Sears Death Spiral Accelerates: Vendors Halt Shipments As Cost Of Default Insurance Soars

When we commented back in March on the unexpected "going concern" notice in Sears' 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."

Shortly after, we wrote "Sears Enters Death Spiral: Vendors Halt Shipments, Insurers Bail" in which we described that as Sears financial condition deteriorated, vendors were boosting their "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 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."

Fast forward five month when just after Sears reported another quarter of painfully bad results including an unexpected double-digit drop in same store sales, Reuters writes that the "worst case" scenario we envisioned for Sears is now accelerating, and that Sears is having trouble stocking shelves, "as some vendors have fled while others are demanding stricter payment terms because of difficulties hedging against default risk."

One reason why Sears' supply chain is in greater turmoil than ever - in addition to Sears' woeful financials of course - is due to the scarcity and high cost of a type of vendor insurance known as accounts receivable puts, which ensure a supplier will be paid even if the retailer files for bankruptcy. Think of them as CDS contracts vendors can buy on a counterparty, in this case their (increasingly insolvent) client, and just like CDS, the puts become prohibitively expensive the closer the underlying entity is to bankruptcy.

“It’s too expensive,” Michael Fellner, owner of Montreal-based women’s wear company Lori Michaels Apparel & Manufacturing Inc, told Reuters about the specialized vendor insurance. He also said he stopped shipping to Sears in March, when his insurer stopped providing coverage.

Two other small vendors told Reuters they stopped supplying Sears this year because they could not afford the insurance, whose cost spiked after Sears warned in March of “substantial doubt” over its ability to continue as a going concern. They asked not to be identified discussing confidential commercial arrangements.

Most concerning, however, is the discovery that Eddie Lampert himself appears to be throwing in the towel on the supply chain: as Reuters explains, Sears’ vendors had previously benefited from support from Sears CEO, billionaire Eddie Lampert, who owns almost half of the company’s shares and is also its largest lender.

Through his hedge fund, ESL Investments, Lampert invested in vendor insurance contracts worth $93.3 million in 2012, $234 million in 2013 and $80 million in 2014, according to SEC filings. Lampert's implicit support of vendors however ended one year ago: filings show no investment by Lampert in vendor insurance contracts since 2015.

A Sears spokesman said the 55-year-old billionaire is not currently investing in these contracts and declined to say why.

In addition to Sears' top stakeholder dropping support, for whatever reason, other hedge funds such as Avenue Capital Group, and traditional credit insurance firms such as Euler Hermes Group, have also exited the insurance market, brokers and investors said. They did not specify the timing of their withdrawal.

Predictably, as the number of market participants in the receivables puts market collapse, the cost of insurance contracts surged as they became harder to come by, putting pressure on Sears’ ability to maintain a robust inventory of goods. As a result, merchandise inventory at Sears fell to $3.4 billion as of July 29 from $4.7 billion a year ago, the company disclosed on Thursday. Sears has attributed the inventory decline to its transformation to an online-oriented business from bricks-and-mortar stores.

“We continue to work to manage our vendor relationships in a constructive manner… we will continue to ensure that our vendors deliver on their obligations to Sears,” Sears said in its second-quarter earnings statement on Thursday. The reality is that it simply does not have as many suppliers as it once did.

Meanwhile, those who can find puts to buy are simply unable to afford them: brokers and investors said that Sears insurance contracts for vendors are currently quoted at more than 4 percent of the value of the vendor’s shipment per month, making them uneconomical for many suppliers whose profit margins are in the single digits. Three years ago, the contracts were being quoted at about 3 percent per month.

LG Electronics Inc, which makes Kenmore-branded washing machines and refrigerators as well as LG-branded appliances, told Reuters it has not bought vendor insurance in the past year because of the cost.


Instead, LG said it negotiated shorter payment schedules to minimize the risk of not being paid by Sears. It declined to say how short the payment period was. The typical payment schedule in the industry is close to 90 days, though it can vary by item.

Of course, the shorter the payment terms, the bigger the hit to Sears' working capital and, thus, liquidity, with the most dire option being cash on delivery in which vendors simply will not provide the much needed inventory unless they are paid on the spot. Here's Reuters:

Sears has promised to pay some suppliers within 15 days, according to a source familiar with the matter who requested anonymity to discuss confidential commercial arrangements. Sears declined to comment.


A 15-day payment schedule gives a vendor priority for repayment in the event of a bankruptcy. This is because claims received within 20 days of a bankruptcy filing are typically repaid in full.


