FINANCE

Analysis: Sears has failed on every facet of retailing

The news that Sears has hired advisors to prepare for a possible bankruptcy filing comes as no great surprise. In our view, this is the inevitable end game of an effective liquidation process that has been going on for many years. 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.

The problem in Sears case 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. 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.

Management’s consistent inability or unwillingness to address these issues is why we have never been confident about the long-term survival of Sears. 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.

There is a slim chance that Sears may avoid the latest bankruptcy threat, especially if lenders and stakeholders quickly agree to the restructuring program put forward by Eddie Lampert. However, in our view, this is not a long-term solution; it is simply a way to prolong the life of a company that has long since lost the will to live.

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Sears reportedly on brink of filing for bankruptcy as debt payment looms

BY Marianne Wilson

Sears Holdings Corp. is inching closer to filing for Chapter 11 bankruptcy protection.

The embattled, 125-year-old department store has hired M-III Partners LLC, a boutique advisory firm, to prepare a bankruptcy filing, the Wall Street Journal reported. The filing could occur as early as this week. The report comes on the heels of Sears adding restructuring expert Alan J. Carr to its board of directors. It also comes as Sears approaches a $134 million debt payment, due on Oct. 15, which the cash-strapped retailer previously warned it may not meet.

In September, ESL Investments, the hedge fund run by Sears chairman and CEO Eddie Lampert, proposed a plan that would essentially translate into a wholesale financial restructuring of the company but without a Chapter 11 filing. It includes selling off many of Sears’ remaining stores and asking lenders to exchange their loans for equity stakes in the retailer. (Some of the stores would be leased back to Sears.) It also includes an offer to buy Sears’ signature Kenmore appliances brand for $400 million. A special committee of the board is currently evaluating the proposal.

“There is a slim chance that Sears may avoid the latest bankruptcy threat, especially if lenders and stakeholders quickly agree to the restructuring program put forward by Eddie Lampert,” commented Neil Saunders, managing director of GlobalData Retail. “However, in our view, this is not a long-term solution; it is simply a way to prolong the life of a company that has long since lost the will to live.

As of its latest quarter, Sears was operating some 900 stores (Sears and Kmart) down from 4,000 plus in 2005.

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Mattress Firm files for Chapter 11, closing up to 700 stores

BY Marianne Wilson

Declining sales, over-expansion and competition from online disruptors have finally caught up with Mattress Firm.

The nation’s largest mattress retailer has filed for Chapter 11 bankruptcy protection as it looks to “strengthen its balance sheet and optimize its store footprint.” Mattress Firm, which operates some 3,500 U.S. locations, plans to close up to 700 stores. An initial group of some 200 locations will close in the next few days, with decisions about additional closings to be made in the next few weeks. (A&G Realty Partners is assisting the retailer with its store closing and lease restructuring program.) Mattress Firm listed Simmons Manufacturing Co. and Serta Mattress Co., as its biggest creditors, with claims of $64.7 million and $25.5 million, respectively.

“Leading up to the holiday shopping season, we will exit up to 700 stores in certain markets where we have too many locations in close proximity to each other,” said Steve Stagner, executive chairman, president and CEO. “We intend to use the additional liquidity from these actions to improve our product offering, provide greater value to our customers, open new stores in new markets, and strategically expand in existing markets where we see the greatest opportunities to serve our customers.”

Houston-based Mattress Firm has been under increased pressure from ongoing disruption in the once-staid mattress category. Online “start-ups such as Casper, which is now expanding in brick and mortar, have been expanding their market share by offering generous return policies and free, bed-in-a-box deliveries. Amazon recently announced it would offer a bed-in-the-box mattress, and Walmart launched its own online premium mattress brand, Allswell, earlier this year.  Most recently, Serta Simmons Bedding — whose brands include Serta, Beautyrest, Simmons, and Tomorrow — merged with direct-to-consumer brand, Tuft & Needle.

“The past few years have been tough for Mattress Firm,” said Daniel Lowenthal, partner at Patterson Belknap Webb & Tyler LLP and chair of the firm’s Business Reorganization and Creditors’ Rights Practice. “It had too many stores, faced competitive industry pressures, and also had a corporate parent that was rocked by an accounting scandal. But now its goal is to get in and out of bankruptcy fast and regroup with new financing.”

The retailer expects to complete a prepackaged restructuring within 45 to 60 days. It has secured commitments for about $250 million in debtor-in-possession financing to support its operations under bankruptcy and $525 million in financing to help its emergence from bankruptcy and to continue operations. The company said it has filed motions to support the continued payment of employee wages and health and welfare benefits, and to honor its customer policies and programs. It also has filed a motion for court authorization to pay suppliers and contractors for all goods and services provided prior to and after its Chapter 11 filing.

“We thank our suppliers and partners for their continued support, as well as the contractors we partner with to make deliveries across our markets, all of whom will continue to be paid in full in the normal course for products and services provided,” Stager said.

Mattress Firm was acquired by South African retail conglomerate Steinhoff International Holdings  for $3.8 billion in 2016. The company, which owns more than 40 retail brands, is involved in an accounting scandal that has damaged its stock price.

Sidley Austin LLP is serving as Mattress Firm’s legal counsel, AlixPartners LLP is serving as its financial advisor, and Guggenheim Securities is serving as its restructuring advisor.

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