Sears files for Chapter 11 bankruptcy protection, to close 142 more stores

Eddie Lampert, who has kept the company alive with a series of debt deals but faced criticism for lacking a clearcut turnaround strategy, has resigned as CEO but remains chairman. He is also the company’s largest investor.

Bankruptcy will allow Sears to “strengthen its balance sheet, enabling the Company to accelerate its strategic transformation, continue right sizing its operating model, and return to profitability,” Lampert said in a statement. “Our goal is to achieve a comprehensive restructuring as efficiently as possible, working closely with our creditors and other debtholders, and be better positioned to execute on our strategy and key priorities.”

The company’s board created an “Office of the CEO” to lead the company, including the chief financial officer and chief digital officer. A chief restructuring officer, M-III Partners managing partner Mohsin Y. Meghji, will help lead the bankruptcy and report to a newly created board committee.

To many, the demise of Sears demise seemed inevitable, if not always imminent, in recent years as the company slowly collapsed. The retailer has announced round after round of store closures, amounting to several hundred in recent years. It also sold off its signature Craftsman brand and sought to renegotiate the terms of its massive debt.

Lampert propped up the company for years with multiple rounds of debt financing. But critics say he arranged the deals to put his hedge fund at the front of the line to collect debt payments and key assets as the company downsized.

Lampert’s strategy could be put to the test in bankruptcy, where he is expected to act as both debtor and creditor — an unusual position that corporate governance experts have said could bring about scrutiny.

Most recently, Lampert’s hedge fund offered to pay Sears $400 million for the Kenmore appliances brand and suggested in September that Sears “must act immediately” on his proposal to sell more assets and restructure debt.

His hedge fund is currently negotiating to extend credit to Sears in bankruptcy, though the company said it has lined up $300 million in financing from other lenders. Lampert’s fund is also negotiating a deal to potentially serve as a lead bidder for “a large portion of the company’s store base,” Sears said.

USA TODAY reported in June that Sears was sending Lampert about $200 million to $225 million in annual debt payments.

“The carcass has had everything picked off its bones,” said Paula Rosenblum,  co-founder and managing partner of the retail advisory firm RSR Research. Still, “this is one of the saddest retail stories I’ve ever seen. . . Sears was the Amazon of its day. Think about the Sears catalog. It was everything you could” now get online.

The case comes on the heels of the liquidation of Toys R Us, another iconic American retail chain, which failed to survive Chapter 11 bankruptcy despite plans to shed debt and unprofitable stores.

“If you think about all the nostalgia people are having for Toys R Us, which is a brand that was 60 or 70 years old, Sears & Roebuck is a different beast,” said Greg Portell, lead partner in the retail practice of global strategy and management consulting firm A.T. Kearney. “It’s hard to overlook or overstate the dynamic impact Sears had on the retail industry in the United States, both in terms of its growth and expansion that really created the American mall and . . ., also in how (it shows) the failure to reinvent ultimately leads to extinction.”

A slow unraveling

The company’s troubles had mounted in recent years. It faced the same challenges upending an industry in which traditional retailers struggled to compete with online giant Amazon, along with powerful big-box rivals like Walmart and specialized store chains like TJ Maxx that offer similar merchandise but at lower prices or with a more unique shopping experience.

Much like defunct department store chains of old, such as Montgomery Ward and Mervyn’s, Sears lost its grip on American shoppers as niche retailers provided alternatives to shoppers..

But Sears also suffered because of problems of its own making — including some that have been largely forgotten, such as the sale of its more than $30 billion credit portfolio to Citibank in 2003.

In the short term, that move likely made sense, industry watchers said, but the retailer gave away a stream of cash that could have helped it down the line.

More recently, the drumbeat of bad news for Sears accelerated. The company sold its signature Craftsman tool brand in early 2017 to Stanley Black & Decker for roughly $900 million in order to raise cash. Soon thereafter, the company said in a filing with the Securities and Exchange Commission that it had “substantial doubt” about its ability to stay in business unless it could borrow more and tap cash from assets.

