There can be few bleaker testaments to the beleaguered condition of US retail than the Sears department store in Flatbush, Brooklyn. Once a flagship of the world’s largest retailer, the landmarked art deco building was opened in 1932 by Eleanor Roosevelt, who made the first purchase ever in this location, “a pair of baby booties”, according to the Brooklyn Eagle. There’s little of that historic legacy on display today.
There is just one entrance open at the store now. The walls are a dirty beige and much of the merchandise sub-discount. Yet many of the shoppers said they were pleased to come and browse. Unlike hundreds of shuttered stores across the country, it is at least still in business.
“It’s been here for so long. It’s like a staple of the neighborhood,” said Waverly Atkins, who’d come to buy a new filter for her refrigerator. “I’d miss it if it were gone.”
Last week, Sears narrowly avoided a deadline for liquidation after a New York bankruptcy judge permitted Eddie Lampert, whose hedge fund ranks as Sears’ biggest shareholder and creditor, more time to improve his offer for the company’s assets, another step in his decade-long, seemingly quixotic, effort to keep the ailing retailer afloat.
On Monday the company’s fate will be decided at an auction when Lampert’s now $5bn bid will go up against liquidators who are planning to shut the retailer down.
Sears has been teetering on the edge of collapse since October when Lampert, who holds around $2.5bn of the $5.5bn debt load, placed the 133-year-old company in bankruptcy protection.
A company representative said the new offer – which includes an additional $600m to cover severance costs and suppliers’ bills – provided “substantially more value to stakeholders than would be the case in liquidation and is the only option to save an iconic American retailer and up to 50,000 jobs”.
“We believe in Sears and will continue to do everything we can to ensure that it has a profitable future.”
Few others do. Representatives for Sears did not immediately accept the new offer, leaving shoppers like Atkins wondering whether the warranty would be honored if they bought a Sears-branded appliance. Bad publicity, others said, did not help foster confidence in Sears.
If creditors reject Lampert’s offer, the only bidders left plan to shut Sears and Kmart, the discount firm Lampert merged Sears with in an $11bn deal in 2006, and sell off its assets, primarily its real estate.
That would come as a blow to Sears’ longtime customers but in the age of Amazon, as US bricks-and-mortar chains struggle to compete, it will come as little surprise against a backdrop of what has been called “America’s retail apocalypse”.
“It’s a tricky situation,” noted one Sears customer, who asked to be referred to as Miss Bennett, as she perused a women’s footwear aisle. To survive, she said, “they’d have to come with something new. What that is, I don’t know.”
The grave condition of US retailers was underscored again last week when, despite a booming economy and record consumer confidence, major US retailers recorded disappointing results from the holiday period.
Some of the biggest US retailers, including Macy’s, Kohl’s and Target, saw $34bn wiped from their market value. Shares in Macy’s dropped 17.7%, their biggest one-day sell-off on record, after the department store cut its sales and earnings guidances having recently upgraded them.
The pessimism on Wall Street spread quickly from department stores to virtually all retail sectors as investors discounted retail’s ability to grasp the changes coming as consumers shift to online shopping.
But while online shopping has hurt Sears, its problems are in some ways exceptional. Through the 60s,70s and 80s, customers went to Sears for appliances and workwear but they lost touch with that customer, says Hitha Herzog, retail analyst at H Squared Research, who describes Sears’s problems as “a near-perfect storm as to what can go wrong with a retailer”.
“There was mismanagement on Lampert’s part getting the correct product mix into the stores, then they couldn’t figure out who their customer base was and didn’t cater to that base, and they had flagship stores in malls that are losing foot-traffic like crazy.”
The collapse of many of America’s chain stores is not as simple as blaming Amazon.
“In general, people don’t want to go to these massive department stores any more,” says Herzog. “When they want specific products, they go directly to the brand or to the manufacturer.”
One common factor for these troubled chains is that they are overloaded with debt – often from leveraged buyouts led by private equity firms. Sustaining that debt in an economy that may well be heading for recession can only become harder.
In September, Toys R Us surprised investors by filing for bankruptcy – the third-largest retail bankruptcy in US history – after struggling to refinance just $400m of its $5bn in debt.
According to Fitch, the amount of retail debt set to mature rose from $100m in 2017 to $1.9bn in 2018. From 2019 to 2025, it will balloon to a yearly average of almost $5bn.
And the demand for refinancing in the retail sector comes just as credit markets tighten. Part of the reason Sears filed for bankruptcy in October was that Lampert found he could no longer raise capital.
As Sears employees and creditors wait for the outcome, the US faces another problem: what to do with the real estate vacated by chains.
Even before the e-commerce boom, US retail was considered massively overbuilt – a result of the big-box era that saw huge stores built across the country in almost every category of retailing. According to the International Council of Shopping Centers, 6,752 locations were scheduled to close through the first nine months of 2017. Of those, 550 were department stores, equating to 43m sq feet of retail space, or about half the total. This year’s figures may well be higher.
Tens of thousands of low-paid jobs will go with those closures. States like Ohio, West Virginia, Michigan and Illinois have been among the hardest hit. But others which have relied on retail job growth, including Nevada, Florida and Arkansas, may now feel the impact.
That leaves mall owners struggling to find opportunities to bring foot traffic back to their locations. But even they don’t want department stores as their flagship tenants.
In court papers, mall owners Simon Property Group and Brixmor Property Group said Sears’ plan to keep stores open rather than pursue going-out-of-business sales was “an unjustified and foolhardy gamble with other people’s money”.
According to Herzog, mall owners are open to offers. “Those big-box stores are probably going to turn into entertainment centres, maybe service centres, gyms or hospitals. Maybe there could be a real estate play on housing. A go-cart track. Anything is possible, but we know for a fact it probably won’t be a retailer in.”