Some vendors are so keen for this protection, that they have offered Sears a small discount of around 5 percent on their merchandise, the source said.

As noted above, the increasingly shorter terms means a sharp erosion in working capital: William Danner, president of told Reuters that at the end of the second quarter, Sears would likely have used $587 million to boost working capital – mostly from asset sales – due to the decision by some vendors to not extend as much credit. Sears’ available liquidity at the end of July was $810 million.

“Even for a huge company like Sears, finding this much more capital is a burden. This apparent loss of confidence in Sears by its vendors is greater now than it was at the end of 2016,” he said. Should more vendors demand the same payment terms, there is a risk that Sears entire liquidity cushion could disappear.

Eddie Lampert, who has valiantly fought for years to delay Sears' inevitable bankruptcy, has complained on several occasions that vendors are trying to exploit Sears’ woes to negotiate better terms. He said last month that some of its vendors reduced their support, “thereby placing additional pressure” on Sears.

Sears took the issue to court in June, when it sued Ideal Industries Inc after the maker of Craftsman-branded tools declined to fulfill purchase orders because of Sears' "known fragile financial condition," according to court documents. Ideal Industries declined to comment.

And while Lampert may no longer be funding vendor insurance, he is still supporting Sears in more "brute force." He held about $1.7 billion in debt mainly backed by the company's real estate and inventory as of April 29, according to regulatory filings.  The reason for this shift is that unlike secured debt, vendor insurance contracts are not backed by any collateral. Underscoring his "support", last month, Lampert extended a $200 million 151-day credit line to Sears at an annual interest rate of 9.75 percent.

To be sure, not everyone has thrown in the towel on Sears: at least one investment firm, Blackstone Group LP's distressed credit arm GSO Capital Partners is backing Sears contracts through December although they did not disclose their value to Reuters.

However, it's only a matter of time - in this case a few more quarters of declining same store sales - before virtually everyone gives up on Sears, forcing Lampert to decide between directly funding the company's inventory or finally admitting defeat to the Jeff Bezos juggernaut, and pulling the plug.


GUS100CORRINA silverer Fri, 08/25/2017 - 11:54 Permalink

Sears Death Spiral Accelerates: Vendors Halt Shipments As Cost Of Default Insurance SoarsMy response: This situation developed quickly, Below is presentation that discusses mathematics of SEARS situation. So we can think of SEARS on ICE which is COLD.I still have my CRAFTSMAN tools. Truly sad.

In reply to by silverer

man from glad GUS100CORRINA Fri, 08/25/2017 - 12:04 Permalink

Sears stores are badly stocked. I went into the tool department recently and they don't seem to carry any slip joint or needle nose plier sets any longer. And many other basic Craftsman tools that used to be their bread and butter. I think things are getting desperate there. I just got $12 in surprise points on $12 minimum purchase today (Shop Your Way). Seems like they are in need of cash flow badly. Too bad, I will be sad to Sears go under.

