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Sears files for Chapter 11 bankruptcy protection, to close another 142 stores

By Lauren Zumbach • Oct 15, 2018 at 1:01 PM

CHICAGO – Sears Holdings Corp., parent of the Sears and Kmart retail chains, has filed for bankruptcy protection — a last-ditch effort to save an American icon that shaped shopping habits for more than a century.

Chairman Edward Lampert is stepping down immediately from his role as CEO, a post he has held since 2013, and the company plans to close 142 unprofitable stores near the end of the year, in addition to the 46 stores it had already identified. The company did not specify whether the closings would be Sears or Kmart stores or their locations. Three executives will be responsible for managing the company’s day-to-day operations in an office of the CEO.

The chapter 11 bankruptcy filing comes 131 years after Richard Sears moved his business to Chicago, where the watch company would grow to become a retail empire that gave the city its tallest building, employed hundreds of thousands of people and mesmerized children everywhere with its annual Christmas Wish Book catalog. Sears was once the country’s biggest retailer, the go-to destination for everything, from Toughskins jeans to Craftsman tools, Kenmore washing machines, Allstate insurance and Discover credit cards.

The last man standing while storied Chicago competitors like Wieboldt’s, Montgomery Ward and Carson Pirie Scott fell by the wayside, Sears survived the Great Depression, adapted as its shoppers traded catalogs for downtown department stores, and followed customers to suburban shopping malls. But it faltered as discounters, specialty chains and online merchants wooed consumers away in recent decades, and it never seemed to find the niche that would bring them back.

Under the bankruptcy court’s protection, Hoffman Estates, Ill.-based Sears buys more time for a turnaround, one it’s been attempting for years. Despite efforts to cut costs by closing hundreds of stores, Sears has lost more than $11 billion since 2011. In the last two years alone, the company has closed more than 725 Sears and Kmart stores.

Shortly after the bankruptcy filing was made early Monday, the company said it has arranged $300 million in debtor-in-possession financing, which will allow it to continue operating the business and paying employees while it tries to restructure around a smaller group of stores. Sears also said it is negotiating an additional $300 million in financing from hedge fund ESL Investments, the company’s largest shareholder and run by Lampert.

Lampert’s ESL also is in talks to purchase “a large portion of the company’s store base,” and other company assets will be put up for sale in the coming months, Sears said in a news release.

The filing, made in U.S. Bankruptcy Court for the Southern District of New York, lists total assets as $6.937 billion and total debts as $11.339 billion as of Aug. 4.

Sears’ path to bankruptcy follows some of the same missteps as competitors whose names are long gone from storefronts.

After decades of staying a step ahead of customers, corporate leaders — many of whom spent their careers rising through the company’s ranks — were confounded by big shifts in how people shop, shift that demanded bold changes at Sears. Small efforts, like opening smaller stores, offering curbside pickup for online orders, or more recently, selling Kenmore appliances through Amazon, couldn’t make up for the mounting losses.

Lampert, who engineered Kmart’s $11 billion acquisition of Sears in 2005, long insisted the company was “fighting like hell” to remake the iconic department store chain into a web-savvy, membership-focused retailer capable of keeping up with its competitors and with consumers’ expectations. However, the turnaround failed to materialize, sales continued to fall and Sears continued to shrink.

In recent weeks, with a Monday deadline to repay a $134 million debt looming, it became increasingly difficult to see the story playing out any other way.

“When the company was the pre-eminent retailer in the world, they could have responded any number of ways … and they never did anything important enough,” said Neil Stern, senior partner at Chicago-based consulting firm McMillanDoolittle.

But before the company’s decades-long, slow-motion decline came a spectacular rise that started in 1886, with a Minnesota railway agent who decided he’d rather be in the watch business. Within a year, Richard W. Sears had moved his R.W. Sears Watch Co. to Chicago and hired business partner Alvah Roebuck.

By 1895, the company had adopted the name Sears, Roebuck & Co. and its mail-order catalog had grown from a small selection of watches and jewelry to a 532-page book touting everything from shoes and apparel to buggies and bicycles.

Sears didn’t invent mail-order catalogs. Another Chicago retail giant, Montgomery Ward, was using them more than a decade before Richard Sears’ business got off the ground. But Sears saw an opportunity in selling to farmers by mail, cutting out middlemen like rural general stores. The company’s 1896 catalogs billed Sears as the “Cheapest Supply House on Earth.”

The company grew fast, and Chicago was at its epicenter. In 1906, Sears opened a 40-acre complex with offices and a 3 million-square-foot mail-order plant in the Homan Square neighborhood on the West Side — at that time, the largest business building in the world. In August of that year, Sears sold stock in the company to the public.

In the 1920s and ‘30s, rural customers were moving to cities, where they could shop in rapidly growing chain stores rather than ordering from catalogs. The Homan Square plant also was the home of Sears’ first store, which opened Feb. 2, 1925, complete with an optical shop and soda fountain. Seven more stores followed that year, including one on Lawrence Avenue in Chicago’s Ravenswood neighborhood that would remain open for more than 90 years before closing in the summer of 2016.

By 1931, the company’s stores outsold its mail-order business. In March 1932 — three years into the Great Depression — Sears unveiled its 381st store and first downtown department store: a $1 million emporium on State Street between Van Buren Street and Congress Parkway, where Robert Morris University now operates. Shoppers could dine at lunch counters and a soda fountain, visit a dentist or pet shop, and buy anything from accessories and apparel to appliances, tents and tombstones. Furniture was displayed in a 14-room model bungalow.

