Sears Enters Death Spiral: Vendors Halt Shipments, Insurers Bail

Tyler Durden's picture

When we commented yesterday morning on the unexpected "going concern" notice in Sears' just filed 10-K which sent the stock crashing, we pointed out the immediate spin provided by Eddie Lampert's distressed retailer which promised that its comeback plan may help alleviate the concerns, “satisfying our estimated liquidity needs 12 months from the issuance of the financial statements", to which however we added the footnote that "the question is what happens when vendors start demanding cash on delivery as concerns about SHLD.'s liquidity concerns continue to grow."

As it turned out, we wouldn't have long to wait, because overnight Reuters reported that the worst case Sears scenario we envisioned for Sears is now taking shape and that suppliers to Sears have told Reuters they are doubling down on defensive measures, such as reducing shipments and asking for better payment terms, to protect against the risk of nonpayment as the company warned about its finances.

The company's disclosure turned the focus to its vendors as tension is expected to mount ahead of the key fourth-quarter selling season amid rising concern about a potential bankruptcy, they said.

Quoted by Reuters, the managing director of a Bangladesh-based textile firm said his company is using only a handful of its production lines to manufacture products for Sears' 2017 holiday sales. Last year, nearly half of the company's lines in its four factories were producing for Sears. "We have to protect ourselves from the risk of nonpayment," said the managing director, who declined to be identified for fear of disrupting his company's relationship with Sears.

Furthermore, precisely as we predicted, Mark Cohen, the former CEO of Sears Canada and director of retail studies at Columbia Business School said vendors will keep a close eye on Sears' finances. "Whatever vendors continue to support them are now going to put them on even more of a short string. That means they’ll ship them smaller quantities and demand payment either in advance or immediately upon delivery."

He added: "Sears stores are pathetically badly inventoried today and they will become worse."

Another supplier to Sears, Arnold Kamler, CEO of New Jersey-based bicycle manufacturer and importer Kent International Inc, said he was not surprised by Sears' Tuesday announcement. He said he noticed a warning sign last year when Sears pushed to increase its purchases, which occurred "because a lot of their current suppliers were either cutting them off or limited them on credit."

Kamler said he declined to sell Sears more product and that he receives a report once a week from his accounting department because of concerns around billing, payments and deductions.

The Bangladesh-based clothing supplier said Sears' announcement is making him re-evaluate accepting new orders.

"So far there was only speculation that they would declare bankruptcy in 2017. But now they are acknowledging it, which definitely complicates our relationship with them and our decision to accept future orders from Sears," the executive said.

A second clothing supplier from Bangladesh who did not wish to be named said he renegotiated payment terms with Sears a year ago and was being paid within 15 days of sending a shipment, compared with the traditional 60 days. He is considering asking the company for an advance payment on orders going forward.

* * *

Sears disagreed, and according to Jason Hollar, the company's CFO, Sears' move to raise capital in recent months is helping strengthen the company's balance sheet he claimed in a blog post.

Sears is "a viable business that can meet its financial and other obligations for the foreseeable future," Hollar said. He cited a $1 billion increase in liquidity from a new secured loan facility and a new asset-based loan that provided $250 million more in "financial flexibility." The only problem with this is that Sears continues to be a melting ice cube which while not as bad as Tesla, is burning through hundreds of millions each year, money which in recent years has come out of Eddie Lampert's pocket, either directly or indirectly, with loan gurantees. At some point even Lampert will realize that throwing away billions to sustain the Sears zombie is no longer a viable strategy, especially if the vendor freak out prompts a sudden need for cash which the company does not have.

Speaking of Sears' cash, here are some more details from Reuters:

Sears' cash position has shrunk dramatically in recent years. Sears, which lost $2.22 billion in the year ended Jan. 28, 2017, had $286 million in cash on hand, down from $609 million in 2012. Retailers in distress often use their accounts receivable to finance operations, and Sears had $466 million in receivables, down from $635 million in 2012.

So is a bankrtupcy inevitable? Well, yes, and increasingly so with every passing day that the company avoids filing.

Neil Saunders, managing director at retail research firm GlobalData, said tension will grow as the year goes on. "As we move towards the last quarter, I think we'll find there are more and more suppliers that are not necessarily willing to engage with Sears" and will demand cash up-front.

 

Another sign of Sears' weakness is that insurance companies that once provided policies to Sears vendors - insuring against nonpayment for their goods - are no longer doing so.

