Pension issues, lawsuits and the impact on some vendors are some of the complications arising from the bankruptcy.
Sears last Monday filed a voluntary Chapter 11 petition for 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.
Edward S. Lampert, chairman of hedge fund ESL Investments, bailed Kmart Corp. out of bankruptcy in 2003 and a year later engineered the merger of Kmart with Sears, Roebuck & Co. to form Sears Holdings Corp. When the merger deal closed in 2005, Sears had over 3,500 stores under the Sears and Kmart nameplates and was projected to have an annual volume of $55 billion.
One of Lampert’s college roommates was Steven Mnuchin, who was on the board of Sears. Mnuchin resigned from the Sears board when he became the current U.S. Treasury Secretary. He remains a close friend of Lampert and at the time of his confirmation hearing in January 2016, he held interests in Sears stock, ESL and the real estate investment trust formed from some of Sears’ real estate to create Seritage Growth Properties. His position now has him on the board of the Pension Benefit Guaranty Corp., a federal agency that picks up the tab for retirees when companies can no longer meet their obligations to pay pension benefits. Sears’ pension is underfunded, and it has been working with the PBGC on its funding tab for the plans.
Some U.S. senators are now demanding from Mnuchin a formal, written recusal from any matters before the PBGC related to Sears Holdings. Sen. Bob Menendez (D-N.J.), a senior member of the Senate Finance Committee, led the charge. He is joined by Ranking Member Ron Wyden (D-Ore.) and Senate Finance Committee member Sherrod Brown (D-Ohio).
The senators in their demand letter reminded Mnuchin of his confirmation hearing, in which he said that “I will recuse myself in any way as it relates to being on the [PBGC] board, if indeed there ever were an issue with Sears. Whether I had an investment in ESL or I did not have an investment in ESL, I would be concerned about any appearance of conflict. So I would recuse myself.”
The senators expressed their concern that anything short of full recusal would be a “significant conflict of interest.” They also emphasized in their letter, “As Secretary of the Treasury, you are a member of the PBGC’s board of directors. This places you in a position of influence over decision-making at the PBGC related to the possible termination of Sears’ defined benefit pension plans during any bankruptcy proceedings.”
The senators also asked for financial information on Mnuchin’s holdings from last year. The request was so they can confirm that Mnuchin has fully divested of all his interests in Sears, Seritage and ESL per financial disclosures filed in spring 2017.
Apparel firms are preparing for their quarterly earnings reports. On Friday, VF Corp. posted its second-quarter results. The company at its March 2017 Investor Day noted marketplace consolidation in the apparel sector, one that alluded to store closures and bankruptcies such as Sears, which sells VF’s Wrangler and Lee brands, and Timberland footwear.
In a telephone interview Friday, VF chairman Steve Rendle said the company modeled the impact of the consolidation when it provided five-year projections. “We absolutely modeled that into our view,” but said of the Sears bankruptcy, “It does not surprise us, maybe a little sooner than we thought.” VF’s Scott Roe, chief financial officer, said the impact is less than $100 million and that “you can assume that will continue to shrink.” Putting that into perspective, Roe said of the impact, “For a $13.7 billion company, it’s not that material. It is meaningful, but not going to change our life.”
Levi Strauss is also sold at Sears. A spokeswoman said Friday, “Sears Holdings has been a valued Levi Strauss & Co. customer for many decades. As their business declined, we took necessary steps to minimize the impact on our business. Levi Strauss & Co. is in a strong position today due to a more diversified global business and successful omni-channel strategy.”
The week before Sears filed its bankruptcy petition, a school district in Illinois filed a lawsuit in a Cook County state court over tax credits that Sears has received. The initial agreement, said to be signed 30 years ago, was to have Sears move its headquarters from Chicago to Hoffman Estates and keep the company in the state. That agreement reportedly was set to expire in 2012 and extended to keep the retailer at its current location. The issue was that had the agreement not been extended, the school district would have then benefited from property tax payments paid by Sears. The lawsuit said that the extension was dependent on meeting certain criteria, including a level of employment and the suit has alleged that Sears violated the requirement in the economic development agreement because of the number of layoffs at Hoffman Estates headquarters.
A spokesman for Sears said, “As we have stated numerous times over the years, the EDGE and EDA tax incentives are governed by unique statutes and have unique job requirements. This complaint is without merit.”
Another lawsuit was also filed by swimwear firm InGear Fashions on Tuesday in a Cook County state court for nonpayment of $840,000. The Cook County docket listed the lawsuit as a fraud complaint. Its complaint listed as defendants: ESL Investments, Kmart Corp., Edward Lampert, Sears Holdings Corp. and Sears, Roebuck & Co. The Sears spokesman declined comment.