More than 151,300 people visited on opening day, overwhelming the 20 police officers assigned to handle crowd control, who “bobbed about helplessly,” the Tribune reported at the time.

Store openings halted briefly during World War II. After the war, as Americans moved to the suburbs, Sears would anchor the regional malls that sprang up to serve them.

In 1973, Sears moved its headquarters from Homan Square to a new building exemplifying Sears’ ascendance: the 110-story Sears Tower. Since renamed Willis Tower, it was the world’s tallest building for more than two decades. Company watchers say it also roughly marked Sears’ pinnacle.

But it was also during that time that changes in shopping habits were beginning to take shape that would ultimately overwhelm Sears and other traditional department stores.

The 1960s and ‘70s saw the launch and growth of discount chains like Wal-Mart, Target and Kmart that would bring shoppers out of the mall and into big-box stores. Sears failed to react quickly.

James Schrager, clinical professor of entrepreneurship and strategy at the University of Chicago’s Booth School of Business, blames a shortage of strategic leadership. Executives make their way up the ranks of a major company on the strength of their ability to manage a business, but good managers don’t always make good strategic thinkers, he said.

“They had good managers running the business as it was, but they couldn’t say, ‘The world is changing,’ “ he said.

Instead, the company shifted its focus away from its roots, branching into financial services in the 1980s by acquiring the Dean Witter Reynolds Organization and Coldwell Banker & Co. real estate and introducing its Discover credit card.

As Sears’ financial businesses grew, its retail business struggled. In the early 1990s, it reversed course, spinning off Dean Witter and Allstate Insurance, and selling its stakes in Coldwell Banker and the Sears Mortgage Banking Group. It handed control of the retail business to an executive brought in from outside the company, despite a history of preferring leaders who came up through Sears’ ranks.

The company traded its downtown Chicago headquarters for suburban Hoffman Estates, taking 5,000 jobs out of the city in 1992; cut its iconic but unprofitable general catalog; and rolled out the $40 million “Softer side of Sears” ad campaign, designed to win over female shoppers and boost apparel sales.

Business rebounded, but missteps followed, and shoppers continued leaving for lower-priced, trendier discounters outside the mall.

Despite some experimentation, Sears had a hard time regaining its relevance.

In 2005, Sears merged with another struggling retailer, Kmart, in an $11 billion deal engineered by Lampert, who bought the discount chain after it filed for bankruptcy in 2002.

Lampert had made his name in finance, not retail, as the founder of hedge fund ESL Investments. Industry watchers accused him of focusing on cost-cutting at the expense of investing in stores.

Meanwhile, newer competitors continued encroaching on areas that had once been Sears’ strengths. Home Depot and Lowe’s moved into appliance sales, and with the rise of e-commerce, department stores weren’t the only place customers could go to find a wide range of goods in one place. Middle-market, mall-based chains that tried to sell all kinds of goods to all shoppers fell out of fashion, and Sears never found a new niche, said Greg Portell, partner at consulting firm A.T. Kearney.

“Once you lose your customers, once they’re not in the store anymore, it’s the end of the game,” the Booth School’s Schrager said. “You have to spend a lot of money to try to get them to come back.”

Sales shrank, and so did Sears itself. The company spun off Sears Hometown and Outlet Stores in 2012 and Lands’ End two years later, and sold the Craftsman tool brand to Stanley Black & Decker last year for an estimated $900 million. Lampert himself made a bid to buy the Kenmore appliance brand earlier this year.

By mid-2016, the number of employees at Sears’ Hoffman Estates headquarters and Loop satellite office fell below 4,250 — the minimum it needed to qualify for state tax breaks it negotiated in 2011 after threatening to leave Illinois.

Struggling to stay afloat, Sears also slashed its vast real estate holdings, raising about $2.7 billion in 2015 through the sale of 235 stores and its stake in joint ventures involving 31 more to real estate investment trust spinoff Seritage Growth Properties. Lampert is both a stakeholder in Seritage and its chairman.

The retailer has closed hundreds of stores in recent years as it worked to cut costs while property owners sought new, higher-paying tenants.

Among the stores that closed: the Sears at Six Corners on the edge of Chicago’s Portage Park neighborhood, the company’s last department store in the city where it built its retail empire. The store, which opened in 1938, shut down in July and is expected to be redeveloped as a residential and retail building.

There were still 866 Sears and Kmart stores in the U.S. as of August. Just three years earlier, the store list was almost twice as long.

Sears’ sizeable assets, combined with Lampert’s financial maneuvering, gave the company a long runway as it failed to turn an annual profit since 2010. But as time passed with little sign the turnaround was taking hold, bankruptcy began to appear all but inevitable.

For years, Lampert — who, along with his hedge fund, lent Sears $1.6 billion over the past 2 ½ years — insisted the company was committed to a turnaround, though he acknowledged it was taking longer than expected. But in September, he pushed for a plan to stave off bankruptcy, calling for restructuring nearly $1 billion in debt and offering to buy assets including the valuable Kenmore brand. To critics, the offer was further evidence that Lampert was carving out the most valuable parts of the flagging business for himself.

Ultimately, the plan failed to find support from either creditors or the company’s board.

Sears outlasted rivals like Montgomery Ward and Bon-Ton Stores, parent of the Carson’s department store chain. But as it continued to find ways to stay in business by slowly shrinking, it never committed to the kind of major change that would have let it reinvent itself again, said A.T. Kearney’s Portell.

“They continue to keep the business alive through various financial engineering moves,” he said. “That’s a sign they don’t have a solution for the fundamental business itself.”

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©2018 Chicago Tribune

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