The Sears Bankruptcy
Sears has been one of the largest retailers in the world for many years now. The company has been in operation for about a century. Sears is one of the most widely known corporations in the world. Finally, in October 2018, Sears is now filing bankruptcy. Many investors were already expecting this move given the tumultuous financial situation that Sears has been in.
However, even though this event was expected, at the end of the day, there are still going to be losses, and some of them might be catastrophic. Sears has total assets which are worth close to $7 billion. However, the liabilities that the company has are somewhere close to $11 billion. Hence, the Sears bankruptcy is expected to have a negative impact on a lot of people.
Shareholders: The shareholders of Sears are going to be the worst hit. In fact, they may already be the worst hit. At the current valuation, the shares of Sears are down by 90% compared to last year. A large part of the $4 billion deficit will have to be borne by the shareholders. If industry pundits are to be believed, the shareholders of Sears will be lucky even if they can salvage a few pennies on every dollar that they have made in investments. Shareholders are paid only after all the creditors have been paid off. In the case of Sears, the money is likely to end before the creditors do. This is the reason why shareholders are unlikely to receive any compensation.
Vendors: Vendors supplying to Sears have already been very cautious. Most companies have not been supplying to Sears without full advance payments. Sears, itself has mentioned this fact in its bankruptcy filing. Sears claimed that more than 200 vendors who used to extend credit are now demanding upfront payments. According to Sears, this is completely destroying their supply chain and their ability to do business.
While most vendors were careful not to give any credit, there are some who were still giving credit. Sears owes a lot of money to companies like Whirlpool and Samsung. Other companies like Frigidaire and Black & Decker are also in the list of creditors. Each of these companies is owed millions of dollars by Sears. This is after the fact that these companies had drastically cut their sales to Sears. Activist stockholders have asked the management at Whirlpool to clarify how the Sears bankruptcy will impact them. Until now, Whirlpool is fairly confident that the fallout from Sears will be limited given the fact that now Sears only accounts for about 3% of the sales that the company makes.
Customers: A lot of customers that have purchased goods from Sears may also face a negative impact. Many of these customers have a lot of loyalty points. In essence, these loyalty points are like loans given by the customers to Sears. Sears has clarified that it will allow customers to make purchases on their loyalty points. Up until now, Sears has also been very upfront and has stated that it will continue to honor any guarantees and warranties. However, customers know that the financial situation at Sears will not allow this benevolence to continue for very long. This is the reason why several customers are making a beeline to buy, exchange and/or repair goods from Sears. It is unlikely that Sears will renege on its promise to the customers. This is because even after the bankruptcy filing Sears plans to continue selling to the same customers.
Workforce: The workforce at Sears may be one of the most impacted stakeholders. During the beginning of 2018, Sears had a workforce of 90,000 workers. Right now the employee strength at Sears is close to 68,000. This means that 22,000 employees, i.e. roughly 25% of the workforce have already been sacked! The people who are currently working at Sears are very concerned about their future. Most of them are trying to change jobs as soon as they can. However, for the moment, Sears believes that it will continue to make wage and benefit payments as per the contract. Sears has assured its employees that their pay will not be withheld for any reason.
However, employees are skeptical of Sears promise. It is a known fact that one of the biggest creditors of Sears is the United States pension department. Sears owes $1.5 billion in worker pension payments. Since this debt is unsecured, it is unlikely that it will be paid. Hence, the workers at Sears will end up financing payments to secured creditors.
Real Estate: Sears has more than 4000 stores across the United States. Most of these stores are in prime locations and malls. Sears has hinted that after restructuring the new company may be about one fourth the sizes. Hence, a lot of stores will become vacant. This may be good news for some developers and bad news for others. The average vacancy period to fill up a departmental store is about 18 months. This means that a lot of malls will have to miss out on rental payments for about 18 months! However, many malls are not looking for multi-brand stores like Sears. Some of them simply divide the space into smaller stores and lend them out to newer brands at higher rentals. Some malls have witnessed an 18% increase in their income after departmental stores have opted out.
To sum it up, the Sears bankruptcy is going to have ripple effects. A lot of stakeholders are going to be affected in a negative way.
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