The good news for vendors regarding Edward S. Lampert’s $5.2 billion plan to acquire Sears Holdings Corp. is that they still have a retail account for new orders—at least for now.
But what might not be so clear is what do vendors need to know immediately after Sears exits Chapter 11 proceedings.
At the outset, vendors who remain a part of the Sears matrix post-bankruptcy won’t have to worry about getting paid. When a company exits bankruptcy as a reorganized firm, it begins with what is considered fresh-start accounting. Sears will have a brand new balance sheet and will be well-capitalized for new inventory.
The caveat here is that Sears will be a private company, which means it will no longer be obligated to file quarterly financial statements. Those public filings can be important for reviewing balance sheets to track how well a company is doing.
Also, vendors should probably not rely on others such as factors to do credit checks. Because Sears will be a private company, it will be up to the retailer to determine when it wants to disseminate any financial information and how much to tell. That means vendors will have to do what they are already doing now, which is to decide on their own whether to take a chance and ship to Sears.
With new financing in place, getting paid for orders over the shorter term shouldn’t be an issue. It’s much later down the road that vendors may want to be on alert if they find the company chooses not to provide regular updates on its financial health.
Sears will continue to review its store count to see which ones it wants to sell or shut down. For vendors, that could potentially mean Sears would still place orders, but over time reduce what’s needed when the store count shrinks.
As for when Sears will exit Chapter 11 proceedings, Lampert still needs bankruptcy court approval to proceed with his purchase. A court hearing is scheduled for Feb. 1, with the transaction expected to close around Feb. 8.
Sears’ restructuring committee said Thursday, “We are pleased to have reached a deal that would provide a path for Sears to emerge from the Chapter 11 process. Importantly, the consummation of the transaction would preserve employment for tens of thousands of associates, as well as the relationships with many vendors, and suppliers who provide Sears with goods and services.”
A spokesman for ESL Investments, which is slated to acquire Sears through its affiliate Transform Holdco LLC, said, “ESL has been steadfast in its commitment to Sears because we believe that its emergence from Chapter 11 as a going concern is the best path for the company, its associates and the many communities touched by Sears and Kmart stores.”
The hedge fund, of which Lampert is chairman, also said, “At every stage in this process, ESL has worked tirelessly to help Sears re-emerge from bankruptcy, including by enhancing our offer several times, because we believe Sears has a future as a profitable company that can succeed in today’s competitive retail landscape.”
While ESL has indicated good intentions on its part, there’s still a question that vendors need to keep in mind as they model their business plan for the rest of 2019 and over the longer term. That question is centered on Sears’ chances for survival.
Christina Boni, credit analyst for Moody’s Investors Service, said Sears will continue to be “hobbled by the same untenable problems, given that its efforts to resuscitate performance by shrinking has mainly been unsuccessful.” She noted that the going-concern business that’s centered on a smaller store base presents a challenge for the company in a retail environment where scale is more critical than ever. “Even after shrinking its store base in recent years, Sears has failed to improve its sales trends and profitability significantly–largely because it has lacked a viable core customer proposition,” the analyst said. She’s not particularly hopeful that the sales trajectory or profitability factor would change, and that’s something vendors should to keep in mind down the road as they evaluate whether or not to continue shipping to a reorganized Sears.
Sears filed for Chapter 11 bankruptcy court protection on Oct. 15, and once certain conditions are met, is expected to exit bankruptcy proceedings with more than 425 stores operating under the Sears and Kmart nameplates.