Is Sears About To File Bankruptcy?

Yes, I am referring to that Sears – the giant retailer. According to an article this week in TheStreet, Sears reportedly has “significant default risk” within the next one to two years. This would likely lead to a bankruptcy filing under either Chapter 7 liquidation or Chapter 11 reorganization. A Chapter 7 filing would mean that Sears would liquidate its assets in order to pay creditors while a Chapter 11 filing would be aimed at staying in business and trying to come out of bankruptcy in a much better financial condition.

Declining Sales

So, what’s going on? According to the article in TheStreet, Sears is suffering from declining sales. The company’s store traffic has been down for several years now. Debt has been rising and the company has seen its cash flow decline significantly. This is not good news for Sears because the company has bonds and loans coming due within the next few years. The declining cash flow could make it impossible for Sears to meet these obligations. Reportedly, Sears is expected to spend $1.6 billion to $1.8 billion in cash this year. This continues a pattern of the company spending significant amounts of cash over the past several years. TheStreet reports that Sears’ cash position is currently down to $276 million from $1.8 billion just a year ago.

Toy Distributors are Nervous

All of this is making toy makers nervous about how much to ship to Sears for the upcoming holiday season. It is estimated that Sears may account for up to 2% of retail toy market in the United States. So, while toy makers want to ship their product to Sears for sales to toy consumers, these toy companies are also worried about getting paid themselves. According to the article, the toy industry has had two strong years and 2016 has been good so far. So, naturally, the toy manufacturers want a strong finish to 2016 as well.

And, as if Sears didn’t have enough on its plate, the company is experiencing an accelerating rate of the selling off of its shares by investors. This problem is most recently aggravated by the company’s negative second quarter results. Shares are down by 20%. Investors are clearly not feeling too good about Sears’ viability.

So, all of this certainly may lead to a bankruptcy filing by Sears next year. Perhaps if the company can achieve strong sales over the upcoming holiday season and begin reversing its declining sales problem, Sears will at least be able to avoid a bankruptcy liquidation. Then perhaps a bankruptcy reorganization would be in order and Sears can stay with us for a while to come. But, for now, we’ll have to see what the future brings. Let’s hope it’s a good one.