SHLDQ Sears Holdings Corporation (CE)

By Suzanne Kapner and Lillian Rizzo 

Billionaire Edward Lampert won a bankruptcy auction for Sears Holdings Corp., keeping the struggling department store chain from shutting all its remaining stores, according to a person familiar with the matter.

Mr. Lampert, a hedge fund manager who steered Sears into bankruptcy, prevailed by sweetening his $5 billion offer over several days of negotiations with Sears's board and creditors, the person said.

His last-ditch rescue plan would keep roughly 400 stores open. The offer beat out a bid, which was supported by most Sears creditors and landlords, by Abacus Advisory Group LLC to close all the stores and sell the inventory.

Sears' longtime leader, who is also its largest creditor and biggest shareholder, has scrambled to retain control of the company since it filed for protection from creditors in October. He stepped down as chief executive at the time, but remained chairman.

The 126-year-old Sears was once the dominant retailer in America. It will emerge, though, from bankruptcy as a shadow of its former self with about 425 locations, making it difficult to compete against healthier chains with thousands of locations apiece -- such as Walmart Inc. and Home Depot Inc. -- as well as with the growing omnipresence of Amazon.com Inc.

"I don't know what's left to shop there for," said Patrick Garrett, a retired consultant. Ever since the Sears near his home in Calabasas, Calif., closed in November, he has visited Lowe's Cos. for Craftsman tools, Best Buy Co. for appliances and J.C. Penney Co. for clothes. "I'd have to drive 40 miles to get to the nearest Sears now," the 70-year-old said.

Retailing has become a game of scale to cover the fixed costs of operating stores, warehouses, e-commerce sites and a supply chain that knits them all together. Sears, by contrast, has been shrinking for years by closing stores and shedding businesses and brands, including the Lands' End Inc. clothing brand and Craftsman tools.

At its peak in 2006, a year after Mr. Lampert took control by merging Kmart and Sears, the company operated more than 2,300 stores. In October, it entered court protection with fewer than 700 locations and had racked up seven years of losses. Annual sales had shriveled to $16.7 billion, down from $49 billion in 2005.

At the time of the Kmart merger, Mr. Lampert was a Wall Street hotshot who was often compared with legendary investor Warren Buffett. The downfall of Sears hasn't only damaged the company's reputation, but Mr. Lampert's as well.

Now, he has what might be his final chance to prove that his contrarian strategy is the right one. He has long argued that as retailing moves online, chains need fewer big-box stores. His mantra for Sears is to turn it into an "asset-light" company.

Yet, there are few precedents of big retailers shrinking their way to prosperity. A rare exception is Federated Department Stores Inc., which filed for bankruptcy protection in 1990 as part of Campeau Corp., emerged and went on to swallow up rivals to become the current Macy's Inc.

"Sears is so far below critical mass," said Steve Dennis, a consultant and former Sears executive, who left the company before Mr. Lampert took control. "What is it about having fewer stores -- which doesn't allow you to spend as much on marketing or have supply-chain efficiencies -- that suddenly makes it a successful strategy?"

In recent years, chains such as Toys 'R' Us Inc., Sports Authority Inc., Bon-Ton Stores Inc. and RadioShack disappeared after filing for bankruptcy protection. Others such as Mattress Firm Inc. and Payless ShoeSource have re-emerged from bankruptcy after shedding debts and shutting hundreds of stores.

Mr. Lampert also is buying the Kenmore and DieHard brands, the company's Sears Auto Centers and its Home Services business, along with inventory, intellectual property and other assets. The rescue plan will save as many as 50,000 jobs.

"Our proposed business plan envisages significant strategic initiatives and investments in a right-sized network of large format and small retail stores, digital assets and interdependent operating businesses," Mr. Lampert wrote in a Dec. 28 letter to Sears's financial advisers. "We believe that our strategy will enable Sears to prosper in an integrated consumer and retail landscape."

His bid, the only offer to keep Sears open, overcame opposition from unsecured creditors, who initially argued they would recover more from liquidation. They objected to the fact that $1.3 billion of Mr. Lampert's offer was in the form of forgiveness of debt owed to his hedge fund ESL Investments Inc.

The unsecured creditors also fought a stipulation that released Mr. Lampert and others from liability related to the asset sales and spinoffs that they say might have siphoned value away from the company. An ESL spokesman said the transactions were approved by independent directors and were designed to raise money for Sears until it could return to profitability.

To overcome resistance, the hedge-fund manager raised his offer by $600 million last week. The revised offer included no new cash but promised to assume liabilities that could drive the retailer further into debt. It also included an additional 57 real-estate properties as well as accounts receivable and inventory.

Not everyone views Sears as a lost cause. Some of its surviving stores are in healthy malls, and other locations in rural areas are facing less competition as rivals have closed stores or gone out of business. But big changes need to happen to make Sears viable, analysts say.

"We think there is a path for them to survive, but they've got to dump apparel and devote the whole store to hard lines," said Craig Johnson, the president of consulting firm Customer Growth Partners. "Sears still has a lot of credibility in appliances, and they can rebuild that business."

Former executives say that idea was considered years ago but deemed unfeasible, because consumers purchase big-ticket items such as appliances too infrequently. It would also be dependent on Sears's ability to reduce the size of its stores, something it has been trying to do by leasing excess space to grocery stores and competing retail chains.

A blueprint for the company's future could lie with a remodeled store in Oak Brook, Ill., that opened in October. At 62,000 square feet, it is about one-third of its original size. The shrunken store no longer sells consumer electronics and jewelry, although most other product categories are available.

Perhaps a bigger stumbling block to Sears is Mr. Lampert himself. Although he has poured money into the company through short-term loans and said he has tried to do everything to keep it afloat, his contrarian approach to running the retailer -- including a reticence to upgrade stores without the promise of a return on that investment -- has proven disastrous.

"Any model with Eddie involved is a no-go," Mr. Johnson said.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com and Lillian Rizzo at Lillian.Rizzo@wsj.com

(END) Dow Jones Newswires

January 16, 2019 06:22 ET (11:22 GMT)

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