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Why Sears’ Vendors May Be Winners After All

Sears Holdings continues to winnow the fleet following its bankruptcy filing last month, sending vendors looking elsewhere to recoup their losses.

On Friday, reports circulated that the retail group will shutter another 40 doors across its Kmart and eponymous chains. This latest group is slated to close in February; that’s on top of the 142 locations already scheduled to go dark before year’s end and the 46 doomed locations shuttering this month.

As the skeleton formerly known as Sears lumbers forward, the question is: how many vendors is it threatening to topple in its wake?

While some vendors surely fled as factoring and insurance options for orders heading to the retail group dried up and others were scared away by what, for most, was an obvious downward spiral, there was still another group that continued to work with the department store chain.

That latter category can be further dissected. In the one camp are the companies that kept Sears on a short chain, demanding payment in advance, on delivery and the like. In the other were the suppliers who continued forward with the type of terms one would normally only afford a retailer in good standing.

And now it seems many of those who gave Sears more rope might themselves be hanging from it. According to a report in the NY Post, some vendors are accepting between 55 and 70 cents on the dollar to sell goods originally destined for the doomed department store. While they could wait it out to see what comes their way in the restructuring plan, the memory of the Toys R Us vendors, who got little to nothing, might still be too fresh in their minds.

The unenviable position these companies now find themselves in might be unthinkable to some given how completely foreseeable this outcome had been, but what seems like recklessness could actually have been savvy in disguise.

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“One of the great things about Sears is they paid people some of the widest margins on their products. That’s why I think a lot of people did business with them—not because they were dumb but because they reached a reasonable calculation that it made sense on a risk/reward basis,” David Tawil, president of event-driven hedge fund Maglan Capital, told Sourcing Journal.

In other words, they made their money during the choppy years and anything they stand to lose now is small by comparison. Plus, Tawil said, today’s losses might yet be dwarfed by the opportunities ahead.

“If history is any guide, Eddie will want to keep control of some portion of operation,” Tawil said, referring to Eddie Lampert, the billionaire business man, who acted as Sears Holdings’ personal pocketbook and CEO for years. “He wants to stay in this.”

Whether Lampert remains involved or other investors emerge, Tawil expects Sears to have a post-bankruptcy life in some form, and for those loyal vendors who held on through the rollercoaster ride, there’s more business to be had.

Calling that potential outcome “pretty good results,” Tawil does something that most wouldn’t: he credits Lampert.

In all the ink that’s been spilled over Sears’ slow decline, not much of it was spared when it came to Eddie Lampert. The guy who brought Sears and Kmart together and kept the company afloat—or maybe more accurately, adrift, has come under fire for everything ranging from misguided leadership to outright malicious actions.

Lampert has closed doors, leveraged the company’s property and put its most valuable non-real estate assets on the block. Through the halfway point of 2018, Lampert’s ESL Investments had extended the retail group $2.4 billion. All the while, Sears Holdings has wasted away from more than 5,600 stores to what will be just over 700 at the close of this year. And as the number shrank, the stores fell into disrepair, some into appallingly poor conditions, according to reports.

And it’s all been in service of a vision that only Lampert seems to understand. Most others have been wondering why he’s bothered to prop up the now anachronistic retailer—and when it would all come to an end.

While Tawil, like many others, is at a loss as to how to explain why Lampert chose this course, he said the truth is without him the vendors would be in much worse shape.

“If Eddie wasn’t in control of this business, this company would have filed for bankruptcy years ago and liquidated. So, we’re getting neither of those. We’re getting an extra lease on life plus it’s not ending in a liquidation,” Tawil explained.

The beginning of what could still be the end for Sears Holdings began on Oct. 15 with a Chapter 11 filing. The company subsequently secured $300 million to keep the balance of its fleet operational through year’s end. Since then, the chains have decked the halls right along with their competitors, putting on a festive face for what could be their last Christmas.