As the industry continues to take bets on if and when Sears will go under, the retailer’s vendors are looking for ways to lower the stakes.
Suppliers for Sears are continuing to pull back from the retailer or request payment terms that reduce their exposure. Others have stopped supplying the retailer altogether because it’s become too expensive. Reuters reports vendor insurance has gone through the roof following Sears’ statement in March that it has “substantial doubt” over its ability to remain in operation.
The insurance, known as accounts receivable puts, is now 4 percent of the vendor’s monthly deliveries, up from 3 percent a few years ago. At that rate, unidentified sources told the publication, it doesn’t pay to work with Sears.
“It’s too expensive,” said Michael Fellner, owner of Lori Michaels Apparel & Manufacturing, a Montreal-based women’s wear company.
Fellner found himself in a situation that other vendors have faced as well. Some insurers, including Avenue Capital Group and Euler Hermes Group SA, have stopped offering the coverage. With fewer players willing to offer the insurance, the price of coverage continues to rise.
Between 2012 and 2014, Sears’ CEO Eddie Lampert was footing the bill for vendor insurance through ESL Investments to the tune of $400 million. The company confirmed, through a spokesperson, that ESL no longer invests in the coverage.
Sears’ receivables have dropped from $152.6 million in 2012 to $44.3 million in 2017, according to CreditRiskMonitor. In the company’s Q2 earnings statement, Sears reported merchandise sales of $3.4 billion during the period, compared to $4.7 billion during the same quarter a year ago.
Some vendors, have found an opportunity in the turmoil however. United National Consumer Suppliers only recently became a Sears supplier after others had backed away—though it does operate on shorter payment terms.
Some ongoing vendors like LG Electronics that have decided to continue to supply the retailer also do so on the condition of shortened payment windows. In some cases, sources say, suppliers are demanding payment in as little as 15 days, down from the typical 90 day terms. That time frame provides a different type of insurance. It helps protect the vendor in the event of a bankruptcy filing, given that any claims within 20 days of a company seeking bankruptcy protection are paid in full.
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While arrangements like this keep some stock in the stores, it also threatens to drain Sears’ liquidity.
That might help explain the situation at some Sears locations.
For months, news reports have shown empty racks and worse. Business Insider, in particular, has been chronicling the deplorable condition of some locations as well as the lack of stock.
Lampert has even engaged in public fights with some suppliers, resulting in lawsuits because he claims they were trying to take advantage of the chain’s weakened state. He has also lashed out at the media for “unfairly singling out” Sears in their coverage of the retail sector.
Sears is in the midst of a massive cost saving initiative with the goal of reaching $1.25 billion this year. To date, the company’s latest earning statement shows it has achieved $1 billion of it. The result has been hundreds of Sears and Kmart store closures and thousands of jobs lost.