Sears Canada posted a wider loss Friday as sales fell.Frank Gunn/The Canadian Press
Mounting troubles at U.S. parent Sears Holdings Corp. raise questions about the fate of Sears Canada Inc., which has also suffered from declining financial results.
Sears Holdings Corp, once the largest U.S. retailer, warned this week in its annual report there is "substantial doubt" that it will be able to continue as a going concern after years of losses and sagging sales.
In Canada, Sears operates separately from its U.S. parent but is still controlled by hedge fund manager Edward Lampert, who is chairman and chief executive officer of the U.S. chain. The retailers on both sides of the border struggle with rising e-commerce and other competitive threats.
Read more: Sears Canada: Seven years of decline, and counting
"It's turbulent times for Sears," said John Williams of retail consultancy J.C. Williams Group.
Still, Sears Canada spokesman Vincent Power said in an e-mail that "we continue on … The Sears Canada operation runs separately from Sears U.S. All our plans regarding Sears 2.0, Initium [its new digital strategy], etc. go on as always."
Jason Hollar, chief financial officer of Sears Holdings, said in an online blog on Wednesday that the doubts referred to in its annual report were potential risks that regulators require companies to disclose but Sears also highlights actions to mitigate those risks.
Mr. Hollar said independent auditors have provided Sears with an "unqualified audit opinion" that indicates the retailer remains a "going concern, which means we are a viable business that can meet its financial and other obligations for the foreseeable future … We are firmly focused on improving the operational performance and financial flexibility of Sears Holdings."
Even so, Sears's warning is a departure for the retailer and "reflects increasing risk," said Keith Howlett, retail analyst at Desjardins Securities.
Sears Canada has raced over the past few years to stem its losses by selling off some of its best assets, including prime store leases such as those at Toronto Eaton Centre and Yorkdale Shopping Mall, while cutting staff and other costs.
Last fall, it unveiled new prototype stores aimed at focusing on newly launched "off-price" discount fashions, stocking more private labels and matching rivals' lowest appliance and mattress prices – all in less space – while adding groceries. But the initiatives haven't been enough to reverse its downward spiral.
In its third quarter, Sears Canada's loss more than doubled to $120-million from $53.2-million a year earlier, tied partly to its failure to regain business lost after the termination of its credit-card agreement in 2015. The retailer's overall revenue tumbled 21 per cent to $625.2-million while same-store sales fell 7.1 per cent; those sales, which exclude the effects of annual store openings and closings, are considered a key retail measure.
On Tuesday, Sears Canada said it had sealed a credit agreement for a five-year secured term loan of up to $300-million with KKR Capital Markets LLC and GACP Finance Co. LLC as joint lead arrangers.
Mr. Howlett said Sears Canada has been busy lining up liquidity with leaseback transactions and the new KKR loan, which can cushion what he expects to be "likely awful" fourth-quarter results. The retailer is scheduled to release them next month.
With Sears Holdings faltering, joint merchandise procurement is likely to be the biggest issue for Sears Canada, he said. "Also spillover anxiety could further hurt appliance sales in Canada."
If Sears stumbles, its landlords could be in a tough spot because many of them are still grappling with trying to fill empty Target stores following that U.S. retailer's failure in Canada in early 2015. It resulted in Target closing all 133 of its outlets here.
Landlords are now looking at splitting up remaining Target locations for multiple retailers, rather than replacing Target with just a single merchant, although chopping up the space for multiple merchants can be costlier, said consultant Mr. Williams.
The landlords have contingency plans, or are developing potential blueprints, for Sears sites, anticipating possible problems at the department-store retailer, he said.
"This is no longer Plan B – it's Plan C," Mr. Williams said. "They did their Plan B on Targets."
He said landlords no longer see category-killer superstores as hugely attractive alternatives to Target or Sears because consumers can now find the widest array of product offerings online at Amazon.com Inc. or other e-commerce destinations. And big chains such as Staples Inc. are shrinking their stores as a result of digital rivals and their own expanding online business.
Alex Arifuzzaman, founder of retail real estate specialist InterStratics Consultants, said the turmoil at Sears and other retailers underscores the urgency for them to transform their businesses quickly to respond to the shifting digital times.
"It's forcing retailers to shape up," he said.
Struggling Payless ShoeSource Inc., once a leader in low-cost footwear retailing, is the latest chain whose fate is now uncertain, he said. In Canada, apparel retailers such as BCBG Max Azria and Tip Top Tailors are shutting stores.
In its heyday Sears was a destination retailer on both sides of the border; its catalogue was an iconic part of the post-Second World War consumer boom in the United States and to a lesser degree in Canada. But Sears proved unable to adjust to changing consumer demands with the emergence of Wal-Mart Stores Inc., Target Corp. and other competitors.
Sears Holdings lost $2.22-billion (U.S.) in the year to Jan. 28. Since 2013, it has accumulated $7.4-billion in losses and seen revenue fall 44 per cent to $22.1-billion. Its total liabilities stand at $13.19-billion.
In recent years, Sears has placed some of its U.S. stores into a real estate investment trust, put some brands up for sale and repeatedly raised debt from its billionaire CEO Mr. Lampert's hedge fund. Mr. Lampert owned nearly 10 per cent of the real estate investment trust that paid Sears $2.6-billion for stores that it purchased, many of which were then leased back to the retailer.
The company said last month it would cut costs by $1-billion and reduce debt and pension obligations by at least $1.5-billion this year.
Sears said on Tuesday actions taken during the year to boost liquidity, including its $900-million sale of the Craftsman tool brand to power tool maker Stanley Black & Decker Inc., could mitigate the going-concern doubt and satisfy its capital needs for the current fiscal year.
Additional asset sales could prove problematic, according to Sears's report. As part of the Craftsman sale, Sears Holdings reached an agreement with the Pension Benefit Guarantee Corp. that puts a claim on some Sears assets in an effort to protect pensions of retired employees.
The agreement "contains certain limitations on our ability to sell assets, which could impact our ability to complete asset sale transactions or our ability to use proceeds from those sales to fund our operations," the company said.
Already, the pension board agreement requires Sears to make a $250-million cash payment to its pension plan three years after the consummation of the Craftsman deal, and the pension board has a 15-year lien on revenue owed to Sears from future sales of Craftsman products.
Sears, which had current liabilities of $4.68-billion as of Jan. 28, said it would continue to explore ways to unlock value from its assets. The company said it could not predict with certainty the outcome of its actions to generate liquidity.