Lessons from the Not Entirely Unexpected Sears Bankruptcy Filing

Serendipitously, I hear this is also the last season of the TV show “The Walking Dead.”  But while I expect that TV franchise to continue in some form, the same can’t be said for Sears.  I know it’s supposed to be a restructuring, but no amount of financial engineering can compensate for Sears’ lack of customers and a defendable and identifiable market position- especially after the most valuable assets have been stripped.

You might read this excellent article on Wolf Street to understand how Sears got to where it is- at least from a financial perspective- and why it’s prospects are grim.

What could have Sears have done differently?  Human behavior being what it is, probably nothing.  In a perfect world, management would have recognized 20 years ago some of the changes that were coming.  That’s expecting too much.

By the time they figured out where things were heading, it might have been too late.  And as you will recognize if you read the article linked to above, the interests of the CEO and hedge fund owner who controls some of Sears’ prime assets and is a secured creditor were not exactly aligned.

In our industry we’ve watched some public companies get into trouble, I’ve argued, specifically because they were public and simply could not do, as public companies, what they needed to do.  Neither Quiksilver or Skullcandy, to use a couple of examples, had a strategy that was consistent with building their brands in the changing retail market and meeting the requirements of being public.  They ended up in private hands- exactly what should have happened and where the brands have the best chance to succeed.

There’s no public data, of course, on how Skullcandy, Quiksilver, Roxy or DC Shoes are doing.  But at least now they can focus on branding and distribution in a way appropriate to how they need to compete.  They couldn’t (didn’t) do that when Wall Street was requiring regular, significant revenue growth.

Sears should have gone private too.  Not in the form of hundreds of big stores in malls selling everything.  That ship has probably sailed due to online/Amazon/millennial habits/demographics/etc.

What would have happened if somebody at Sears had had the vision to say, “We need to do something risky, dramatic and different if we’re going to be a viable business?

JC Penney tried that.  They brought in Ron Johnson from Apple to completely remake the brand.  As you may recall, that didn’t work.  Neither Mr. Johnson or the Board of Directors or Penney’s balance sheet had the patience or the ability to withstand the pressure his aggressive new strategy generated.  I’d argue that it would not have worked even if they’d had the patience, as JC Penney has the same problem Sears has; too many stores that are too big selling too much commodity like stuff.

Sears had some valuable brands.  These include Diehard, Lands End, Kenmore, Craftsman.  Am I forgetting any?

Anyway, most of these have been sold.  But what if, years ago, somebody way smarter than I am had the foresight to say, “In its present form, Sears doesn’t have much of a long-term future.”

Yeah, I know.  If that person is out there, you’d like to meet them, hire them, work for them.  Me too.

That visionary might have suggested that each of Diehard (a battery brand but let’s think of it as auto repair), Lands End, Kenmore, Craftsman, perhaps others each had potential to find life as companies/brands independent of the Sears name.  The challenges of the new consumer and retail market would still have existed but starting with a strong brand is a leg up.  Vans comes to mind.  It was a $400 million public company in trouble when VF bought it.

Let’s say that with the full support of the board of directors and the stock market, Sears spins off these brands and closes the rest of Sears.

Didn’t I just make that sound easy?  Here in the highly inconvenient real world there would be shareholders, a board of directors, all the real estate people who have long term leases with Sears, debtholders who have some of those assets as collateral- well, you get the picture.  The bottom line is it can only happen though a bankruptcy filing where shareholders lose everything, unsecured creditors lose most of what they are owed, store leases can be rejected, and a deal can be made with the secured creditors.  Basically, bankruptcy is a legal process for allocating losses when the assets are no longer worth what people paid for them.

You also must hope that the brands being spun off, either as separate public companies or sold to private equity, haven’t been so damaged by corporate attempts to generate cash flow at any cost that they have lost their cache.  Can you think of any brands in our industry that applies to?

The lesson here is about the dynamics of change.  You need to act sooner rather than later but the realization of the need to do something different often doesn’t happen soon enough and the resistance to doing it is extreme until outside stakeholders force action.