 

Doug Collins, regional director for risk services at Atradius Trade Credit Insurance, said his firm has stopped providing insurance to Sears vendors. "We tried to hang in as long as we could," he said. "Vendors may try to get a few more cycles in before the worst happens, and then it just depends if they're lucky or not."

Of course, if that's the case, then Sears has nothing to worry about: if the past 9 years of trading this "market" has shown, is that luck - or hope - is the only strategy that matters for this market, and courtesy of central banks, it always somehow shows up in the last moment.

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SilverRhino's picture

That retail chain is shit.  Good riddance. 

froze25's picture

Is Sears still a major property owner?

Shocker's picture

Ouch, not really hard to believe but sucks to see

Add them to the list: http://www.dailyjobcuts.com

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nuubee's picture

Sears has basically zero online presence. This was inevitable.

manofthenorth's picture

I think the writing was on the wall when they decided to sell "Craftsman" and "Die-Hard".

All over but the crying.

 

fx's picture

Tyler and most commenters here have no clue. Bruce Berkowitz, one of the smartest fund managers around has a hge position in the stock, is on the board and keeps buying stock. He stated several times in the past that SHLD is worth dead more than alive. Lots of people may ger quite surprise. a bk doesn't always end bad for the owners. and eddie lampert as the major owner has prepared for years and years for a liquidation of sears. he will come out surprisingly well, that I can tell you. Surprising to the many clueless, that is.

cheka's picture

nyc hedge fund manager/banksters made bank buying kmart and sears.  everybody else lost

NoDecaf's picture

Sears is basically like a mini Greece....dragging out the inevitable

J S Bach's picture

Will this mean my Craftsman tools are no longer guaranteed for life?

chosen's picture

They are still guaranteed for life, for the life of Sears.

cheka's picture

remember cnbc cramer pumping this crap.  saying that the new skype owner was a genius and would turn k-sears around

Potato Farmer's picture

Hurry up.  Get your free replacements on your Craftsman's tools now!  Pronto!

83_vf_1100_c's picture

Nice word play.

You probably don't want to bother with a replacement. The new Craftsman tools are cheaply made junk. I snagged a nib bulk set to throw in the trunk of my old Fairlane for emergency roadside repairs. Pulled them out of the box and after examining them put them right back in the box.  I wouldn't use them on my lawnmower. I may miss their Kenmore brand. My last washer/drier lasted 20 yrs+ before I replaced them. Maybe those have gone downhill as well. The kid started his mechanic career at Sears. He said DieHard batteries were a constant warranty item. Sears earned their bankruptcy imo. Their revolving credit scam was little better than the payday loan ripoffs.

Mr. Universe's picture

Sort of Ironic in that Sears back in the day became a giant due to their catalogue. Yet they somehow couldn't manage to see the writing on the wall and go back to electronic version of what made them huge in the first place. Not surprising since look how they handled Orchard Supply hardware. The purchased it, ran it into the ground, spun it off then declared BK. Now owned by Lowes, it's making a big comeback. I wonder how that happened?

Citxmech's picture

Exactly - Sears was the Amazon of it's day.  It essentially pioneered the concept of one-stop remote ordering back in the 1890s.  

Hell, you could buy everthing from clothes to carriages to a complete blacksmith's outfit to a house.

WTF happened?

TheMeatTrapper's picture

When they did away with the womens underwear section of their catalog - it was all down hill after that. I think that's why kids these days are so screwed up. No Sears catalog to sneak a peak at when Mom wasn't around. 

buzzkillb's picture

Craftsman. Once they stopped their really good warranties in addition to being made outside of the US, there was no reason to purchase those tools anymore. I would imagine someone walks in looking for tools and if they aren't alone, the other someone might be with them and says lets buy another type of item. Not only the quality went down but the last time I did purchase some sockets the workers could be replaced with anything and the service would be better.

The last time I was in the store, 3 years ago, was for Black Friday where they ended up having really bad sales compared to other local electronic shops. There was no one working the appliance section. 0, zero, no one. A huge line piled up of people waiting. Do I think any of us ever went back to a Sears? Most likely.

Bad Attitude's picture

Sears lost my business in the '90s when they started targeting their advertising at blacks and hispanics - I guess whites were no longer worth trying to attract.

Craftsman tools was one of their last bright spots, but the last time I went to Sears to get a wrench set (a pretty basic tool item), I couldn't find what I wanted that wasn't made in China.

Forward (over the cliff)!

