When Sears filed bankruptcy on October 15, 2018, it announced that it would close 142 under-performing stores. But determining the aggregate number of store closings has been difficult. Early in 2018, Sears Holdings said it would close 166 stores this year. In May, the company identified 100 unprofitable stores and said it would close 72. Of those, 63 were closed which were comprised of 48 Sears stores and 15 Kmart locations. In August, Sears announced liquidation sales at 46 Sears stores, starting immediately. (Where will Sears close next? – via CNBC)
Leverage for Landlords
In light of the 2005 bankruptcy amendments, landlords have a lot more leverage over their bankrupt tenants. Having filed for bankruptcy protection, Sears will have no more than seven months to assume or reject its leases, giving landlords the right to terminate those leases. This leverage requires Sears to make significant strategic decisions in a relatively short period of time — and could result in the liquidation of Sears. Similar tragic examples include retail chains such as Circuit City, Linens ‘n Things, the Borders book store chain, and Toys ‘R’ Us.
If the company does not liquidate, Sears will face tremendous pressure to restructure its finances while rebranding itself into a relevant and profitable business. It will need vendors to provide credit with attractive repayment terms that will allow Sears to survive the holidays and hopefully beyond. That said, any vendors previously burned in other large retail cases, may be less inclined to work with Sears.
Rent Concessions?
In addition to issues involving its vendors, Sears will also need rent concessions from its landlords. Yet, some of these landlords may want to rid themselves of Sears in order to increase rent and bring in more relevant and customer-driven anchors. Or, they also may want to restructure the space for more than one tenant – and thus more than one income stream.
Unintended Consequences
Although the 2005 Bankruptcy Amendments gave landlords more leverage by requiring debtors to assume or reject leases in a shorter time span than that enjoyed under the prior law, at least two strikingly unintended consequences have occurred:
- more retailers are liquidating and/or quickly closing underperforming stores with the hope of a) selling a smaller version of themselves, or b) selling the company’s intellectual or real property to a third party; and/or
- lenders are requiring the retailers to turn their collateral at a much quicker pace resulting in lower profit margins, if any, in order to ensure the inventory can be sold before the retailer is kicked out of its store locations.
For example, Sears was able to obtain a $300 million DIP loan and among other things agreed to confirm a plan of reorganization in less than seven months — a relatively short period of time to confirm a plan. Perhaps this will only delay the inevitable, but it appears that with the pressure Sears faces from its vendors, lenders, and landlords, a likely result will either be a significantly restructured Sears being sold to a third party or a complete liquidation.
None of these results is good if the intent is to remain open with a restructured balance sheet. That said, more often than not, as with other large retail stores, the ultimate result has been a liquidation of all assets, vendors losing significant customers, landlords losing tenants, and employees losing their jobs.
