By Suzanne Kapner, Lillian Rizzo and Soma Biswas
Late Tuesday night, billionaire Edward Lampert's bid to keep
Sears Holdings Corp. alive was all but dead. A few hours later, the
hedge-fund manager walked away with what he wanted: continued
control of the retailer he ran into bankruptcy court.
By kicking in an extra $150 million at the last minute, the
Sears chairman's $5.3 billion offer trumped a plan by some
creditors to liquidate the unprofitable company and close all its
remaining stores, said people familiar with the matter. Unhappy
with the outcome, those creditors could still mount a legal
challenge.
Mr. Lampert, who is also Sears's largest creditor and biggest
shareholder, will own all its real estate and hold on to the
Kenmore and DieHard brands. The former chief executive is also
seeking to be shielded from potential lawsuits over previous asset
sales and spinoffs that creditors allege siphoned away value, the
people said. Mr. Lampert has denied the claims.
Whether Mr. Lampert's victory is also a victory for Sears itself
is less certain. The deal will keep open about 400 stores and
preserve as many 50,000 jobs, but the company continues to lose
money and lacks the scale to compete effectively with Amazon.com
Inc. and Walmart Inc., analysts and executives say.
The already battered Sears brand has been further tarnished by
going-out-of-business sales at roughly 200 stores since the company
filed for chapter 11 in October. The company is bleeding cash at
such a rapid rate that Mr. Lampert will likely have to close more
stores after the bankruptcy case, some of the people said.
"This deal is simply putting off the inevitable," said Erik
Gordon, a professor at the University of Michigan's Ross School of
Business. "For Sears to survive over the long run, it would have to
be either much larger or much smaller."
The rescue plan must be approved by bankruptcy Judge Robert
Drain at a hearing set for Feb. 1 in White Plains, N.Y.
Mr. Lampert must also get approval from the Pension Benefit
Guaranty Corp., the government's pension insurer. The PBGC is
likely to want proceeds of any further asset sales to cover Sears's
pension liabilities, one of the people said.
Although Sears stood atop American retailing for most of the
20th century, it has struggled with a shift to online shopping and
the rise of discounters. The company, which also owns the Kmart
chain, posted seven straight years of losses and closed hundreds of
stores. Yet, it was still one of the biggest retailers to file for
chapter 11, with more than $7 billion in assets.
Some retailers such as Mattress Firm Inc. and Payless ShoeSource
have re-emerged from bankruptcy after shedding debts and shutting
hundreds of stores. Others such as Toys "R" Us Inc. and RadioShack
have disappeared. Still others, including Wet Seal and Eastern
Mountain Sports, emerged only to wind up back under court
protection.
"I don't know what's left to shop there for," said Patrick
Garrett, a 70-year-old retiree in Calabasas, Calif. Ever since the
Sears near his home closed in November, he has visited Lowe's Cos.
for tools, Best Buy Co. for appliances and J.C. Penney Co. for
clothes. "I'd have to drive 40 miles to get to the nearest Sears
now," he said.
Retailing has become a game of scale to cover the fixed costs of
operating stores, warehouses, e-commerce sites and a supply chain
to knit them all together. Sears, by contrast, has been shrinking
for years by closing stores and shedding businesses and brands,
including the Lands' End Inc. clothing chain and Craftsman
tools.
At its peak in 2006, a year after Mr. Lampert took control by
merging Kmart and Sears, the company operated more than 2,300
stores. It entered court protection with fewer than 700. Annual
sales had shriveled to $16.7 billion, off from $49 billion in
2005.
At the time of the Kmart merger, Mr. Lampert was a Wall Street
hotshot who was often compared with legendary investor Warren
Buffett. The downfall of Sears hasn't only damaged the company's
reputation, but Mr. Lampert's as well.
Now, Mr. Lampert has what might be his final chance to prove
that his contrarian strategy is the right one. He has long argued
that as retailing moves online chains need fewer big-box stores.
His mantra for Sears is to turn it into an "asset-light"
company.
Yet, there are few precedents of big retailers shrinking their
way to prosperity. A rare exception is Federated Department Stores
Inc., which filed for bankruptcy protection in 1990, emerged and
went on to swallow up rivals to become the current Macy's Inc.
"Sears is so far below critical mass," said Steve Dennis, a
consultant and former Sears executive, who left the company before
Mr. Lampert took control. "What is it about having fewer stores --
which doesn't allow you to spend as much on marketing or have
supply-chain efficiencies -- that suddenly makes it a successful
strategy?"
One path for Sears to survive could see it become even smaller.
Craig Johnson, the president of consulting firm Customer Growth
Partners, said Sears would need to shrink to about 300 stores,
focusing on the Upper Midwest and Sunbelt, where the retailer is
strongest. Mr. Johnson also said Sears should exit apparel and
focus on appliances and tools.
"Sears still has a lot of credibility in appliances, and they
can rebuild that business," Mr. Johnson said.
A blueprint for the company's future could lie with a remodeled
store in Oak Brook, Ill., that opened in October. At 62,000 square
feet, it is about one-third of its original size. The shrunken
store no longer sells consumer electronics and jewelry, although
most other product categories are available.
Write to Suzanne Kapner at Suzanne.Kapner@wsj.com, Lillian Rizzo
at Lillian.Rizzo@wsj.com and Soma Biswas at soma.biswas@wsj.com
(END) Dow Jones Newswires
January 16, 2019 19:40 ET (00:40 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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