The news that some lenders have urged Sears Holdings to file for Chapter 7 bankruptcy, which involves the liquidation rather than the restructuring of the business, confirms the view that Sears is a firm without any real inherent value, one analyst says.
The embattled US department store retailer announced earlier this week that Alan Carr, managing member, and CEO of financial services firm Drivetrain, has joined its board of directors – a move which could mean the company is preparing for a possible bankruptcy filing.
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In a statement, Sears notes Carr has significant experience as a principal, investor, and advisor leading complex financial restructurings, as well as serving as a director of reorganised businesses in the US and Europe.
CEO Edward Lampert added: “Alan brings deep experience as a director for companies that went through complex organisational change. We are pleased to welcome him to the board and look forward to the benefit of his expertise as we work to maximise value for the company and its stakeholders.”
The appointment comes as no great surprise to Neil Saunders, managing director of GlobalData Retail, who notes it is the inevitable end game of an effective liquidation process that has been going on for many years.
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“Throughout that time the sale of various assets along with injections of cash from Eddie Lampert have kept the ailing retailer from going under. However, the activity is akin to bailing out water from a holed ship: it keeps the vessel afloat for longer but does nothing to sort out the underlying problem,” he said.”
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By GlobalDataThe problem in Sears case, Saunders explains, is that it is a “poor retailer”.
“Put bluntly, it has failed on every facet of retailing from assortment to service to merchandise to basic shopkeeping standards.”
“Put bluntly, it has failed on every facet of retailing from assortment to service to merchandise to basic shopkeeping standards,” he says. “Under benign conditions, this would be problematic enough but in today’s hyper-competitive retail environment it is a recipe for failure on a grand scale. That failure has manifested itself in lost customers, lost market share, and a brand that has become tarnished and increasingly irrelevant.”
Meanwhile, management’s “consistent inability or unwillingness” to address these issues is why GlobalData has never been confident about the long-term survival of Sears, Saunders adds.
“It is all well and good to undertake financial engineering, but the company is in the business of retailing and without a clear retail plan, the firm simply has no reason to exist.”
While he acknowledged earlier this week there is a slim chance that Sears may avoid the latest bankruptcy threat – especially if lenders and stakeholders quickly agree to the restructuring programme put forward by Lampert – Saunders said yesterday (11 October) the news that some lenders have urged Sears to file for Chapter 7 bankruptcy confirms his company’s view that Sears is a firm without any real inherent value.
The latest financials show that group liabilities outweigh assets by some US$4.4bn, he says, and not only has this imbalance been present for many years, it has progressively worsened over time.
“A restructuring involving further asset sales would do little to fill this hole. Certainly, the process may allow Sears to pay down some debt and reduce liabilities, but it would also further weaken the asset base of the company. Ultimately, this puts Sears in a dangerous catch 22 situation from which there is no real escape.”
If the company was profitable at the operating level there may be some hope that after restructuring it could rebuild its assets and pay down further debt, however, this is not the case, Saunders explains.
“The latest numbers show that in the half year to August, the company made a huge operating loss of $419m. In our view, this is a company that is broken operationally as well as financially.”
He concludes: “The prognosis is gloomy, just as it has been for many years. Over this time Sears has been expert in restructuring and playing for time with various financial machinations. However, at some point, the music has to stop. We believe that time is now.”
In August, Sears announced another tranche of store closures, which will see a further 46 unprofitable locations shuttered before the end of the year. The news followed an announcement in June that Sears would close 72 stores as it revealed a net loss and a sharp decline in group sales in its first-quarter.