In reply to by GUS100CORRINA

Haus-Targaryen silverer Fri, 08/25/2017 - 12:12 Permalink

As sad as the downfall of Sears will be, it isn't not well deserved.  Their late-adoption of establishing a large online presence and being attached to shopping malls acted as the 1-2 punch for Sears. I almost gave up on shopping malls (grew up in Texas) around the time I graduated from high school.  Then in college I worked in a shopping mall for five years, and that is what killed it for me - and based on Sears' traffic numbers, is what killed it for them too. Last time I was in a shopping mall in the US, I found it predominately populated with five distinct groups of people:1) Teenie mall rats, who have no money, no intention to buy anything save a pretzel and just go there to hold their teenie GF/BFs hand;2) Inner-city thugs, who like the mall rats have no money and no intention to buy anything.  Because none of them have a job, they use malls as a people watching opportunity which is air conditioned with close proximity to slushies and cheap food.  If they happen to accidentally walk off with something that doesn't belong to them, well, that happens too;3) Hispanic families.  Like the thugs and mall rats, they too have no money and have no intention to buy anything save food for their kids.  I found these people are seasonal -- they only come for the free air conditioning or the free heat.  They don't come one or two at a time, but rather a good bakers dozen all crammed into a mid-90s Ford Explorer.  They traditionally congregate in the food court for hours at a time.  Tables close to electrical plugs are at a premium;4) Old people wanting to get out and walk.  Can't say I blame them, free air conditioning, free heat and if you happen to have a Barnes and Nobel in your mall, well, guaran-damn-tee you the above three groups won't be there, so the old people go.  Like the other three groups no one has an intention of spending any money and use it predominately as a social opportunity; and5) Middle-class families in their 30s to 40s.  Traditionally middle class seeking to purchase something from a store one can only find in a mall.  Mom needs to buy little Timmy that new Hollister Co. T-Shirt for $45, you'll find them there.  Need a multi-colored glow-in-the-dark liquor flavored penis for a bachelor party?  Yeup, Spencers has one.  These customers normally go in, get what they need and leave.  There isn't much meandering.  And so the malls, and thus Sears are dying.  To be fair, what killed the mall and Sears by extension in my opinion isn't/wasn't their prices or horrible customer service.  Look, Best Buy is still around. I think what killed Sears (and malls) is their clientele. Sears is a relic that should have died with White Flight in the 60s and 70s but had enough cash flow to keep itself going.  When the inner-city black population began shopping and working at Sears in larger numbers the white and asian customers went elsewhere.  Then came their late adoption of the internet and it was game over sometime in the 90s.  I remember as a kid my dad and I were doing our first home surround sound system.  We wanted to get some bookshelf speakers and went to Best Buy, Circuit City, HiFi Buys and Sears.  We were in there only a few minutes, when the guy who was supposed to help my dad couldn't speak English and relied on Ebonics.  Told my dad he "didn't know shit" about "them speakers" but if he buys some let him know because he wants his commission. We left, didn't buy anything and that was the end of my dad's relationship with Sears. All this to say, its dead ... a goner.  The lifespan of the chain should be measured in quarters at this point and no longer years. 

In reply to by silverer

Give Me Some Truth Haus-Targaryen Fri, 08/25/2017 - 12:32 Permalink

Good analysis of the reasons for the death of the indoor mall.... So we got these upscale outdoor shopping centers. Where customers have to have a car and walk outside from store to store. The price points of many of their tenants are also too high for the lower-income groups. Anyway, People (read: white people) are less afraid to shop at the stores. These places, all of which draw customers from a 50-mile radius, seem to be hanging in there. That is, shoppers have to shop SOMEWHERE and this is that somewhere. But even these places are losing tenants at a greater clip than they were a few years ago. If you really want to see a scary retail picture venture into the downtown shopping districts or the strip malls of the smaller towns located beyond the regional shopping hub. These towns have some fast food restaurants, a Wal-Mart, a growing number of Dollar General stores and a growing landscape of empty businesses. They do have plenty of "emergency cash" loan shark type operations. I know this. There are hardly any retail businesses left to buy ads in the local football program or high school yearbook. And this is in the towns big enough to support a Wal-Mart. Outside of these towns are even smaller towns, towns like Mayberry that once produced Salt of the Earth country leaders. Those towns are really on life support. I predict many of them will disappear in 10 to 20 years. I guess they will still exist on the map but they won't need a mayor, town council or school anymore.  Anyone remember the Bruce Springsteen song, "My Hometown?" (from an album released in the mid to late '80s). One line stays with me: "These jobs are leaving ... and they ain't coming back ... to my hometown."). The Boss was prescient. Now he was probably railing about this president or that president. He should have been railing against the Fed, but that's a little esoteric for a pop song villain I guess.

In reply to by Haus-Targaryen

Haus-Targaryen Give Me Some Truth Fri, 08/25/2017 - 12:49 Permalink

I think you're really going to see the enptying out of the working middle-class suburbs in the coming decades. The Millennials whom are expected to buy their parents houses will instead gentrify the inner cities pushing the low-income blacks and Hispanics somewhere else, likely into the working-class suburbs. As the schools there dictate house prices, the school's performance will tank and push out the remaining working-class whites either into the inner cities or out into the countries. I would actually be pretty optimistic about the rural/small towns less than 80 miles away from a major city.  The working-class suburbs (so I'll work with the burbs I am familiar with) such as Hurst/Euless and Duncanville in the DFW area; and Marietta and Smyrna in the Atlanta area are going to go to shit in the coming decades. That, or the US goes full on Zimbabwe and you have white flight out of whole states and sections of the country.

In reply to by Give Me Some Truth

poland spring Haus-Targaryen Fri, 08/25/2017 - 13:26 Permalink

This is exactly what is happening in Philadelphia.  The counties outside of Philly (Chester, Delaware) used to be really nice, now they are dumps...meanwhile some of the worst inner city areas in Philly are booming with brand new construction.  Wiping out old deserted run down blocks with brand new $300-$400k homes.  The city is actually looking much much better.  More bikes, more public transpo and lots of Uber/Lyft.

