bay Co., said trying to attract younger shoppers to Sears might be impossible. Instead, he said the 126-year-old retailer should focus on expanding its customer base to people who would view Sears as a viable shopping option, people “who tend to be older.” He also said the company should concentrate on its strengths, such as selling hardware, automotive goods and appliances.
Meanwhile, the unprofitable apparel business needs a makeover.
“I’ve seen some recommendations that Sears exit apparel altogether, but I think that’s ridiculous,” Storch said. “They need to remain fundamentally a department store or otherwise you risk alienating their base consumers who are still loyal. And there still are some.”
“You don’t become stronger in hard lines just because you exit apparel,” he added. “All that does is weaken the company. They don’t need to exit apparel; they need to fix it.”
But Craig Johnson, founder of research and consulting firm Customer Growth Partners, said trimming Sears’ soft-line categories, what he calls “a very weak assortment of apparel,” is just the first step.
Johnson would advise a four-part process: eliminate apparel, shrink the store count to closer to 300 stores, reduce the square footage in those remaining stores and hire a retail veteran to be Sears’ new ceo.
“The soft-line side of Sears, like apparel and linens, are hemorrhaging cash,” Johnson said. “There’s no value there.”
There is, however, “still a certain equity with consumers, a residual brand equity that’s all built around the hard-line categories. They need to focus on what they do well, rather than just be a marginal player selling apparel.”
Meanwhile, people are still out shopping — just not at the same places. While some traditional retailers have become relics, consumer sentiment is strong among other players, including e-commerce giant Amazon, big-box retailers like Target Corp., off-price channels like T.J. Maxx, and strong brands, such as Nike and Lululemon that offer customer convenience and a large omnichannel of shopping options.
Even fears of a possible recession this year don’t seem to be preventing people from spending money, which makes the case for saving Sears seem bleak.
“If Sears can’t succeed in the perfect economy that we had last year, then it raises questions about what’s going to happen if the economy is even weaker,” Storch said.
America’s largest retailer did nearly $53 billion in sales in its heyday more than a decade ago. But the company had less than $7 billion in assets when it filed for bankruptcy on Oct. 15.
Lampert, who served in various leadership positions with Sears for 13 years, including a stint as ceo, might be part of the problem.
While Johnson acknowledged that Lampert is considered by many to be a real estate and investment wizard, once likened to Warren Buffet, he said Lampert is no retail expert. Johnson called Lampert’s term as ceo of Sears a “disaster.”
“That’s why you have to get someone in there…that has zero to do with managing the company,” Johnson said.
In fact, for Sears to succeed, what Johnson calls a “long shot,” the leadership will need to be “a truly independent retail executive with turnaround experience.”
It’s unclear if the most recent agreement will include a provision that would prevent creditors from later suing Lampert, who is also the company’s largest shareholder and debt holder, for deals he previously executed while heading the company. That includes a 2014 Spin-off of Lands’ End and a deal with real estate firm Seritage Growth Properties.