Sears Has Filed For Chapter 11 Bankruptcy, But Its Future Remains In Question

Sears—once the largest retailer in the U.S.—has filed for bankruptcy protection early Monday. (Photo by Justin Sullivan/Getty Images)

As expected, Sears Holdings Corp.—once the largest retailer in the U.S. that traces its roots back to 1886, introduced the popular Kenmore appliance and Craftsman tools and pioneered the concept of mail order catalogs—has filed for bankruptcy protection early Monday. It's another sobering example that an established name is not enough capture today's unforgiving consumers who have a myriad choices.

Sears plans to close another 142 money-losing stores by the end of this year in an attempt to return to profits after years of losses, a glaring underperformance at a time when the improved economy has led many retailers to report their best results in years. But the big question is, can the Chapter 11 filing alone keep Sears from repeating the fate that’s fallen on the likes of Toys “R” Us, Circuit City or The Sports Authority, which eventually liquidated their stores?

Sears said its namesake and Kmart stores, as well as its online business and Shop Your Way membership reward program, will operate as normal as the industry heads into its critical holiday selling season. Sears said it’s also working with vendors to “maintain” inventory levels and “ensure timely product delivery.”

Eddie Lampert, whose hedge fund ESL Investments is the company’s largest shareholder and engineered the 2005 merger of Sears and Kmart, has stepped down from his role as CEO. A newly created Office of the CEO, made of Sears’ finance chief and two other executives, will manage the day-to-day operations, Sears said. The company also has named a chief restructuring officer.

"Over the last several years, we have worked hard to transform our business and unlock the value of our assets," Lampert, who remains chairman, said in a statement. "While we have made progress, the plan has yet to deliver the results we have desired, and addressing the company's immediate liquidity needs has impacted our efforts to become a profitable and more competitive retailer."

The thing is the transformation that Lampert has envisioned may simply have a false premise. For years, Lampert has been faulted by Wall Street for refusing to make the kind of capital investment behind stores that rivals like Walmart and Target have emphasized as key to driving traffic and satisfying increasingly hard-to-please consumers.

In response, Lampert had said that there was no concrete evidence that major store-remodeling investments yielded returns. He had also pointed to a “significant” investment the company had made after the 2005 Sears-Kmart merger, which had failed to generate the justified returns, and said “increased marketing spend” doesn’t automatically generate higher sales or profit, again defying general industry belief.

A Missed Opportunity Online

Instead, a big part of his retail-related investment focus had been online. Lampert pitched the Shop Your Way membership reward program the company created in 2009 as key part of its “integrated retail” strategy to help drive both in-store visits and online sales and allow Sears to study the way customers shop. Sears was ahead of many other retailers in creating a mobile app and its online was a business once outperformed other retailers. In fact, Sears was named a Mobile Retailer of the Year in 2011 before other rivals (Walmart, Target) claimed the top honor later on.

In his shareholder letter in 2013, Lampert described Sears as a “membership company,” adding at the time that those in its Shop Your Way program topped 60% of its transactions, with members spending more than other shoppers. Fast forward to today and Sears has squandered the advantage it once had. Sears’ namesake brand’s share in the U.S. e-commerce market has fallen to No. 27 last year from No. 17 in 2012, according to Euromonitor. Its Kmart unit saw its share in the online retail market declining to No. 53 from No. 27 during the same period.

Visits to Sears.com totaled just 30.3 million in September, less than even that of the also troubled JC Penney, which generated nearly 40 million visits. In comparison, traffic to the better-performing Kohl’s totaled 62 million visits in September, according to Hitwise. Home Depot and Lowe’s, competing with Sears on appliance sales, posted traffic five times and nearly four times that of Sears, respectively. As for the king of online? Amazon's September traffic was 1.7 billion visits.

Meanwhile, Rakuten Intelligence data showed that Sears.com’s e-commerce share had declined to 0.2% last month from a peak of 0.4% in November 2016, while Kmart’s online share, if any, was so small it showed up as nonexistent.

“The journey to running a member-centric company on a consistently profitable basis has taken far longer than we expected,” Lampert said in a blog post in September. “Like many other brick-and-mortar retailers, Sears has encountered very substantial obstacles to profitability as a result of the enormous changes to the retail environment caused by the ever-increasing trend to online shopping.”

Only blaming the growing shift to online shopping wasn’t a good enough excuse. Online was supposed to be bright spot for Sears—and it was at one point. Even as retailers like Walmart and Target are taking a hit on profit margins by doubling down on things like fast online delivery, they are showing those investments, coupled with continued store updates, have paid off. Walmart, for instance, in August credited its better-than-expected 40% jump in online sales as key to boosting total Walmart U.S. comparable sales and traffic as it capitalized on its brick-and-mortar store fleets as both a pick-up and online distribution hub.

At a time when "experiential retail" and being top of the consumers' mind are among big industry buzzwords, Lampert's reluctance to spend on areas like stores or marketing has simply given shoppers an easy enough to reason to simply bypass or altogether forget about Sears as a shopping choice.

A smaller footprint alone—if the company emerges from bankruptcy protection—won't bring new shoppers in or convince its existing shoppers to stay. The Chapter 11 itself marks just the beginning of a tall order ahead for Sears.

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