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May 20, 2020

Sears' survival is in doubt

Photo | Flickr via JJBERS Sears at Buckland Hills mall in Manchester.

Sears has been in trouble for years, but the coronavirus pandemic could be the end.

Covid-19 has decimated the already embattled department store sector. Stores have shut down across the globe, toppling some retailers into bankruptcy, including J.Crew, Neiman Marcus and JCPenney.

Sears Holdings, which owned Sears and Kmart, went through bankruptcy less than two years ago. The company that emerged from bankruptcy came out with much less debt, but it is in a similarly weak position. Sears has flailed in the first year-plus since exiting bankruptcy.

And that was before the crisis.

"Sears is in a very dangerous position," said Neil Saunders, managing director at GlobalData Retail. "Before the crisis hit, the consumer economy was robust. Even during those times Sears wasn't doing particularly well, and things will be tougher going forward. They sell a lot of discretionary products -- that's the area where things are going to be cut back."

A Sears spokesman did not respond to questions about the company's chances of avoiding another bankruptcy filing in the face of the pandemic.

Sears has closed hundreds of stores after exiting bankruptcy in February 2019. The company operated just 182 Sears and Kmart stores at the end of February, down from 400 a year earlier and 1,000 two years ago.

All Sears-branded stores were closed as of April 4 because of health concerns. Most Kmarts remained open, although some were closed by various state orders. Although Sears started reopening some of its stores on May 9, it has only reopened 25 store so far.

JCPenney is a bad omen for Sears
It might seem like JCPenney's troubles would be good news for Sears -- it could pick up some sales at a troubled rival's expense.

But JCPenney's decision to file bankruptcy and close nearly 250 stores is bad for Sears. It will probably reduce foot traffic in a number of malls where both stores are located. It will also force Sears to compete with low-priced store-closing sales that JCPenney will be holding at 30% of its stores this year and next.

Coronavirus could keep shoppers away for a long time
Then there's the X-factor: how willing people are to return to malls when stores reopen.

"What Covid has done is accelerated the shift to online purchases pretty rapidly," said Marie Driscoll, a managing director at Coresight Research, an advisory and research firm specializing in retail. "We already know mall traffic was down. We don't have a vaccine and people are afraid of going out."

That could be a particular problem for Sears and JCPenney, given that older shoppers are more likely to stay home during the pandemic. The average age of Sears shopper is 50, according to Coresight's data, and JCPenney shoppers' average age is 48. Both are among the oldest of any retailer.

Double trouble
If Sears is forced back into bankruptcy a second time, it could be the end of both the Sears and Kmart brands. Retail history is full of examples of companies that go out of business after a second bankruptcy filing, including Payless Shoes, Gymboree and RadioShack.

Sears' creditors were pushing hard to have the company shut down during its first trip to bankruptcy. They could get their wish if Sears goes bankrupt again.

"I was surprised it wasn't liquidated the time before," said Reshmi Basu, analyst with Debtwire and an expert in retail bankruptcies. "History shows a [second bankruptcy] for a retailer almost always ends up in liquidation. I don't know what levers it can pull in bankruptcy, given the assets that have been stripped out."

Before Sears filed for bankruptcy, it sold off its Craftsman brand of tools to Stanley Black & Decker. The line is now sold at competitors, such as Lowe's. Then recently Sears sold its DieHard batteries and auto parts to Advanced Auto Parts, another competitor. And it sold Innovel Solutions, its delivery and installation business, to Costco.

Sears still owns the Kenmore appliance brand, but it's no longer exclusive to the company.

Sears' saving grace is going bust
Critics of Sears owner Eddie Lampert argue he has been more interested in the company's real estate than its retail operations. Lampert, a hedge fund operator with an expertise in real estate, he has redeveloped many former Sears locations.

But there's about to be a flood of other companies' store closings that will hurt the value of the real estate that has been Sears' saving grace.

Office Depot has announced plans to close an undetermined number of its 1,300 stores. Stage Stores, which owns nearly 800 smaller department stores under a variety of brands, has also filed for bankruptcy and plans to close all those stores permanently. Pier 1, which was already in bankruptcy ahead of the crisis, announced plans this week to permanently close all of its 450 US and Canadian stores.

"How much is that [Sears] real estate worth now, given all the empty locations?" said Basu. "It's become a very crowded commercial real estate market."

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