Sears suppliers fear the company is going bankrupt
Companies that supply Sears with the TVs, toys, and clothing for sale in its stores are growing increasingly concerned about the retailer's ability to pay its bills, according to a risk management executive.
At least half a dozen suppliers have "significantly" reduced product shipments to Sears over fears that the retailer will soon go bankrupt, according to Marc Wagman, executive vice president of trade credit and political risk at the insurance brokerage firm Arthur J. Gallagher & Co., which represents the Sears suppliers to insurers.
The companies' concern over Sears' financial health has "really accelerated in the last 6 to 12 months," Wagman told Business Insider.
If Sears goes bankrupt, then suppliers risk not getting paid for orders they produced for the retailer. Suppliers sometimes buy insurance on their orders, called recievables, to protect themelseves from the risk of non-payment.
Only one of Wagman's clients has gone so far as to cut ties with Sears altogether, but others may not be far behind, he said.
"There is great concern out there," Wagman said. He declined to say which supplier had cut ties.
To mitigate risk, "A lot of suppliers are continuing to ship products to Sears but at much lower levels and entering into supply-chain arrangements that manage their inventory very, very closely," he said. "They are going to get paid shortly after Christmas and then see what happens in 2017."
Wagman said there's speculation inside and outside of the supplier community that Sears could declare bankruptcy next year.
"2017 is the year that a lot of people think a default of Sears and Kmart is going to happen," he said.
Sears denies that it's heading toward bankruptcy.
"We are absolutely focused on restoring Sears Holdings to profitability," Sears spokesman Howard Riefs told Business Insider, pointing to a CNBC story saying that Sears has "plenty of levers to pull" to avoid bankruptcy. "We are an asset-rich enterprise with multiple resources at our disposal."
He said Sears is "proud to have a strong relationship with our vendors."
But Wagman's clients aren't the only suppliers who are getting nervous about doing business with Sears, according to a recent report by The Wall Street Journal.
The report, which cited unnamed sources, said that toy maker Jakks Pacific Inc. recently suspended sales of its products to Kmart, which is owned by Sears Holdings, due to worries about the company's financial health.
In response, Sears Chief Financial Officer Jason Hollar wrote a blog post saying that the company has had a "longstanding relationship" with Jakks.
"Despite the speculation and rush to report the negative, we have always paid our vendors for orders we have placed and as part of the normal negotiations between retailers and vendors, there are occasionally disputes over prices, allocations of product and other terms," Hollar wrote.
Business Insider contacted half a dozen Sears' suppliers, including VF Corp, A.O. Smith, Helen of Troy, and Electrolux. All of them declined to comment on their relationship with Sears.
The suppliers that Wagman represents are basing their concerns on publicly available information, including a string of recent negative reports on Sears' financial viability, he said.
Fitch Ratings last month identified Sears as one of seven major retailers at risk of going bankrupt in the next 12 to 24 months and eventually liquidating.
In September, Moody's analysts downgraded Sears' liquidity rating, saying Sears and Kmart don't have enough money — or access to money — to stay in business.
The Moody's analysts said Sears is bleeding cash and will have to continue to rely on outside funding or the sale of assets, such as real estate, to sustain operations. Kmart in particular is at risk of shutting down, the analysts said.
Sears CEO Eddie Lampert responded in early October, saying "there have never been any plans to close the Kmart format."
Many analysts have been spooked by Sears' recent decline in cash flow.
The company said in August that its cash and equivalents have fallen to $276 million from $1.8 billion one year ago.
As a result, the retailer was forced to accept $300 million in financing from Sears CEO Eddie Lampert's hedge fund, ESL Investments, in the most recent quarter.
The company is losing cash as sales plunge at its namesake and Kmart stores.
Sears' sales dropped from $41 billion in 2000 to $15 billion in 2015. Kmart, which merged with Sears in 2005, has seen its sales plunge from $37 billion to $10 billion in the same period.
Sears has been closing unprofitable stores to stop the bleeding.
Sears closed nearly 80 stores this summer — most of which were Kmart stores — and announced another 64 Kmart closures that will take effect at the end of this year, as Business Insider first reported.
Wagman said his clients are hoping that if Sears does in fact default, it won't be until after the busy holiday season.
"They hope it is later on in the first quarter after they have been paid for their receivables and inventory carry is much, much less," he said.
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