The Mighty Retail King has Fallen...Or has He?

The fate of Sears Holdings Corp., a 126-year old retail chain that significantly transformed American shopping, has been sealed by Judge Robert Drain in the U.S. Bankruptcy Court for the Southern District of New York. As of Thursday, February 7, Judge Drain sanctioned the sale of the retailer’s operating assets to chairman and former CEO Eddie Lampert. Judge Drain has given Sears multiple chances to save itself and stay in business. However, despite the fact that 45,000 employees at Sears and Kmart are at risk of losing their jobs, the hearing was set to prioritize the reimbursement of Sears’ creditors. In fact, the major creditors objecting to Lampert’s $5.2 billion rescue bid are owed over $3 billion. ESL Investments, Lampert’s hedge fund, previously countered that “should our bid be accepted and succeed, we expect that the company that emerges from bankruptcy would offer employment to up to 50,000 associates” (Fickenscher 2018).  $1.3 billion in financing from three financial institutions is backing Lampert’s contentious bid. Bank of America, Royal Bank of Canada, and Citigroup have agreed to provide a $350 million revolving credit line and a $950 million asset-based loan.

Only time will tell if this bid will succeed in salvaging the floundering retailer. Nevertheless, more than 40 parties involved in the case objected to the sale of Sears, calling for a liquidation of assets instead. In court, a committee of unsecured creditors, including the company’s landlords and vendors, alleged that Sears’ recovery plan is ineffective, running the risk of incurring additional losses. Thus, creditors warn that accepting Lampert’s bid is “an unjustified and foolhardy gamble with other people’s money” since debt is not backed by hard assets (Isidore 2018). In response to creditors’ claim that a sale rather than a liquidation is better suited for raising money, the lead bankruptcy attorney for Sears, Ray Schrock, maintains that overloading the market with assets and stores would be counter-productive. Although Judge Drain is legally obligated to protect creditors, his loyalties seem to lie with Lampert and ESL. In the past, through his hedge fund, Lampert turned billions in profit through dividends, business spinoffs, and share repurchases as Sears wobbled on the brink of bankruptcy. By the same token, it appears that previous objectors to the bid are being silenced. For instance, the Pension Benefit Guaranty Corp., a federal agency that protects retirement security and insured benefits, abandoned its previous objection to the bid.

The fall of “the original everything store,” as dubbed by the New York Times, has sent shockwaves throughout the retail industry. In January 2016, 178,000 were employed for Sears. In 2018, the number significantly shrunk to 68,000, with 47% serving as full-time employees. The Chapter 11 filing for bankruptcy, which occurred on October 15, 2018, threatens to dismantle the former retail empire. For over a century, Sears was the nation’s largest merchant, boasting diverse product lines that stretched from Craftsman tools to Discover credit cards to Kenmore washing machines (Zumbach 2018). The company’s success dates back to 1886, when Richard W. Sears, a Minnesota railway agent, decided that he wanted to pursue the watch business. After moving to Chicago and joining forces with business partner Alvah Roebuck, Sears, Roebuck & Co. was born. With its roots in the mail-order business and Chicago at its core, Sears rapidly expanded. In the 1920s and 1930s, this merchandising powerhouse was able to survive the Great Depression, opening its 381st store in March 1932 (Zumbach 2018).

Since filing for bankruptcy this past October, CEO Eddie Lampert stepped down from managing the company’s day-to-day operations and has remained chairman.  Three high-ranking executives, who comprise the “Office of the CEO,” have since filled the vacancy and attempted to keep Sears from crumbling. While Lampert has made efforts to distance himself from the company, he remains Sears’ largest creditor and shareholder through his hedge fund ESL Investments, as he has been since purchasing the company in 2005.  Lampert vowed to return the department chain to its former glory, combining the retailer with Kmart to form Sears Holdings, but the company never realized profits after 2010. In fact, the retailer continues to liquidate its asset base to remain in business. In addition to selling valuable properties, the CEO dissolved many of Sears’ bread and butter brands, such as Sears Canada, Lands’ End, and Craftsman Tools. As consumers continuously substitute brick-and-mortar locations with e-commercial platforms, Lampert has failed to innovate and revitalize corporate strategy, thus isolating Sears’ once-loyal customer base.

Some critics blame Lampert’s greed as the primary contributor to running the once mighty retail king to the ground. Distressed Sears has progressively hurdled toward insolvency as Lampert has created separate spin-off companies in which his ESL hedge fund is an investor. Critics contend that Lampert, despite serving as chairman and CEO, is not invested in Sears and its role as a pioneer in the retail industry. Rather than prioritize Sears’ core competencies and reinvigorate its strategic initiatives, Lampert “has stripped the meat off the Sears bones and dried them out into beef jerky that his holding company ESL gnaws on periodically” (Rosenblum 2018).

During the first court hearing this past Monday, Lampert defended that his plan to leverage ESL to repurchase Sears’ operating assets is the only solution to keeping the business alive. Despite the CEO’s apparent confidence in his multi-billion dollar bid, a limited amount of his personal cash is at risk; it is the aforementioned $1.3 billion in external financing that is funding Lampert’s deal. While Lampert and ESL maintain that the acceptance of this bid will prevent the slashing of 45,000 jobs, Lacy Lawrence—one of the attorneys representing a committee of the retailer’s unsecured creditors—underscores the uncertain impact of the bid by questioning a member of the Sears board restructuring committee, William Transier. Transier confirmed that the asset purchase agreement does not assure continued employment and includes planned headcount reductions.

Interestingly, prior to the acceptance of the bid, former and current Sears employees joined together in an action group named “Rise Up Retail,” imploring U.S. Bankruptcy Judge Robert Drain to force the company to make concessions in their interest. As of February 5, 2019, the retailer has shut down over 3,500 stores and slashed nearly 250,000 jobs over the past fifteen years.  Transier explained that Judge Drain has exhorted Sears to negotiate the sale away from the public eye, for he is aware of the severity of unemployment that is at stake.

Although creditors are infuriated that Judge Drain approved Lampert’s bid, he beseeched Mr.  Lampert to “make a fresh start” (Corkery 2019). Despite the fact that many believe Lampert to be the reason for Sears’ demise, he has now acquired the bankrupt retailer and has the opportunity to play the hero. The deal is not yet finalized, however, with details such as who will assume responsibility for $166 million in liabilities still unsettled. The future of Sears is uncertain, and time will only tell if the former retail icon will return to the top, let alone stay afloat.

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