Lore's picture

The writing was on the wall when they selected Bangladeshi (!) vendors for apparel.  Wash once, and then the clothes will fit your son's action figure collection. 

I visited a Sears store in Canada yesterday afternoon, and it was like a tomb, depressing and downright creepy.  To her credit, the one salesperson who I could find on the 2nd floor was courteous and knowledgeable, but she's a lifer at the end of her career, last in line to be turfed due to seniority. She didn't have the things I was looking for, and admitted that "We aren't getting much stock. You might have more luck on the website." 

Interesting that the American Sears still carries bicycles.  It must be 25 years since they had any bikes in Canadian stores.  Ah, those halcyon days of healthy retail.  I'll miss department stores at Christmastime -- oops, I mean 'Festive Season.'  But the death of malls is a good thing to the extent that it frees up all those lonely chain outlet employees from wasting precious days-weeks-months-years of their lives standing behind the cash register.  Even in the most depressed areas, there must be more life-affirming ways to make ends meet...

It's a mystery to me why the Canada Pension Plan Investment Board (CPPIB) is buying up American retail space, unless they plan to transform it into something else...?

The central planners's picture

They would be a way better if they sold stuff online under the cost like Amazon.

Cman5000's picture

Yes the property is where the money is at that's why they don't renew their leases. Selling off their property. This is the end for Sears.

froze25's picture

Yeah, I would say that they are in a death spiral then if they are selling off assets to keep alive.

francissba's picture

Huh?  Sears?  Really?  Is it still in business?   

Raffie's picture

I still see COMP USA buildings up. Circuit City empty buildings was up for a long time.

Raffie's picture

Where will I buy the most fashionable clothing and shoes? 1st Payless and now this. I am running out of shopping stores.

Wonder what will happen to Craftsman since they been carrying the company for decades.

ArgentDawn's picture

Craftsman was sold to Stanley Black & Decker earlier this year.

Offthebeach's picture

A non existing middle class, economic and cultural, doesn't need a middle class retailer.   Goodwill at one end, and ever changing exclusive signalling brands at the other. 

( Thoses Bangladesh manufacturers are going to miss Sears, Penny when Dollar Store Clothing takes off.  Anyway, I work construction and destroy clothes.   No faux Carhart poser for me, it's  Sally Mae at $5 for jeans.( Salvation Army) )

CrankyCurmudgeon's picture

Where do you find thrift store jeans with less than a 40 inch waist?

Lore's picture

+1 @ OfftheBeach for good summary.  Goodwill-type places are BUSY.  The busiest in my town is called Value Village, a kind of shared retail space that pools donations received from a variety of charities -- basically, 50 years worth of cast-offs being picked over by the growing local underclass.  Maybe that's what will happen to some Sears stores: convert them into a kind of community flea market...

BigFatUglyBubble's picture

Now where am I going to get a nailgun?

stormsailor's picture

you could release some really damaging information on hillary or o'bunghole, and ambush the cia guy when he comes to nail-gun you.

ACES FULL's picture

They should have never stopped selling mail order guns and buying fur. Its been all downhill from there.

CompassionateConservative's picture

Guns should be banned.  Fuck the constitution and second amendment!

SILVERGEDDON's picture

You need an all expenses paid vacation to inner city Chicago.

You get stripped down to your undies, and turned loose on the east side with a big " I hate niggers " sign around your neck.

Can you hear me now ?

Be careful what you wish for, asshole. 

Iknowstuff's picture

You just really showed your knowledge of the city of chitcago. The east side is known as lake Michigan whereas the west and south sides are where you go to get shot. Just sayin.

SILVERGEDDON's picture

I figgered on giving a dumb ass an even chance on getting out alive, Mister National Geographic.

83_vf_1100_c's picture

Fucking moron. If i possessed ban hammer priveleges you sure do resemble a nail.

CompassionateConservative's picture

Guns should be banned.  Fuck the constitution and second amendment!

ACES FULL's picture

Guns are banned in Chicago. Hows that working out for ya?

TheReplacement's picture

Guns are not banned in Chicago.  Citizens are banned from having guns.  The police are not banned from owning guns.  Therefore it is only logical to conclude that the police are killing the citizens of Chicago at an accelerating rate.

I am Jobe's picture

O Fuck. What would many families do on A Friday Night now?  

canisdirus's picture

It depends on their socioeconomic status:

Lower class: Walmart

Lower-middle and above: Amazon