Will Sears Go Out of Business in 2018? All the Signs Sears Will Soon Be Bankrupt

The Sears deathwatch continues. For years, the once-dominant department store chain (it’s been called the Amazon of its day) has been teetering on the edge of collapse. The company has closed hundreds of stores, sold valuable real estate, and unloaded iconic brands like Craftsman, all in an effort to keep the business alive and service its massive debt.

Now, CEO Eddie Lampert is sounding another alarm. The company “must act immediately” if it hopes to stay in business, according to Lampert’s hedge fund, ESL Investments. Lampert is Sears’ largest shareholder and biggest creditor. It’s not the first time he has warned that the company’s future is in jeopardy, but is it possible that it will be the last?

Why Sears is on the verge of bankruptcy

Sears

Sears store closing | Felixmizioznikov/iStock/Getty Images

It’s hard to imagine today, but 50 years ago, Sears was the biggest retailer in the world. But in the decades since, the company’s fortunes have taken a turn for the worse. Competition from an upstart chain called Walmart cut into Sears’ sales. It remained married to its mall locations, even as Americans changed the way they shopped. And in 2004, Lampert, who had previously taken control of Kmart, another struggling chain, merged the two companies, now called Sears Holdings.

The marriage of two retail dinosaurs didn’t solve either company’s problems. Over the past decade and half, its been a pretty steady drumbeat of bad news from Sears and its sister store. Sales are down and stores are closing. The company is circling the drain, albeit very slowly.

Massive debt

Sears has $5.6 billion in debt, with a $134 million payment due on October 15. Unless it can come up with some cash, quick, it might not survive. To keep going, Lampert and ESL proposed selling more than $3 billion in assets to help pay down the debt. Previously, Lampert had suggested that his hedge fund buy the Kenmore appliance brand to generate cash.

“We continue to believe that it is in the best interests of all stakeholders to accomplish this as a going concern, rather than alternatives that would substantially reduce, if not completely eliminate, value for stakeholders,” noted ESL in a proposal.

Shrinking sales

Even if Sears is able to keep up with its debt payments, that doesn’t solve the underlying problem: No one wants to shop at its stores. In the second quarter of 2018, same-store sales at Sears stores fell by 4%. That followed a 13.4% decline in sales in the first quarter of the year.

“As usual, Sears is focusing on financial maneuvers and missing the wider point that sales remain on a downward trajectory,” said Neil Saunders, the managing director of GlobalData Retail. “In our view, this is simply storing up trouble for the future.”

Fewer – and shabbier — stores than ever

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Empty racks at a Sears stores during a going-out-of-business sale. | Megan Elliott/The Cheat Sheet

People who are loyal Sears customers are finding it harder than ever to spend their dollars at the store. There are about 500 Sears stores left. When it merged with Kmart in 2004, it had 3,800 full-line and specialty stores.

Those stores that are still around are looking a bit worse for the wear. Many locations are run down, noted the New York Times in a 2017 report, citing stained carpets and damaged display tables. Employees who talked to Business Insider detailed collapsing ceilings, rodent infestations, and broken toilets.

A demoralized workforce

As Sears has shrunk, so has its workforce. Those employees who are left reported being demoralized, the New York Times reported. Unsurprisingly, customer service is slipping. Shoppers report being unable to find salespeople, long checkouts, and empty shelves. On Glassdoor, only 29% of employees would recommend working at the company to a friend and just 17% approved of the job CEO Lampert was doing.

The future for Sears looks grim

Retail experts say it’s a question of when – not if – Sears will eventually go bankrupt. If the company goes the way of Toys R Us, another retail giant that recently went bust, that could mean job losses for roughly 90,000 workers. But one person who will probably come out ahead is Lampert.

Lampert is making millions every year on interest Sears pays to his hedge fund, which has loaned the company money to stay afloat. If Sears does go bankrupt, those loans will probably be paid back in full because the hedge fund is a secured creditor.

“[C]onceivably, Sears could enter bankruptcy, shed some of its debt, strike deals with other lenders and Lampert could wind up with ownership of whatever’s left, including a significant amount of potentially valuable real estate,” wrote Stephanie Gleason at the Motley Fool.

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