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Sears files for Chapter 11; Lampert resigns as CEO

Sears Holding Corp. filed for Chapter 11 bankruptcy protection early Monday morning, hours before a $134 million debt payment came due. Sears listed $11.34 billion in liabilities and $6.94 billion in assets.

The 125-year-old company, which was once the nation’s largest retailer, said it will close 142 stores near the end of the year, with liquidation sales set to begin soon. (For a list of the stores, click here) near the end of the year, with liquidation sales to begin soon. This is in addition to the previously announced closure of 46 unprofitable stores by November 2018.

Sears has shuttered more than 1,000 stores in recent years. It currently operates a total of about 700 Sears and Kmart stores.

“Today is a day that will live in retail infamy,” commented Neil Saunders, managing director, GlobalData Retail. “That a storied retailer, once at the pinnacle of the industry, should collapse in such a shabby state of disarray is both terrible and scandalous in equal measure. However, it is not surprising because this is a destination that Sears has been headed towards for many years, with virtually no serious attempt having ever been made to change the trajectory.”

As part of the restructuring, Eddie Lampert, Sears’ chairman, CEO and its biggest shareholder, is stepping down as CEO, effective immediately. He remains chairman. The company has appointed restructuring expert Mohsin Meghji, managing partner of M-III Partners, as its chief restructuring officer.

Lampert, who purchased Sears, Roebuck & Co. and brought it together with Kmart in an $11 billion deal in 2005, is also one of Sears’ biggest creditors through his hedge fund ESL Investments. He has been helping to keep the company afloat for years, primarily with billions of dollars of short-term loans. And he still is. Sears said ESL is negotiating a $300 million debtor-in-possession loan to support it through bankruptcy. (Sears has also secured commitments for $300 million in senior priming debtor-in-possession financing from its senior secured asset-based revolving lenders.). In addition, ESL is exploring a stalking-horse bid to buy “a large portion” of the company’s stores in the bankruptcy process.

"Over the last several years, we have worked hard to transform our business and unlock the value of our assets," said Lampert. "While we have made progress, the plan has yet to deliver the results we have desired, and addressing the company's immediate liquidity needs has impacted our efforts to become a profitable and more competitive retailer. The Chapter 11 process will give [Sears] Holdings the flexibility to strengthen its balance sheet, enabling the company to accelerate its strategic transformation, continue right sizing its operating model, and return to profitability.”

Sears has created an “office of the CEO,” which will be responsible for managing the company's day-to-day operations during the bankruptcy restructuring process. It will be composed of Robert A. Riecker, CFO; Leena Munjal, chief digital officer, customer experience and integrated retail; and Gregory Ladley, president of apparel and footwear.

While long expected, Sears’ bankruptcy filing will still have a big impact on the retail real estate industry.

“Most retail-center owners have anticipated significant Sears and Kmart closures for many years,” said Melina Cordero, global head of retail research, CBRE. “But the recovery for properties facing an imminent store closure will take a long time, given that this is perhaps the most complex retail bankruptcy ever. It typically takes 18-36 months to backfill a vacated department store, and developing or subdividing a department store is an expensive process.” (For more, click here.)

Sears has been on a downward trajectory for years. It last posted a profitable quarter in 2010. The company’s problems are legion, dating back pre-Lambert to its expansion into non-core retail areas and its failure to adequately respond to the rise of Walmart, update its brand, and invest in the technology that would soon rule the industry. Its decline only intensified in the face of changing consumer behavior with the rise of online shopping and Amazon.

Unable to stop the sales hemorrhage, Lampert turned to other methods to raise cash, selling off some of Sears’ most valuable brands, such as Craftsman, and real estate. Many of Sears best stores were spun off into a real estate investment trust (Seritage Growth Properties). With little cash to invest in existing operations, Sears has not been able to keep up with far more nimble competitors such as Walmart, Home Depot, Kohl’s and Lowe’s. Its stores, suffering from a lack capital expenditure investment, have grown outdated and forlorn looking.

Sears said it intends to continue payment of employee wages and benefits, honor member programs, and pay vendors and suppliers in the ordinary course for all goods and services provided on or after the filing date. Sears and Kmart stores, and its online and mobile platforms, are open and continue to offer a full range of products and services to customers.

“As we look toward the holiday season, Sears and Kmart stores remain open for business and our dedicated associates look forward to serving our members and customers,” Lampert stated. “We thank our vendors for their continuing support through the upcoming season and beyond.”

Not everyone shares Lampert’s confidence in Sears’ ability to emerge from Chapter 11 as a viable entity.

“Over the longer term it is still unclear what Sears hopes to accomplish,” GlobalData Retail’s Saunders said. “We believe there is no clear path to success. The group has tried to shrink its way to profitability for years to no avail, so it is hard to see why pursuing the same strategy under the auspice of Chapter 11 would result in a different outcome. Further asset sales may reduce debt, but they would not put the company on a sound financial footing nor would they solve the operating losses the group is racking up.” (For more of Saunders commentary, click here.)
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