In October 2017, the company said that for the first time in more than a century, Sears would no longer sell Whirlpool appliances. While Whirlpool said it decided to end the relationship because it could not reach an agreement with the retailer on pricing, analysts said that the move was another signal that Sears — once the dominant player in the appliance space — was becoming increasingly irrelevant.

From humble beginnings to retail juggernaut

It’s a precipitous fall for a retailer that in many ways embodied the American dream, rising from humble beginnings to legendary success.

Richard W. Sears, a railroad agent, founded the R.W. Sears Watch Company in 1886, and linked up with a watchmaker named Alvah C. Roebuck a year later. In 1906, the business went public and by 1945 it had topped $1 billion in sales.

Sears became the one-stop retail destination for American shoppers, with families eagerly awaiting the arrival of the Sears catalog in their mailboxes. First printed in 1888, the catalog was a staple in American households, enabling shoppers to furnish an entire home with its contents — and even buy the house itself, delivered through the mail in sections.

The company’s looming presence in American life was perhaps epitomized by its move into the Sears Tower in Chicago in 1973, at the time the tallest building in the world.

But in 1991, Sears relinquished its title as the nation’s best-selling retailer to rival Walmart. More recently, the company has shown its age, failing to keep up with customers’ shifting tastes and habits, and seeing its sales and profits crater as a result.

Kmart opened its doors for the first time in 1962 in Garden City, Michigan. And just as Sears was a pioneer, debuting a popular catalog that enabled those living far from town to still purchase whatever they needed, Kmart is credited with introducing mass merchandising to the shopping public, said Raymond Wimer, a retail professor at Syracuse University.

Unlike Sears, which became an anchor of enclosed shopping centers, Kmart planted its big-box stores in strip malls, where it sold a variety of products at discounted prices. Its popularity helped drive rivals out of business in the 1960s and 1970s, industry observers say.

Kmart also carved out its own distinctive perch in American culture with its blue-light specials, deals that were a hallmark of its heyday. Starting in 1965, a voice over a store’s public-address system would announce a deal on an item and shoppers would be guided to the bargain by a flashing blue light, like the one on a police car. The deals would usually disappear in minutes.

Kmart began to pursue a slightly more upscale image in the 1990s, offering collections curated by celebrities and personalities like Martha Stewart and former Charlie’s Angel Jaclyn Smith. That proved to be another innovation.

“They were one of the first chains to really aggressively go after celebrity-branded merchandise,” said Miro Copic, a marketing professor at San Diego State University who also runs his own branding and marketing consulting firm. “And that brought in … middle-income shoppers.”

But Walmart eventually became the dominant player in the discount space, and by the time Kmart and Sears merged in 2005, Kmart was struggling with a fading brand.

Controversial CEO

The tie-up of Sears and Kmart was spearheaded by Lampert, the hedge fund manager who is CEO and largest shareholder of Sears Holdings. Lampert helped keep the company afloat, often with hundreds of millions of dollars in loans from his firm, ESL Investments. But critics said he designed those deals to put his hedge fund at the front of the line to collect debt payments and key assets from Sears as it declined.

“What (he) wanted was the real estate,” said Rosenblum. “Not only has he done nothing to improve their sales, but then he sells off the real estate and then rents it back from himself.”

Lampert is a key investor in a company that owns hundreds of prime Sears locations, which were split off into a real-estate investment trust called Seritage Growth Properties.

Critics assailed Lampert for allowing stores to fall into disrepair while piling up debt that Sears could not afford.

“Now,” Rosenblum said, “he’s the biggest creditor when the final bell is rung.”

Ultimately Sears, a one-time innovator, failed to anticipate shifts in its industry and was then too slow to react.

“The key to transformation is a big bold move that gets ahead of a trend,” said Portell. “Sears in many ways replicated the mistake many companies have made.”