Sears’ Future is in Jeopardy

Sears Holdings, the parent company of Sears and Kmart, filed into bankruptcy less than two years ago. Although the business that emerged from bankruptcy had much less debt, it is nonetheless precarious. Sears has struggled in the year since it emerged from bankruptcy.

The coronavirus epidemic may spell the last for Sears, which has been in turmoil for years.

The already beleaguered department store industry has been devastated by Covid-19. J.Crew, Neiman Marcus, and JCPenney have all declared bankruptcy due to store closures across the world.

That was before the catastrophe.

“Sears is in grave danger,” said Neil Saunders, managing director of GlobalData Retail. “The consumer economy was strong before the crisis. Even at that time, Sears wasn’t doing very well, and things will only become harder in the future. They sell a lot of discretionary items, so that’s where the cuts will be made.”

In the face of the epidemic, a Sears spokesperson did not answer queries about the company’s prospects of avoiding another bankruptcy case.

Following its bankruptcy departure in February 2019, Sears has shuttered hundreds of shops. The firm had just 182 Sears and Kmart locations at the end of February, down from 400 a year ago and 1,000 two years ago.

As of April 4, all Sears-branded stores were shuttered due to health concerns. The majority of Kmarts stayed open, but some were forced to shut due to governmental directives. Sears began reopening several of its stores on May 9, although just 25 have been reopened thus far.

JCPenney is a harbinger of doom for Sears

It may seem like JCPenney’s problems is good news for Sears since it may gain sales at the cost of a struggling competitor.

JCPenney’s decision to file for bankruptcy and shut almost 250 shops, on the other hand, is terrible news for Sears. Foot traffic would likely decrease in the number of malls where both shops are situated. It will also compel Sears to compete with JCPenney’s low-priced store-closing discounts, which will be held at 30% of its locations this year and next.

The Coronavirus has the potential to keep customers away for a long period.

Then there’s the X-factor, which is how eager people are to return to malls once they reopen.

“What Covid has done is is hastened the transition to online purchasing,” said Marie Driscoll, managing director of Coresight Research, a retail-focused consulting and research company. “We already knew that mall traffic had decreased. People are scared to go out since we don’t have a vaccination.”

Since many elderly customers are more inclined to remain at home during a pandemic, Sears and JCPenney may be a particular issue. According to Coresight statistics, the average age of a Sears customer is 50, while the average age of a JCPenney consumer is 48. Both are among the oldest retailers in the world.

Double whammy

If Sears is pushed into bankruptcy a second time, both the Sears and Kmart names may be doomed. Payless Shoes, Gymboree, and RadioShack are just a few instances of retailers that have gone out of business after filing for bankruptcy a second time.

During Sears’ first bankruptcy, creditors were pressing hard to have the business shut down. If Sears goes bankrupt again, they may get their wish.

“I was shocked it hadn’t been sold before,” said Reshmi Basu, a Debtwire analyst who specializes in retail bankruptcies. 

“A retailer’s [second bankruptcy] nearly invariably results in liquidation, according to history. Given the assets that have been taken away, I’m not sure what levers it can pull in bankruptcy.”

Before declaring bankruptcy, Sears traded its Craftsman tool line to Stanley Black & Decker (SWK). Competitors, such as Lowe’s, now carry the line (LOW). Then, only recently, Sears sold its DieHard batteries and car components to another rival, Advanced Auto Parts. It also sold its delivery and installation company, Innovel Solutions, to Costco (COST).

The Kenmore appliance brand is still owned by Sears, although it is no longer unique to the retailer.

Sears’ only hope is to go bankrupt

According to critics, Eddie Lampert, the owner of Sears, is accused of being more interested in the company’s real estate than its retail business. Lampert, a hedge fund manager with a real estate background, has rebuilt many old Sears sites.

However, there will be a torrent of store closures by other businesses, lowering the value of the real estate that has been Sears’ saving grace.

Office Depot (ODP) has stated that it would shut an unknown number of its 1,300 locations.

Stage Shops (SSI), which operates roughly 800 smaller department stores under various names, has also filed for bankruptcy and intends to shut all of them permanently.

Pier 1 (PIRRQ), which was already insolvent before the crisis, said that it would permanently shut all of its 450 locations in the United States and Canada this week.

“Given all the vacant sites, how much is that [Sears] real estate worth now?” Basu wondered. “The commercial real estate market has grown very congested.”

 

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