Calvin McDonald has many vivid memories of the 27 turbulent months he spent as the chief executive officer of Sears Canada Inc. But the one that haunts him most is the day he gave up and announced that it was all over for him.
It was a warm, sunny day in September, 2013, but he was exhausted. He'd tried everything to save the struggling department store chain, and now he was giving up. Earlier in his tenure, the dapper Mr. McDonald used to visit different floors at head office, accompanied by an assistant with a plastic milk crate. He'd pick a spot among the cubicles and ask the assistant to set it down so he could jump on top and deliver a Speaker's Corner-style impromptu pep talk to the staff.
Now, he was taking out his milk crate for the last time. To be accurate, this time it was an actual step stool – it was a special occasion. He had it set down in the middle of the dowdy grey cubicle farm outside the executive offices on the seventh floor of the Eaton Centre office tower in Toronto. Hundreds of employees crowded into the overheated room to hear what he had to say.
Mr. McDonald told his team that it was time for him to move on – that the board did not support his growth strategy for the department store, so he could no longer continue to lead it. He told them he still thought Sears could win, he believed in what they had accomplished and was proud of their commitment. Tears began to well up in his eyes as he spoke. Some of the staff began to cry, while others looked on with strained, pale faces.
When he was done, executives and managers formed a receiving line. It took more than an hour to get through it. Some had questions, others wished him well. Marinella Gonzalez, who had worked for the company as a planner, helping to budget and forecast merchandise purchases for almost 14 years, gave him a big hug. "It was very sad," she recalls. "He apologized. He tried to comfort people. He was going to bring this company forward. We thought he was going to save us."
Beneath the tears, though, Mr. McDonald was angry. He, too, thought he was brought in to save the company, but now he's not so sure. "I joined with a clear growth mandate," he says now. "I had an agreement with the board, to show that this business could perform. But it needed investments in almost every area – in the stores, online, in the supply chain, the systems."
The money needed for those investments never came. The purse strings were controlled by the board, and the board was, in effect, controlled by the company's majority shareholder: financier Edward (Eddie) Lampert, chairman of Chicago-based Sears Holdings Corp. Mr. Lampert had a reputation as a whiz with numbers, but he seemed to have an odd relationship with his Canadian outpost.
To fund his growth plan, Mr. McDonald agreed to sell off some particularly lucrative store leases, hoping that some of the hundreds of millions freed up could be reinvested in the company. Instead, most of the money was paid out in the form of special dividends. Mr. Lampert's company, as the largest shareholder, got the lion's share.
"Why would a business, which was supposedly trying to transform itself, dividend out all that resource?" Mr. McDonald now says. "I was not part of the board decision at the time, but it wasn't a vote of confidence that they felt the store had future potential." The former CEO now feels that "there was not a real long term commitment to save this business."
He is not the only one who feels that way. After dozens of interviews with current and former Sears employees and industry experts, it is clear that many feel the company's downward spiral – it began liquidating all of its stores this week – didn't have to happen. Sears Canada was once the largest and most successful department store in the country. It was one of the large retailers that managed to brush off the 1994 entry of Wal-Mart Stores Inc. into this country. With an extensive distribution network, a massive array of products and cutting-edge technology, in many ways, Sears was the Amazon.com Inc. of its time.
But over the past 20 years, it made huge mistakes. It bungled its attempts at retailing online, badly, and never did figure out its brand positioning. Each of a succession of CEOs steered it in a different direction, until eventually it became an ungainly hybrid that no one could understand.
More importantly, insiders say, the company was catastrophically damaged by the decisions of a board of directors that failed to pump enough capital back into the business and by a U.S. hedge fund manager who is rumoured to have never once visited the Canadian office.
Sears Canada didn't die of natural causes. It bled to death.
Mr. McDonald, who is now chief executive officer of the Americas at cosmetics giant Sephora, is furious and he isn't alone. Many of the chain's once-loyal customers are angry too, as are the 16,000 employees who are being laid off with no severance pay. John O'Brien, who has managed the Sears store in Avalon Mall in St. John's, Nfld., since late 2014, is one of them. He says that Mr. Lampert, along with Brandon Stranzl, who just stepped down as executive chair of Sears Canada after putting the company into creditor protection in June, "systematically and categorically dismantled a Canadian retail institution."
