Sears Canada Melts Down

by Wolf Richter, Wolf Street:

Goes Bankrupt. Lays Off 2,900 People. Shareholders rue the day.

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. It will also close a slew of stores and fire 2,900 people.

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.

In a later release today, the company said that it was granted an “Initial Order” from the Court. Among other things, the order authorizes Sears Canada to obtain prearranged debtor-in-possession (DIP) financing of C$450 million. This is expected to provide the company with enough liquidity to keep some of its doors open through the bankruptcy proceedings.

Only some of the doors because Sears Canada will shutter 20 full-line locations, 15 Sears Home stores, 10 Sears Outlet stores, 14 Hometown stores, and lay off “approximately 2,900 people across its retail network and at its corporate head office in Toronto.” Timing of the store closings “has not yet been finalized,” it said.

The initial release claimed, “Sears Canada Reinvention Continues.” 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.”

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