In reply to by Haus-Targaryen

yaright Haus-Targaryen Fri, 08/25/2017 - 14:46 Permalink

I live in one of those Mayberry towns and commute into a large city for work.  These type of towns are growing more than you think.  Not everyone’s head is in the sand, they see the big box stores as killers and won’t shop them. I see more and more independent stores doing very well.   I know in my family and circle of friends we have buying local all we can for a long time.  As for Sears fuck them they were dead years ago.

In reply to by Haus-Targaryen

Chuck Walla Give Me Some Truth Sat, 08/26/2017 - 16:37 Permalink

We travel the two lanes a lot, all over the US. N. Dakota last year, small town Kansas and Colorado this year. Taking on Montana and Idaho in a few weeks. The Carolinas in October.I photograph old neon and Americana in general. Hence, I am in and through a lot of small towns. The upper Midwest is somewhat healthy. Down South, I never saw so many beat-down places. In general, small towns are dying fast. A few regional powers will survive, the rest will rot away with the old folks. The urbanization of America won't stop anytime soon until the riots commence. Too late then.

In reply to by Give Me Some Truth

Give Me Some Truth tmosley Fri, 08/25/2017 - 12:41 Permalink

Re: Goldbugs only profit if everyone else dies ...What the heck? People have owned gold for thousands of years, and benefited from said ownership. No one had to die for them to be glad they owned gold. What's changed in recent years is that "gold bugs" are now derided and somehow scapegoated (I guess for being skeptical of the wisdom of unlimited printing of fiat money).It's the "paper bugs" who rule our governments (and thus our lives) that created this dysfunctional, corrupt world.  Now buying gold in such an environment is probably wiser (and more necessary) than it has ever been. But, as a gold and silver bug, I am not "pulling for" any kind of economic collapse. I am pissed off that the Powers that Be are conspiring to suppress the price of gold and silver. If they stopped doing this, I don't think the world would end. In fact, I think this would help the world and the people in it save itself. A genuinely "free market" does work and benefit all of humanity. We just need to try it.

In reply to by tmosley

SMC Fri, 08/25/2017 - 11:49 Permalink

Perhaps Sears should not have fired those who pushed for internet sales in the 1990s...

The TBTF / TBTJ always fall in the long run.

skinwalker Fri, 08/25/2017 - 11:51 Permalink

My MIL has been boycotting sears for 40 years after they sold her shoddy appliances.

She's thrilled beyond belief that she's finally winning.

Hopefully in the fullness of time I will do the same over the demise of amazon.

aliens is here Fri, 08/25/2017 - 11:52 Permalink

How about get rid of them low class hijab wearing employees and then hire some normal looking friendly helpful ones. You might just see some hope in turning Sears around.

techpriest aliens is here Fri, 08/25/2017 - 13:24 Permalink

If they did that ten years ago, maybe. Now we're at the point where Sears is associated with "failing store that has no goods and bad service" deep in folks' mind, and it would take a lot more than simple improvements to change that.

If they really wanted to turn the chain around, they would drop the "Sears" brand as it currently is, fire all of the first 2 layers of upper management, and roll out what is effectively a new store concept. However, at this point it would be better to kill the brand, and sell off the buildings to some other company.

IMO the executives are riding out the crash and trying to collect as many paychecks as possible before finally walking away.

In reply to by aliens is here

ali-ali-al-qomfri stormsailor Fri, 08/25/2017 - 12:27 Permalink

/* Style Definitions */
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Kingdom: Capitalus Phylum: Corporatious Order: Retailian Family: Cubus-Grandes Genus: Catalogues-Orderes  Found in fossil samples in the Fukushima Boundry Layers.

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CRM114 Fri, 08/25/2017 - 12:00 Permalink

Just like Target Canada, shit senior management can ruin everything.Perhaps people ought to be hired who are good at their job, rather than good at schmoozing up to their boss and ticking HR's 3 million little boxes?Especially in Sears case, where they took the World's greatest remote sales company into the internet ordering age, and f#cked the whole thing up. Any department manager in a Sears store could have told them what they were doing wrong (I 've spoken to two), but they didn't care to listen.In itself, this has nothing to do with Amazon. Sears should have been Amazon. For 100 years it WAS Amazon.