While Sears has been on its last legs for what seems like forever, there is still a universe of suppliers that, to one degree or another, depend on the retail chain. And in most cases, their degree of reliance will likely forecast if they themselves can remain standing or whether they too could end up bottoming out.
In the latest round of earnings calls, apparel CEOs have revealed the ways in which the Sears bankruptcy has affected their businesses.
Jeans at VF Corp., maker of Lee and Wrangler, had a tough quarter, and retail bankruptcies like Sears only served to compound the issues. For Q3, the company reported a 7 percent decline in sales, and it anticipates a full-year decline of 1 percent to 2 percent in the jeans category, led by a 3 percent to 4 percent dip in Lee.
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For Iconix, which sells Joe Boxer, Cannon and Bongo brands to Sears, the company was dinged with a $8.2 million bad debt expense due to the retailer’s bankruptcy.
Hanesbrands, too, sees losses ahead. The company reported it will likely lose $15 million in the fourth quarter, or 1 percent of its overall sales as a direct result of the Sears bankruptcy.
While the numbers continue to add up surrounding Sears’ filing, these companies were still supplying the department store chain because there was clearly an upside, even as things went downhill.
Allan Ellinger, co-founder and senior partner of financial advisory firm MMG Advisors, said most of his clients had long since weened themselves off of any Sears dependency, though some had done the math and figured out a way to continue the relationship, even as the writing on the wall became a blinking neon sign.
“There are those companies who have ratcheted down the amount of goods they sell to Sears and were willing to take a chance on their gross margin, meaning they would try to cover their cost of goods sold where possible” Ellinger explained, adding that even until recently it was possible to get a factor to provide short-term credit on orders bound for Sears. In fact, he said, they made “decent money” in a landscape where retailers were actively closing and contracting.
Though Ellinger understands the schadenfreude some have felt toward any company in dire straits today because they were all in with Sears all the way to the end, he does believe calculated risks are OK, even when dealing with retailers on the watch list. “It’s OK to do business with Sears, but it has to be a small percentage of your total business,” he said.
What now?
Those that did in fact have all of their eggs in the Sears basket, however, are now scrambling.
According to reports, some vendors are trying to recapture goods shipped in the days leading up to the bankruptcy, while another group is accepting lowball deals just to pass a hot potato in the form of product that had been destined for Sears.
Ellinger said the urgency to react could be the result of the unprecedented way the Toys R Us bankruptcy devolved, leaving vendors with little to nothing when the company liquidated. Ellinger said the situation was an “eye opener,” which could make some less willing to work with a retailer post filing.
While Wolverine Worldwide didn’t experience any ill effects from retail bankruptcies in the third quarter, Blake Krueger, chairman, president and CEO, expects them to be “a Q4 issue.” Still, the footwear conglomerate isn’t running scared.
While Krueger didn’t refer to any one retail partner by name, the company’s brands like Keds and Wolverine are sold at Sears. “We’ve been able to operate on really good terms with this account… and we would expect next year that we’d be able to continue to work through that through continuing to work with this account and/or the customers finding that product in other channel,” he said during Wolverine’s Nov. 7 earnings call.
If companies like Wolverine already have their product stateside, they could in fact be able to sell their goods elsewhere—and at a fair price. And they have Donald Trump to thank.
“We’re in an interesting time right now because there was a big rush to get product into the U.S. because of the tariffs, and we’re seeing that especially in apparel though those tariffs haven’t hit apparel yet,” said Carol Lapidus, partner and national consumer products industry lead for accounting services firm RSM US. “So, my guess is if it’s a product they could sell elsewhere, they’re not going to have a problem. If it’s a salable product and they got it in before the tariffs, they have a lower cost to them.”
For some, this inventory shuffle has no doubt become almost routine, given the number of retail doors that have been swinging shut over the last two years. Even if a vendor managed to protect against too much exposure to any one of these failed businesses, the cumulative effect of one after another could still pose challenges.
For Carters, Bon-Ton, Toys R Us and Sears were just the latest dominos to fall. In Q3 of 2017, the company sold $34 million in goods to these three now-bankrupt retail chains.
In response, the children’s wear behemoth, which is sold in more than 18,000 locations, has created new pipelines for meeting moms’ needs. The company is partnering with Kohl’s to create 150 baby shops in locations closest to former Babies R Us stores. It’s upping the presence of its Skip Hop brand in more than 110 Macy’s locations and adding the juvenile products to Amazon’s four-star retail concept.
All in all, EVP and CFO Richard Westenberger is confident Carter’s will be able to replace $40 million of the $80 million the company had planned for Toys R Us and Bon-Ton from Q2 to Q4.
Though “disruptive,” chairman and CEO Michael Casey said the retail fallout could ultimately work in Carter’s favor. “Going forward, we will be serving fewer, better and larger retailers. We have the ability to invest in their businesses and our brands to provide a better experience for consumers,” he said.
What’s ahead?
The question is whether Sears will be one of the healthy retailers brands are looking to do business with in the future. The retail group has outlined plans to further slash its store fleet from 700 to 400 locations and continue as a going concern.
While she admitted Sears would have a lot of work to do, Lapidus said it would be possible for the company to survive.
“It’s realistic if they take this time with bankruptcy protection and make serious changes,” she said. “Not just in shareholders and management. They need to change the in-store experience and [provide] two-way engagement to become more relevant. They need to look at all the demographics and find a way to make themselves relevant, if they don’t do that just shrinking is going to give them 400 stores that won’t be successful.”
It’s a tall order, one that a group of unsecured creditors, including Hanesbrands and Simon Property Group, have already banded together to call “wishful thinking.”
The group is pushing for liquidation not transformation. In their eyes, this story is really only going to end one way, so on with it before all of the value is extracted from the company.
Echoing that tone, Ellinger said “I’m sorry to see it go but it’s a long time coming.” He pins the blame, as many have, on Eddie Lampert, Sears’ former CEO and current chairman, who’s been accused of keeping the company on life support while harvesting everything of value.
“It was an embarrassment. In an era when so many retailers were trying to reinvest in themselves and change their models and invest in e-commerce, he was doing nothing,” he said. “Sears never invested in their stores or a true merchant. It was financial engineering was all it was.”
