By Richa Naidu and Jessica DiNapoli
Sears Holdings Corp has started to miss payments to vendors, adding to concerns about its future after sources said on Wednesday that the U.S. department store operator was preparing to file for bankruptcy in the coming days.
Three vendors told Reuters that Sears had missed scheduled payments to them in the last couple of weeks.
It was not immediately clear how widespread the issue was and how it would affect Sears' supply chain ahead of the holiday shopping season. Vendors could stop shipments if they are worried Sears cannot pay, potentially sending the retailer into freefall.
"We went into business with them with our eyes open and knew this day would come one day," said Arnold Kamler, CEO of Parsippany, New Jersey bike maker Kent International Inc. Kamler said he has withheld a shipment to Sears after it missed a regular payment last week for the first time.
Sears did not respond to multiple requests for comment.
Were Sears to file for bankruptcy, stocking shelves adequately could prove key to escaping liquidation. Both vendors and creditors will be looking at the retailer's sales performance during the holiday season in deciding whether to continue to back it, sources have said.
"If consumers walk into a store and there is empty shelves, it lowers consumer confidence and that is what has ultimately happened," said Brett Rose, CEO of United National Consumer Suppliers, a wholesale distributor of overstocked goods such as garden tools, beauty products and toys.
"If you can go to Amazon.com and get Craftsman tools, why do you have to walk into a Sears," said Rose.
Vendors are usually considered unsecured creditors and face repayment of just pennies on the dollar in bankruptcy court.
For this reason, securing a sizable financing package to carry Sears through bankruptcy could boost confidence among vendors. Sears has started talks with banks about securing such a debtor-in-possession financing, Reuters reported on Wednesday.
As Sears' financial condition deteriorated over the years, some vendors stopped supplying Sears, cut down on their shipments or tightened repayment terms, concerned about the retailer's financial woes and the soaring cost of insuring supply agreements, Reuters reported last year.
PREPAYING VENDORS STOPS
As vendors became more concerned about Sears' financial health, they started asking for full payment before they ship their order. However, last summer Sears told vendors it would not prepay for orders anymore, according to a source with direct knowledge of that strategy, who requested anonymity to discuss a commercially confidential matter.
Sears also tried to keep vendors onboard by placing purchasing orders and not picking up the goods until it could make a payment, the source said.
Merchandise inventory at Sears was $2.7 billion as of Aug 4, a decrease of about $719 million from a year ago, according to the company's most recent quarterly financial report. Sears has attributed this to store closures and improved productivity.
Sears said its inventory decreased in all categories, with the most notable decreases in the apparel, tools and outdoor living, which includes lawn and patio furniture. Inventory at discount chain Kmart also decreased in all categories, Sears said.
The belt-tightening has been in sharp contrast to Sears' legacy. At its peak in the 1960s, Sears sold everything from toys and auto parts to mail-order homes, and was a key tenant in almost every big mall across the United States. But it has struggled to reinvent itself in the face of online competition from companies such as Amazon.com Inc , as well as from other brick-and-mortar retailers, including Walmart Inc .
"Unfortunately, the purchasing pipeline stopped. They stopped issuing orders, they stopped buying," said Rose, who last year negotiated a deal with Sears requiring the retailer to pre-pay for goods.
(Reporting by Richa Naidu in Chicago and Jessica DiNapoli in New York; Additional reporting by Melissa Fares and Mike Spector in New York; editing by Clive McKeef)