The Washington PostDemocracy Dies in Darkness

Sears files for bankruptcy after years of turmoil

Sears filed for Chapter 11 bankruptcy Oct. 15 and announced that it will close 142 stores. (Video: Reuters)

Sears, the one-time titan of American retail, filed for bankruptcy ahead of a $134 million debt payment due Monday and announced that it will close 142 stores.

For years, Sears has contended with the threat that it would become the latest big-name retailer to fall to online competition and crushing debt. The icon once known for its pristine catalogs, and more recently known for decrepit showrooms and a controversial chief executive, saw its stock price plunge last week after reports that it had hired an advisory firm to prepare a bankruptcy filing ahead of the Oct. 15 payment.

Early Monday morning, Sears announced it had filed for Chapter 11 bankruptcy -- which would allow it to reorganize and possibly reemerge from bankruptcy with some part of the business intact -- and received commitments for $300 million in debtor-in-possession financing to carry through the bankruptcy period while it restructures its debt and reorganizes its business. The company is negotiating an additional $300 million in financing from ESL Investments, a hedge fund run by Sears' former chief executive, Eddie Lampert. ESL Investments is also Sears' largest stockholder and creditor.

“The intention is to bring the company out on the other side,” a person familiar with the negotiations told The Post on Friday.

The stock price was trading at 33 cents a share at lunchtime Monday -- just below Friday’s closing price.

Sears will close 142 unprofitable stores near the end of this year, with liquidation sales at those stores expected to begin soon. It was not immediately clear where those stores are located or how many jobs would be affected. Those store closings are in addition to 46 others that were expected by next month.

As part of the transition, Sears will also undergo a series of leadership and board changes. Eddie Lampert has stepped down from his role as chief executive and will remain chairman of the board. The company created an Office of the Chief Executive -- responsible for day-to-day operations -- that will be filled by three officers. The company has also formed a committee to oversee the restructuring process.

The company said it will continue payments of employee wages and benefits, honor member programs and pay its vendors and suppliers. Customers should expect loyalty programs to continue uninterrupted.

“As we look toward the holiday season, Sears and Kmart stores remain open for business and our dedicated associates look forward to serving our members and customers,” Lampert said in a statement.

Lampert’s hedge fund, ESL Investments, said it had consistently believed that restructuring the company’s finances could have been best achieved outside a court-run bankruptcy process. In April and August, ESL presented proposals to acquire certain Sears assets, followed by a broader September plan for real estate transactions and asset sales.

But ultimately, it was not possible to achieve a successful restructuring outside a Chapter 11 bankruptcy process, ESL said.

“ESL believes that supervision by a judge will enable creditors to address any issue among them according to a clear set of rules and permit the sale of certain assets through a court-approved auction process to maximize value,” the fund said in a statement.

Even President Trump weighed in on the bankruptcy when speaking to reporters Monday morning.

“Sears has been dying for many years," Trump said. "It’s been obviously improperly run for many years, and it’s a shame.”

The 125-year-old retailer was hardly the first to crumble while saddled with cavernous showrooms as e-commerce competitors soared. The company has roughly $5.6 billion in outstanding debt and has dwindled down to about 820 Sears and Kmart stores, down from 2,000 five years ago. It has also already sold off many of its brands, including Craftsman tools, and hasn’t turned a profit since 2010. Many of its most valuable properties have been sold off, with the other half leased and offering little cost savings from rent restructurings since Sears already pays below market rents.

The big missteps that brought an American retail icon to the edge of collapse

Sears used to sell houses by catalogue. Buyers then put them together. The Sears brand may soon vanish, but these sturdy homes live on. Step inside for a look. (Video: Lee Powell/The Washington Post)

One bankruptcy expert described Sears’ downfall as “the slowest-moving train wreck." But any movement toward bankruptcy seemed to gain momentum last week with reports that Sears had hired New-York based M-III Partners to prepare the filing. Sears recently added a restructuring expert as a company director for an additional layer of guidance on how to navigate a bankruptcy filing.

Still, it was unclear whether the company would attempt some other restructuring plan and whether Lampert, would devise another plan to save the company he took over in 2013.

In September, Lampert — Sears’ largest shareholder and creditor and the owner of the hedge-fund ESL Investments — asked creditors to refinance $1.1 billion in debt before the Oct. 15 payment, according to a filing with the Securities and Exchange Commission. He also called on the company to sell off $3.25 billion in real estate and assets. Those include Sears Home Services and the company’s flagship Kenmore brand, which Lampert offered to buy in August for $400 million.

Lampert has often attempted to keep Sears viable with loans. Much of his focus has turned to Sears’ online presence over upkeep on physical storefronts, many of which total thousands of square feet. Lampert bought Sears in 2004 and merged it with Kmart, in which he had a controlling stake, the next year.

Matt Kopsky, an analyst at Edward Jones, said Sears would be hard-pressed to turn around its business -- even while operating fewer stores -- given its high debt load, a subpar e-commerce presence, underinvestment in physical stores and diminished relevancy to customers. Kopsky said Sears may need to sell off its Kenmore brand, which ESL offered to buy in August for $400 million, in addition to closing its unprofitable stores.

In time, Lampert’s “fight to keep Sears running” may only delay an inevitable liquidation, Kopsky said.

“Toy R Us filed for Chapter 11 [bankruptcy] before the holidays last year and liquidated shortly after,” Kopsky said, “If Sears does not show improvement this holiday season, especially given how strong the economy and consumer are, I could see the same fate happening with Sears.”

Tom Lynch, managing director at SierraConstellation Partners, a firm that advises companies going through bankruptcies and other transitions, said that Sears faces a number of crucial obstacles, including its debt load and poor store quality. But it must also grapple with answering “What is Sears?” for shoppers, vendors and investors wondering why the former icon should survive.

That’s unlike Toys R Us, Lynch said, which was also burdened by tremendous debt but still had a “compelling brand story.”

“This was a story that’s been deteriorating for a decade," Lynch said. “I think you could see a case where Toys R Us reemerges in a smaller form, but that brand is compelling enough that it deserves to fight another day. This one I’m not so sure.”

Lampert himself has had a controversial tenure at Sears. Paula Rosenblum, co-founder of Retail Systems Research, wrote in Forbes that Lampert would emerge from a Sears bankruptcy as the least-sympathetic victim and perhaps the largest beneficiary. Lampert learned long ago that Sears could make money from selling off some of the company’s signature brands, like Craftsman tools, Rosenblum wrote. Plus, in bankruptcy proceedings, the largest creditors become the owners of the new entity. (Still, the Chapter 11 filing effectively wipes out both Lampert and ESL’s equity investment.)

Rosenblum told The Post that those with the most to lose from Sears’ end will be the workers who stand to lose their pensions and jobs. And malls and shopping centers — ultimately left with huge empty warehouses — will have to get creative about new ways to clinch foot traffic. Options could range from food halls to pop-up stores to Tonya-Harding-esq skating rinks, Rosenblum said — so long as the concept was about more than just shopping.

Still, even given Lampert’s mismanagement and Sears’ drawn-on decline, Rosenblum distilled the company’s downfall to one word: tragedy.

“Here you have what was the original Amazon on steroids,” Rosenblum said. “This is a proud American institution, and what he’s done to it is embarrassing. It just is.”