Ailing Sears Canada Inc. on Thursday got court protection from its creditors so it can close 59 stores – including 20 large department stores – and let go about 2,900 of its 17,000 employees to continue operating and possibly sell the business.
Toronto-based Sears said it is closing 20 of its 94 department stores, plus 15 of its home stores, 10 outlet stores and 14 Hometown locations.
Insolvent Sears Canada Group operates 225 stores in all under the Sears and Corbeil banners. It got protection from Ontario Superior Court under the Companies' Creditors and Arrangement Act.
Sears has not finalized the specific timing of the store closings; its other outlets will remain open, it said in a statement.
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Sears said it wants to continue its reinvention plan which entails introducing discounted designer fashions and a new private label line at affordable prices to draw more customers to the stores, as well as beefing up its digital and e-commerce operations.
Sears lawyers asked the court to shield it from creditors so it could "continue operating as a going concern as it pursues restructuring options including reorganization and a potential sale of the business in order to maximize enterprise value," documents filed with the court say.
The initial CCAA court order is in effect for 30 days, subject to extension by the court which is usually what happens in these types of major insolvencies.
Sears's executives "need to complete their operational restructuring in a stable environment that will allow them to preserve the going-concern value of their business and deal with the claims that will arise from the last phase of their restructuring," court documents say.
The various Sears divisions "are facing a looming liquidity crisis and will be unable to meet their obligations as they become due without court protection."
Sears's lawyers met with a court judge in his chambers – rather than in open court – at 8:30 am in Toronto, a court official said.
"It is necessary and in the best interests of the Sears Canada Group and their stakeholders that the Sears Canada Group be afforded the 'breathing space' provided the CCAA [insolvency law] as they attempt to restructure their business."
Sears Canada secured up to about $450-million of crucial debtor-in-possession financing from its two existing lenders in two interim financing facilities, court documents say.
"The lenders providing the DIP facility will only extend credit to Sears Canada if it is a borrower under the DIP facility and obtains an initial order of this Honourable Court under the CCAA providing for a super-priority charge on all of the assets and property of the applicants [Sears] …. Without the DIP facility, the Sears Canada Group will be forced to shut down its operations, with a significant loss of employment."
Sears had scrambled this week to secure the debtor-in-possession financing, which was crucial to getting the CCAA court nod.
Sears also has developed a "key employment retention plan" (KERP) to "encourage the continued participation of senior management and other key employees of the Sears Canada Group in the business and the restructuring," documents say. The plan provides "appropriate incentives" for Sears's critical staff "to remain their current positions and ensures that they are properly compensated for the assistance in the restructuring process."
Despite its poor results over the past years, Sears has managed to increase its same-store sales in each of its last two quarters under its new strategy, the company said. "Sears Canada believes this indicates that the new brand positioning is starting to resonate with consumers," it said.
As of April 29, Sears Canada had total liabilities of about $1.108 billion and total assets of $1.187 billion, court filings say.
Sears plans soon to ask the court for approval to stop making monthly special payments under its defined benefit portion of its pension plan, according to a filing from Billy Wong, chief financial officer of Sears Canada. It "can no longer afford to make these special payments in respect to the DB component of the Sears pension plan as it attempts to restructure under the CCAA."
Up until now, Sears has paid all contributions under both its defined benefit and defined contribution parts of its pension plan, Mr. Wong says.
As well, Sears will ask for the court's green light for its financial advisor, BMO Nesbitt Burns, to search for potential buyers of its assets among its landlords and other companies.
"The Sears Canada Group is entering these proceedings with the intention of emerging as a stronger, more focused competitor in the Canadian retail industry," Mr. Wong says. "It plans to continue to operate a large number of stores, maintain significant employment, and service its customers across Canada."
To do this, it needs to "right-size its business," close 59 stores, cut 2,900 jobs, reduce costs further and exit some lines of business.
The plan calls for dropping product categories that have long been associated with the Sears brand, such as home appliances, tools, electronics and auto parts.
Over the past few years, the company already had shrunk its operations, raising money by selling assets, including leases to some of its best store locations. But Sears "has experienced many years of declining sales and significant losses, with net losses beginning in 2014," he says.
He blames the decline on the overall weakening of traditional Canadian retailing; "unsustainable fixed costs from an overly broad footprint;" the decline of its catalogue business; lower than expected conversion of catalogue customers to online customers; the 2015 termination of its agreement with JPMorgan Chase & Co. to manage its credit and financial services operations; and the weakening of the Canadian dollar.
Last week, Sears signalled it was in trouble when releasing its generally disappointing first-quarter results. It said at the time that its financial situation raises "significant doubt as to the company's ability to continue as a going concern."
Its first-quarter loss more than doubled to $144.4-million from $63.6-million while sales skidded 15.2 per cent to $505.5-million.
The court appointed as monitor FTI Consulting Canada Inc. in the Sears case to oversee the restructuring.
The initial CCAA court order does not apply to Sears Canada 's pension assets that have previously been contributed to the pension plan, the company said. Those funds are held separately from the assets of the Sears Canada Group, it said.
Sears Canada had hired Osler, Hoskin & Harcourt LLP as its legal counsel. The board of directors has retained Bennett Jones LLP as its law firm.
Edward Lampert, CEO of Sears Holdings Corp., has been a key beneficiary of Sears Canada's asset sales over the years through his hedge fund, ESL Investments Inc., and other related firms, which together owned about 45 per cent of Sears Canada at the end of April. Sears Holdings owns roughly 12 per cent of Sears Canada.