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Sears Canada moves to calm customers despite $144.4M loss

Sears Canada said this week it has ‘significant doubt’ about its future. What does that mean for the store’s shoppers?

Sears Canada said Tuesday that it has "significant doubt" about its ability to continue as a going concern.

THE CANADIAN PRESS/ FILE

Sears Canada said Tuesday that it has "significant doubt" about its ability to continue as a going concern.

Sears Canada says it’s business as usual for shoppers, even as the company, which announced a first-quarter loss of $144.4-million on Tuesday, examines options that include a possible sale or restructuring.

“We are trying to get more customers to shop at Sears, the last thing we’d want to do is give them a disappointing experience or unfulfilled commitments,” said company spokesman Vince Power, in an e-mailed response to questions from the Star about whether customers can expect Sears to continue honouring deliveries and warranties.

“We are improving all customer touchpoints, and any customer who makes a purchase from Sears now or anytime in the future will get their products delivered or money refunded as per usual practice.”

The company has posted recurring operating losses and negative cash flows from operating activities in the last five fiscal years, with net losses beginning in 2014.

In the first quarter reported on Tuesday, revenue at Sears Canada was down $90 million or 15 per cent, to $505.5 million, and the company pointed to conditions raising “significant doubt as to the company’s ability to continue as a going concern.”

Retailers in deep financial distress can seek protection from creditors under the Companies’ Creditors Arrangement Act (CCAA) while they restructure. Filing allows them to continue operating as they take actions to try to return to profitability, which can include selling assets, closing or selling unprofitable stores, laying off staff, typically paying suppliers and other creditors a percentage of what they are owed.

Sometimes the result is a complete closure – as in the case of Target, which liquidated its inventory and shuttered 133 stores less than two years after expanding into Canada. In other cases, it can leave the company leaner and more competitive, albeit with a smaller number of stores.

Even if Sears does file, it would likely want to continue honouring the commitments it has made to consumers to preserve its goodwill and brand, according to Robert J. Drake, a member of the restructuring and insolvency group at Goldman Sloan Nash and aber LLP.

“It would be a death spiral if tomorrow they said, ‘We’re going to cancel our Kenmore warranties,’ because then no one is going to buy a Kenmore appliance,” said Drake, who believes Sears is a candidate for restructuring.

“Without people buying Kenmore appliances, you’re just further starving Sears of any money going towards it and its possible restructuring.”

Not honouring its obligations to customers would also undermine the company’s ability to sell off pieces to a private equity group or other potential purchaser, said Drake.

“The massive goodwill that Sears has as a brand strikes me as something that shouldn’t be squandered,” he said.

It’s possible the scenario could be different if a customer has ordered an item that is not in stock and not a Sears brand, according to experts.

“Suppliers will certainly be nervous and a prudent supplier will want to know where their guarantee of payment is coming from, since Sears has announced it can’t get enough financing to carry on business,” said Ira Smith, an insolvency and restructuring expert and founder of Ira Smith Trustee & Receiver Inc.

Lawyer Lou Brzezinski, a partner in the commercial litigation group at Blaney McMurtry LLP, represents eight Sears Canada landlords and several suppliers.

He says Sears has cancelled orders with some of its vendors and he thinks the chain is a better candidate for liquidation, not restructuring. In such a scenario, it is possible that customers with goods paid for but not delivered could be left in the same position as suppliers, forced to line up as unsecured creditors.

“It’s like Target. They’ve lost huge amounts of money; their assets are going to be the real estate leases – whichever good ones they’ve got – and the brand,” said Brzezinski, who represented several suppliers in the Target insolvency.

Amid the sea of red ink in the first quarter earnings report at Sears Canada was a beacon of hope – same-store sales were up 2.9 per cent, a sign that efforts to streamline and rebrand the chain under executive chairman Brandon Stranzl are resonating with consumers.

“We have monumentally improved the stores at Fairview, Promenade, Lime Ridge, Mapleview, Guelph, Newmarket and Oshawa, with others in the greater GTA in process. Sears.ca is totally revamped and modernized,” said Power. “Sears is committed to its customers, and we will continue to keep them and the commitments we make to them as top priorities.”

The company employs about 16,000 people across Canada. Sears Canada has 94 department stores, 23 Sears Home stores and 10 outlets.

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