SHLDQ Sears Holdings Corporation (CE)

By Suzanne Kapner, Lillian Rizzo and Soma Biswas 

Late Tuesday night, billionaire Edward Lampert's bid to keep Sears Holdings Corp. alive was all but dead. A few hours later, the hedge-fund manager walked away with what he wanted: continued control of the retailer he ran into bankruptcy court.

By kicking in an extra $150 million at the last minute, the Sears chairman's $5.3 billion offer trumped a plan by some creditors to liquidate the unprofitable company and close all its remaining stores, said people familiar with the matter. Unhappy with the outcome, those creditors could still mount a legal challenge.

Mr. Lampert, who is also Sears's largest creditor and biggest shareholder, will own all its real estate and hold on to the Kenmore and DieHard brands. The former chief executive is also seeking to be shielded from potential lawsuits over previous asset sales and spinoffs that creditors allege siphoned away value, the people said. Mr. Lampert has denied the claims.

Whether Mr. Lampert's victory is also a victory for Sears itself is less certain. The deal will keep open about 400 stores and preserve as many 50,000 jobs, but the company continues to lose money and lacks the scale to compete effectively with Amazon.com Inc. and Walmart Inc., analysts and executives say.

The already battered Sears brand has been further tarnished by going-out-of-business sales at roughly 200 stores since the company filed for chapter 11 in October. The company is bleeding cash at such a rapid rate that Mr. Lampert will likely have to close more stores after the bankruptcy case, some of the people said.

"This deal is simply putting off the inevitable," said Erik Gordon, a professor at the University of Michigan's Ross School of Business. "For Sears to survive over the long run, it would have to be either much larger or much smaller."

The rescue plan must be approved by bankruptcy Judge Robert Drain at a hearing set for Feb. 1 in White Plains, N.Y.

Mr. Lampert must also get approval from the Pension Benefit Guaranty Corp., the government's pension insurer. The PBGC is likely to want proceeds of any further asset sales to cover Sears's pension liabilities, one of the people said.

Although Sears stood atop American retailing for most of the 20th century, it has struggled with a shift to online shopping and the rise of discounters. The company, which also owns the Kmart chain, posted seven straight years of losses and closed hundreds of stores. Yet, it was still one of the biggest retailers to file for chapter 11, with more than $7 billion in assets.

Some retailers such as Mattress Firm Inc. and Payless ShoeSource have re-emerged from bankruptcy after shedding debts and shutting hundreds of stores. Others such as Toys "R" Us Inc. and RadioShack have disappeared. Still others, including Wet Seal and Eastern Mountain Sports, emerged only to wind up back under court protection.

"I don't know what's left to shop there for," said Patrick Garrett, a 70-year-old retiree in Calabasas, Calif. Ever since the Sears near his home closed in November, he has visited Lowe's Cos. for 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," he said.

Retailing has become a game of scale to cover the fixed costs of operating stores, warehouses, e-commerce sites and a supply chain to knit 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 chain 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. It entered court protection with fewer than 700. Annual sales had shriveled to $16.7 billion, off 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, Mr. Lampert 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, 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?"

One path for Sears to survive could see it become even smaller. Craig Johnson, the president of consulting firm Customer Growth Partners, said Sears would need to shrink to about 300 stores, focusing on the Upper Midwest and Sunbelt, where the retailer is strongest. Mr. Johnson also said Sears should exit apparel and focus on appliances and tools.

"Sears still has a lot of credibility in appliances, and they can rebuild that business," Mr. Johnson said.

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.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com, Lillian Rizzo at Lillian.Rizzo@wsj.com and Soma Biswas at soma.biswas@wsj.com

(END) Dow Jones Newswires

January 16, 2019 19:40 ET (00:40 GMT)

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