Sears files for bankruptcy after years of turmoil
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They didn’t open their first brick-and-mortar store until 1925, but the catalog operation was still going strong for decades after that. However, they mis-judged the future, and shut it down in 1993. Amazon was founded in 1994. Sears had all the logistical knowledge of how to sell and deliver billions of dollars of consumer products at scale; they should have been Amazon, but pivoted away at exactly the wrong moment.
> "The mall is still an incredibly powerful draw," Mr. Martinez said. "Some of our better-performing stores are there."
But the writing was already on the wall:
> Traffic in malls has slowed somewhat in recent years, but analysts said the company had little choice but to focus on its mall stores, which are its most profitable.
Arthur C. Martinez was head of Sears from 1992-2000[2] and known as "the person who saved Sears". Their stock price kept climbing until around 2007, and has been on a downwards trajectory ever since then.
1. https://www.nytimes.com/1993/01/26/business/sears-eliminatin...
They had all the pieces in place and still dropped the ball.
As Sears closes hundreds of stores and considers bankruptcy, Lampert will likely come out ahead. He enjoyed fees from all the lending to Sears, and he’ll recoup more money in any restructuring, even if Sears has to sell off inventory to do it. As a shareholder of Seritage, Lampert’s hedge funds can profit from higher rents charged to new retail outlets that move into the shuttered Sears locations." [1]
[1] https://newrepublic.com/article/145813/cause-consequences-re...
It can't be as simple an algorithm as:
1. Buy a company
2. Spin off major assets into another company
3. Have the original take debt and pay the money to the spinoff
4. Bankrupt the original, but keep the healthy spinoff without paying any of the debt
5. Profit!
... can it?
It's also ridiculously destructive and abusive to all except the asset stripper.
Barbarians at the Gate is a classic business book about such a case (the takeover of RJR Nabisco).
It also functioned as a tax dodge: in the unlikely event of Maplin making an operating profit, the interest repayments would not have been taxable whereas other means of profit-taking would have been.
While that allows for some tax avoidance, in the grand scheme of things it does not allow for a lot.
I asked this same question of my accounting prof in grad school. His answer was "You guys are very good at coming up with ways to commit fraud". Basically shareholders will sue the crap out of you - diverging debt is a very careful and meticulous process, and bag holders have legal recourse to come after you.
Individual shareholders have contractual rights that are guaranteed by the shareholder's agreement with the corporation, and shareholders will sue if there is negligence or other violations of this agreement. There are also varying degrees of control/rights depending on the class of equity - it's one of the reasons Warren Buffet only buys preferred stock.
There are plenty of articles over the past few years on the impending demise of Sears. It took just long enough to sink for all the actual assets to be transferred to separate profitable companies while creditors (e.g. suppliers and customers with unfulfilled orders) are left speaking to the bankrupt shell.
This trajectory they've been though on has been a long time coming.
wow
"The company has roughly $5.6 billion in outstanding debt"
wow!
That got me to google. As it turns out, only 18 out of the 500 s&p 500 companies don't have ant dept. That is crazy to think about.
Leverage works both ways, so to my old fashioned way of thinking there's a lot to be said for not getting over extended. Leaving some profit on the table beats shutting down.
Either way the board members will probably okay, and most of the shareholders probably didn't have their live savings all in that particular company.
I guess this is why investing is a risk vs reward trade-off. If you're of the opinion that leaving some profit on the table beats shutting down, then you probably want to invest heavily in blue chip stocks. Others might have a different risk preference.
Notice that the author in your link states he's long on AAPL and MSFT, both of which have somewhere around $90 billion in debt last I heard.
I'm BigCo and am valued at two billion dollars. My profits are $100m a year. ($100m x 20 = $2bn)
There is a company I could buy that is complementary to my business. It's generating $20m a year in profit. The price is $140m.
Spending $140m (6 times earnings) will approx. increase your market cap by $400m (20 times earnings) -- making every shareholder richer. So what do you do? You go and raise the debt and make the acquisition if you think you can run the business.
Debt in itself isn't bad. It's a lever that makes good decisions great, or bad decisions horrible. It needs to be used conservatively. Most large companies should use both longer term and shorter term debt in their businesses.
If you can make more money running your business than lending money, then you can also make more money than it would cost to borrow money. If you are making 10% on your $100 and someone offers you another $100 for 5%, then it's a pretty good deal if you can expand your business. Just to make it clear, 10% on $100 is $10 and 5% on $100 is $5 dollars. So by borrowing, you expand your business and make $15 instead of $10 -- increasing your profits by 50%.
Obviously, I chose easy numbers to make the math obvious, but generally it works. The thing you need to ask yourself before you borrow money is, "What are the chances that I can make that I can expand my business with that money" and "What are the risks". But generally speaking, healthy companies can increase profits if people keep offering them more money to work with. There are a few exceptions that have so much cash that they don't know what to do with it. Believe it or not, that is considered to be a big problem.
Even companies with large cash reserves will take out loans when the interest rates are less than the internal rate of return of spending that loan. Most people take out loans for personal things, not increasing their own personal rate of return.
No. The idea of the company is to pay out the $100 to shareholders. You take on debt if that makes more financial sense to the shareholders.
A prime example is AAPL and their dividends. They could repatriate $1 billion from overseas accounts and pay 10% ( or $100 on taxes ) and then pay $900 million in dividends to the shareholders. Or they could keep their $1 billion overseas, borrow $1 billion at 1% interest rate and pay $1 billion to shareholders.
Debt makes sense for corporations because you are able to shift profits to the shareholders and risk/liabilities to the company. Ultimately, that's why companies exist. To shield shareholders from liability and to serve as a vehicle to transfer profits/wealth to the shareholders.
