Sears Circles the Drain as Stores Close and Vendors Balk at Shelving Stock

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It’s going from bad to worse for Sears Holdings Corp (NASDAQ:SHLD) this week. First, the company announced that it is closing 28 more Kmart stores this year. On top of that, Sears is having trouble stocking its shelves, as some vendors have fled and others are looking for stricter payment terms.

On Thursday, Sears announced its financial results for its second quarter, ended July 29, 2017. Second-quarter revenue fell 22% to $4.4 billion from $5.7 billion in the same prior-year period. Comparable-store sales at Sears fell 13.2%, while Kmart comparable-store sales fell 9.4%.

The struggling retailer posted a second-quarter net loss of $251.0 million, or $2.34 per share, an improvement over the second-quarter 2016 loss of $395.0 million, or $3.70 per share.

In the face of tougher competition, both online and at the brick-and-mortar level, the company said it will close 28 Kmart stores later this year in addition to the 150 Sears and Kmart stores it plans to shut down by the end of the current quarter.

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The long and winding road to the demise of what was once the largest and most popular department store in the U.S. is coming even more into focus, as vendors are hesitant to shelve their stock at Sears. Some have fled the village, while others have demanded stricter payment terms because of the company’s precarious financial position.

According to regulatory filings with the Securities and Exchange Commission, merchandise inventory at Sears fell to $3.4 billion at the end of July from $4.7 billion a year earlier. That’s a drop of 27%.

And it’s not like the products are flying off the shelves. Vendors are balking at stocking the shelves at Sears because of the rising costs of vendor insurance, which ensures a supplier will be paid, even if the retailer files for bankruptcy.

The costs of the vendor insurance, known as “accounts receivable puts,” soared earlier this year after Sears warned of “substantial doubts” over its ability to continue in March.

Sears insurance contracts for vendors are currently being quoted at more than four percent of the value of the vendor’s shipment per month. This makes it unfeasible for suppliers whose profit margins are in the single digits. Three years ago, when Sears’ share price was trading near $45.00 per share, or 440% higher than where it is today, contracts were being quoted at about three percent per month.

In the past, Sears’ vendors received some help from Eddie Lambert, Sears’ Chief Executive Officer. Lambert owns nearly half of the company’s shares and is its largest lender. Through his hedge fund, ESL Investments Inc., Lambert invested in vendor insurance contracts worth $93.3 million in 2012, $234.0 million in 2013, and $80.0 million in 2014.

Lambert has not made any investments in vendor insurance contracts since 2015 and is currently not investing in them.

Lambert isn’t the only one not investing in Sears. In the face of deteriorating sales and a grim outlook, other hedge funds, including Avenue Capital Group and credit insurance firms like Euler Hermes Group SA, have also exited the insurance arena.

The shortage of market participants, which has made the accounts receivable puts more expensive, has put pressure on Sears’ ability to keep its shelves stocked. Again, over the course of the last year, inventory levels have plunged 27%.

The death watch at Sears continues.

 

Sources

Sears Holdings Reports Second Quarter 2017 Results And Provides An Update On Recent Liquidity And Strategic Actions,” Sears Holdings Corp, August 24, 2017.

Form 10-Q,” United States Securities and Exchange Commission, August 24, 2017.

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Categories: Businesses Closed, News

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