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Sears skips payments to vendors amid bankruptcy concerns

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10/11/2018 | 03:10pm CEST
FILE PHOTO: Store closing signs advertising discounts at a Sears in New Hyde Park, New York

(Reuters) - Sears Holdings Corp has started to miss payments to vendors, adding to concerns about its future after sources said the U.S. department store operator was preparing to file for bankruptcy in the coming days.

Three vendors told Reuters that Sears has missed scheduled payments in the last couple of weeks.

It was not immediately clear how widespread the vendor problems were and how they would affect Sears' supply chain ahead of the holiday shopping season. Sears is also scrambling to secure financing for its expected bankruptcy, and has been unsuccessful so far, sources familiar with the effort said late Wednesday.

Vendors could stop shipments if they are worried Sears cannot pay, potentially sending the retailer into freefall.

"We went into business with them with our eyes open and knew this day would come one day," said Arnold Kamler, chief executive officer of Parsippany, New Jersey, bike maker Kent International Inc. Kamler said he withheld a shipment to Sears after it missed a regular payment last week for the first time.

Sears did not respond to multiple requests for comment.

Vendors are usually considered unsecured creditors and usually get pennies on the dollar in bankruptcy court.

For this reason, securing a sizable financing package to carry Sears through bankruptcy could boost confidence among vendors.

Sears' talks on Wednesday night with some banks, including Bank of America and Wells Fargo, about securing debtor-in-possession financing ended unsuccessfully, according to two people with knowledge of the discussions.

Sears could file for bankruptcy as early as Sunday, and it would need to secure the financing by then to avoid liquidation, the sources said. It was not clear whether Sears will succeed.

Bank of America and Wells Fargo did not immediately respond to requests for comment.

The Wall Street Journal first reported on the unsuccessful debtor-in-possession talks.

If Sears files for bankruptcy, stocking shelves adequately could prove key to escaping liquidation. Both vendors and creditors will be looking at the retailer's sales performance during the holiday season in deciding whether to continue to back it, sources have said.

"If consumers walk into a store and there are empty shelves, it lowers consumer confidence and that is what has ultimately happened," said Brett Rose, CEO of United National Consumer Suppliers, a wholesale distributor of overstocked goods such as garden tools, beauty products and toys.

"If you can go to Amazon.com and get Craftsman tools, why do you have to walk into a Sears," said Rose.

As Sears' financial condition deteriorated over the years, some vendors stopped supplying it, cut down on shipments or tightened repayment terms, concerned about the retailer's financial woes and the soaring cost of insuring supply agreements, Reuters reported last year.

'PURCHASING PIPELINE STOPPED'

As vendors became more concerned about Sears' financial health, they started asking for full payment before they shipped orders. However, last summer Sears told vendors it would no longer prepay for orders, according to a source with direct knowledge of the strategy, who requested anonymity to discuss a commercially confidential matter.

Sears also tried to keep vendors onboard by placing purchasing orders and not picking up the goods until it could make payment, the source said.

Merchandise inventory at Sears was $2.7 billion as of Aug. 4, a decrease of about $719 million from a year ago, according to the company's most recent quarterly financial report. Sears cited store closures and improved productivity.

Sears said its inventory decreased in all categories, most notably apparel, tools and outdoor living, including lawn and patio furniture. Inventory at discount chain Kmart also decreased in all categories, Sears said.

The belt-tightening has been in sharp contrast to Sears' legacy. At its peak in the 1960s, Sears sold everything from toys and auto parts to mail-order homes, and was a key tenant in almost every big mall across the United States.

But it has struggled to reinvent itself in the face of online competition from companies such as Amazon.com Inc and other brick-and-mortar retailers, including Walmart Inc.

(Reporting by Richa Naidu in Chicago and Jessica DiNapoli in New York; Additional reporting by Melissa Fares and Mike Spector in New York; Editing by Clive McKeef and Jeffrey Benkoe)

By Richa Naidu and Jessica DiNapoli

Stocks mentioned in the article
ChangeLast1st jan.
AMAZON.COM 2.96% 1812.145 Delayed Quote.50.58%
BANK OF AMERICA 1.99% 28.46 Delayed Quote.-3.59%
SEARS HOLDINGS CORP 113.19% 0.63 Delayed Quote.-91.34%
WAL-MART STORES 2.10% 95.785 Delayed Quote.-3.99%
WELLS FARGO 0.40% 53.44 Delayed Quote.-12.25%
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Financials ($)
Sales 2019 515 B
EBIT 2019 21 900 M
Net income 2019 9 223 M
Debt 2019 48 921 M
Yield 2019 2,24%
P/E ratio 2019 33,89
P/E ratio 2020 19,98
EV / Sales 2019 0,63x
EV / Sales 2020 0,61x
Capitalization 278 B
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Average target price 104 $
Spread / Average Target 11%
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NameTitle
C. Douglas McMillon President, Chief Executive Officer & Director
Gregory B. Penner Non-Executive Chairman
Brett M. Biggs Chief Financial Officer & Executive Vice President
Jeremy King Chief Technology Officer & Executive VP
Clay Johnson Enterprise Chief Information Officer & EVP
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