Sears Canada Melts Down

Files for bankruptcy protection. Shareholders rue the day.

by Wolf Richter • Jun 22, 2017

Sears Canada and its subsidiaries, which operate 95 department stores, 29 Sears Home stores, 71 Hometown stores, 16 Outlet stores, 69 Sears Travel offices, and 32 Corbeil appliance stores, and thus lease a lot of mall space, filed for bankruptcy protection today.

The company was partially spun off from similarly struggling Sears Holdings in the US in 2012, which still holds a 12% stake, and whose CEO Eddie Lampert owns a 45% stake in part via his hedge fund, ESL Investments.

In the announcement, Sears Canada said that it has applied to the Ontario Superior Court of Justice for protection under the Companies’ Creditors Arrangement Act (“CCAA”), in order to restructure its debts. It doesn’t plan to liquidate.

“Sears Canada Reinvention Continues,” it says. Despite sales having plunged for years, it points at its “brand reinvention,” how it “rebooted its customer experience and service standards,” and how its “newly designed site built in-house by a new technology team” and some other factors are going to make this work.

But retail businesses are notoriously difficult to restructure because they have so few assets and so much debt once they get to this stage, and because the collateral isn’t worth much. Most end up being liquidated. To stay alive over the years, Sears Canada has sold off most its real estate holdings, so the most valuable assets are already gone.

On June 13, I reported that Sears Canada had hired the same leading bankruptcy and insolvency advisory firm (Osler, Hoskin & Harcourt LLP) that represents Target Canada, which ended up in insolvency proceedings in 2015 when it shuttered its 133 stores and 7 more locations it hadn’t even occupied. Hiring that firm was a dead giveaway.

June 13 was also the day Sears Canada disclosed another fiasco for quarterly results, that there were “material uncertainties” about its “ability to continue to satisfy its obligations,” given the rate at which it was bleeding cash, that it had doubts about its ability “to continue as a going concern,” and that lenders weren’t willing to keep it afloat for the next 12 months.

It added that, “in light of these developments,” it had canceled its annual shareholder meeting scheduled for the next day, and “as a result,” Jeff Stollenwerck, a SVP at Sears Holdings, had “resigned as a director effective today.”

It took only nine days for its warning to turn into the reality of the ongoing brick and mortar retail meltdown.

In today’s announcement, Sears Canada projects some optimism that it would actually, against all odds, be able to restructure its business and go on, rather than liquidate and disappear:

The brand reinvention work Sears Canada has begun requires a long-term effort, but the continued liquidity pressures facing the Company as well as legacy components of its business are preventing it from making further progress and from restructuring its legacy assets and businesses outside of a CCAA proceeding. If granted, the Sears Canada Group will work to complete its restructuring in a timely fashion and hopes to exit CCAA protection as soon as possible in 2017, better positioned to capitalize on the opportunities that exist in the Canadian retail marketplace.

Even if it succeeds in restructuring, current shareholders – including Sears Holdings, its CEO Eddie Lampert, and his hedge fund, ESL Investments – will likely end up with shares that are worth nearly nothing or nothing. A restructuring essentially hands ownership of the company to its creditors that will also take a massive haircut, depending on their seniority.

Trading in its shares is currently halted. They’ve been reduced to penny-stock status long ago, and their value has become inconsequential.

Shares of Sears Holding in the US hit a new all-time low yesterday of $6.21. Today, once again, the dip buyers that have been playing this game for years, are trying to pick up pennies in front of a slow-moving steam roller, which works for a while if you’re fast enough to get out of the way.

Sears Holdings is skidding the same direction as its sister company. The ingenious strategy of cost-cutting and store-closing its way out of trouble is leaving marks: Pretty soon, it leads to zero.