Being all equity doesn't prevent you from insolvency. You still have money that you owe, like salaries.
I’m genuinely saddened for the people at my local sears that are left. They always were kind.
They’ll be looking for jobs as fast as they can I expect. I hope they get them.
Over a decade ago I was frustrated with the sharp decline in Craftsman's tool quality. At one point I had exchanged a malfunctioning .5" drive rachet using their famous lifetime warranty, only to have the noticably inferior replacement start malfunctioning months later. It was already clear to me back then Sears was done.
https://s.thestreet.com/files/tsc/v2008/photos/contrib/uploa...
Sometimes, I wonder what might have been if Sears had never gotten out of the mail order business, and had adapted reasonably to the advent of the Internet. I like to imagine they wouldn't have been as disgusting as Amazon.
This was a service they offered back in the 90's and were subsequently litigated for it in some cases as they hadnt disclosed the full operational process to customers before the work was agreed upon. Basically a tire alignment at Sears also included wear leveling. Sears would pull your tires off, spin them in a special laser mapping machine on the wheel, and grind down high spots in the tire to "balance" it. this worked to remove flat spots in the tires but the technology could actually increase the chance of a bubble or blowout in certain conditions.
Then theres Craftsman tools. Worthless garbage from 2000 onward, but if you managed to find yourself a set of genuine Craftsman sockets or wrenches from the good old days then you're officially the dreamiest grease monkey in the shop. These wrenches were practically strong enough to tear the hinges off St. Peters gates. They were the gold-standard that settled every east german/west german tool argument from an old timer.
Every now and then you could find an okay product at a decent price in KMart, but the writing has been on the wall for the longest time. Now both of these stores are gone from our area.
I can remember how different these places were when I was a kid/teen, though, and interesting to watch, as the person quoted in the article says a "slowest train-wreck" happen to what used to be popular brands (at least Sears, not sure if KMart really had the same status or not)
To your question, Shares will be delisted to pink sheet under $SHLDQ.
But yes, you're screwed. In general you might get some money back if the assets they can sell on a firesale exceed the debts, but that'll be pennies on the dollar.
But if the company had more debts than assets you've lost your money, unless you're among the first in line for debt payout, but that'll go to "innocent bystanders" like the suppliers of Sears first, not investors who just made a bad investment decision.
Sears was started in the 1890's as a mail order business to compete against local general stores (think of all those westerns with "General Store" on one of the buildings - they were Sears competition). The guys Sears worked on railroads, and he saw all the middlemen tacking on markup as products moved west in the distribution chain until they go to the stores.
So he started a catalog, the famous Sears catalog in 1893. It was 300 pages, and had everything. Now think about this for a second. In 1893, you had a mail order catalog that sold pretty much everything that was for sale in 1893 - machinery, bikes, toys, dry goods, etc. Does this sound like another business you know?
So every year the catalog comes out, and after a few decades it becomes an American institution. For much of the population, the Sears catalog includes a decent quality, low cost version of every mass market nonperishable consumer product in the United States that wasn't a car (they did sell those at one point very early on. They also sold mobile homes too, up to the 1940's).
You could pick anything from the catalog, mail in your order with a check, and in a few days/weeks you'd get it. If you didn't like it, for any reason, Sears had a "satisfaction guaranteed" policy that you could return it at anytime for a full refund.
Now pay attention, because here's where it gets good.
In 1931, Sears starts an insurance company - Allstate. It buys financial investment firm Dean Witter and real estate broker Coldwell Banker in 1981. In 1984 it starts a joint venture with IBM called Prodigy, an online computer service, sort of a prototype AOL. In 1985, Sears launches a new major credit card, the Discover card. For the next eight years, the only credit card you can use at Sears is Discover.
At this time, the early 80's Sears is the largest retailer in the U.S.
By 1993, the 100th anniversary of the Sears Catalog, Sears had built up considerable goodwill in the mind of consumers. They weren't the lowest price, but they had what you needed at good prices and the service was second to none. They had real estate, insurance, financial planning, and all at good prices with top customer service.
This is 1993. In quite possibly the greatest example of corporate shortsightedness, Sears shut down it's mail-order business in a cost cutting measure. It spins off Allstate that same year, and soon dumps Dean Witter and Coldwell Banker.
In 1993, Sears had the most extensive and sophisticated mail-order retail operation on the planet and they closed it.
Two years later, Amazon.com launched, and was soon selling everything that sears sold through it's catalog. By the late-90's Walmart's push of low-cost China imports killed Sears retailing. Online banking takes off. Credit card use surges as mail order and retail purchases are shifted online.
Sears had its own computer network in 1993. They had access to IBM, they should have understood the power of the internet. All they had to do was shift the catalog online instead of killing it off, promising in store returns and the same Sears satisfaction guaranteed. Discover could have been the credit card of choice for security and protection online. Dean Witter could have been what Schwab, E-Trade and Ameritrade became. Back in the mid-late 90s when many people were hesitant to use credit cards online, Sears could have been a familiar face online.
Sears could have used the Catalog to create searscatalog.com or wishbook.com and owned online retailing, owned amazon's business, owned online brokerage and banking, but they blew their chances to save a few bucks in 1993. They could have made huge profits in the early 2000s real estate boom by leveraging that success with their real estate arm (imagine if Amazon sold houses).
By my estimates, Sears could have spent about $200 million in 1994-1996 to develop and promote retailing and financial services online, and they'd be reaping billions.
Sears could still be a huge American company today, instead of a historical footnote.