In 2004, billionaire Edward Lampert thought he was creating a retail powerhouse. He arranged Kmart Holdings’ $11 billion acquisition of Sears Roebuck in hopes of building a low-cost rival to big-box chains such as Walmart (WMT) and Target (TGT) that were dominating the retail landscape then and continue to do so today.
At the time, the hedge fund tycoon called it an “enormous undertaking,” words that have come back to haunt him more than a decade later. The firm Lampert created, called Sears Holdings (SHLD), could now be heading for bankruptcy, an ignominious end for an iconic 124-year-old American retailer.
Experts say the seeds of the company’s problems can be traced to that very marriage of two struggling companies, arranged by an investor who didn’t understand the ramifications of the deal he engineered.
That deal “created an even bigger, more struggling company,” said Amanda Nicholson, a professor at Syracuse University’s Whitman School of Management. “Everyone within the retail field knew that they were not keeping up with what was going on.”
Indeed, since then everything seemed to go wrong for Sears, whose roots date to the dawn of the 20th century. For one thing, Lampert spent billions repurchasing the company’s stock instead of investing in the business, a move that retail consultant Howard Davidowitz said was a mistake. Wall Street has also never been a fan.
Shares of Sears have lost more than 95 percent of their value over the past 10 years. They nosedived another 13 percent on Wednesday, to $7.93, after the company disclosed that its auditors had raised concerns about its ability to continue as a “going concern.” Davidowitz, chairman of Davidowitz & Associates, which also provides investment banking services to the sector, is skeptical that Sears can right its financial ship or that any white knight will ride to its rescue.
In recent years, Sears has shed brands such as Land’s End clothing and Craftsman tools, which Stanley Black & Decker (SWK) recently acquired for $900 million. The chain is considering selling its DieHard car batteries and Kenmore appliances businesses and is unloading its vast real estate holdings. All these financial moves, however, can’t hide the retailer’s weaknesses.
“When you’re burning through $1.5 billion in cash every single year, how are you possibly going to survive?” asked Davidowitz.
Sears CFO Jason Hollar insisted in a blog post that the retailer can meet its obligations. Earlier this year, it increased its liquidity by as much as $1 billion through a secured loan facility and a standby letter of credit. Sears also amended its existing asset-based credit facility to provide it with an additional $250 million in “financial flexibility.”
In addition, Sears is considering selling its DieHard auto batteries and Kenmore appliance businesses.
Davidowitz expects Sears to seek bankruptcy protection from creditors “sooner rather than later” in the wake of the “going concern” declaration because suppliers will cut off the retailer’s access to credit and will demand cash up-front to provide it with merchandise.
“Whatever money Sears has will be drained by that,” said Davidowitz.
Sears is one of many brick-and-mortar retailers struggling to adjust to the growing popularity of e-commerce. Payless Shoe Stores reportedly plans to seek bankruptcy protection and will shutter 500 stores, further exacerbating the growing surplus of retail space. Electronics retailer hhgregg, which filed for bankruptcy protection earlier this month, said on Wednesday that an unnamed bidder backed out of an auction for the company.
If Sears does go the bankruptcy route, it’ll have plenty of retail company on that road.