He's livid that millions of dollars from Canadian store sales were sucked out of the company while there was a $270-million deficit in the employees' pension fund.
"This was intentional," he says. "I know it, many others know it, and I won't quit until they are held accountable for what they have done to my family, my 175 employees and 16,000 of my Sears associates."
The glory years
Anyone who has visited a Sears store recently can be forgiven for wondering why anyone is mourning its demise. Many outlets have a faded early-1990s look to them. Some are dirty, with peeling paint, a mishmash of poorly organized and somewhat random items on display – from juicers to socks to baby clothes – with a few disinterested clerks looking on. It looks like the chain died years ago. But to dismiss Sears Canada as an inevitable victim of changing tastes is to do it a disservice. After all, it was once the biggest, brightest and most technologically advanced department store in the country.
The Canadian operation – now a separate company based in Canada but with the largest single stake held by Mr. Lampert's ESL Holdings – was launched in 1952 by U.S. parent Sears, Roebuck and Co. It originally planned to expand into Canada by snatching up Simpsons, an independent Canadian chain founded by retailer Robert Simpson. But that attempt failed because Simpsons didn't want to lose control. The two companies struck a partnership instead, forming Simpsons-Sears Ltd. in 1952.
It was a huge success. By 1976, Simpsons-Sears had become the top department store in Canada with almost $1.9-billion of sales and about 30 per cent of the department-store retail market. While the Bay and Eaton's were ringing in between $120 and $150 sales per square foot, Simpsons-Sears was doing more than $250.
It was the most successful department store in the country and the most sought-after tenant in fast-growing suburban malls, according to Hermann Kircher of Kircher Research, who advised Sears in the 1970s.
Given its roots as a mail-order company, it's no surprise that one of the store's strengths was its catalogue. One of its first catalogues, published in 1953, boasted 708 pages, weighed in at 31/2 pounds and listed almost 14,000 items, including portable graineries, motor scooters, one-size socks, "automatic" washers and dryers and pianos.
For many Canadians, particularly those in rural areas, the Sears catalogue was a lifeline to the outside world. Kelly Macsymic, now 38, grew up in Unity, Sask., a town of 2,500-plus about two hours from Saskatoon. Every fall, she and her three siblings would count down the days to the arrival of the famous Sears Christmas Wish Book. The local flower shop, which doubled as a Sears distribution centre, mailed out cards to residents that could be redeemed for a "free" Wish Book.
Ms. Macsymic, who now works in real estate in Saskatoon, remembers poring over the pages, circling items and making notes beside the pictures. "I'm sure most of my parents' Christmas shopping was done through the Sears catalogue," she says. "That's how you would decide what you were going to tell Santa you needed for Christmas. Everybody's house had one. It was just something neat to look forward to. It was a way to fantasy shop."
By the 1980s, Sears was building out its national distribution network by investing heavily in the latest technology to manage it. It broke new ground by installing one of the country's most powerful IBM computer mainframes in 1986. Sears used the machines, which could handle 75 million instructions a second, to study selling patterns of each of its more than 100,000 items. The systems helped pinpoint, for instance, which top-selling "action lines" the stores should bet heavily on. It was also one of the first department stores in Canada to streamline the checkout process by centralizing cashiers in each store with a system that could handle goods from any department.
It's hard to see it now, but in many ways, Sears was the original Amazon: It had the best technology, it had a nationwide distribution system and it sold everything under the sun. And this was in the 1980s, before the internet was adopted by the masses, before Amazon was even a gleam in Jeff Bezos's eye. Given its natural advantages, why it never successfully made the jump to online retailing will be the subject of MBA case studies for decades to come.
"There is no question Sears completely blew an opportunity to leverage their assets for online retailing," says David Zietsma, vice-president at retail consultancy Jackman Reinvents and a former vice-president of strategy at Sears Canada. "They had more than just the best distribution network from the catalogue business and the technology to do it, though. They owned something far more valuable: the hearts and minds of customers for home shopping."
The decline sets in
While the 1980s were generally good to Sears Canada, the 1990s brought the first signs of decline. The Canadian retail market began to fragment, and retail analysts began to talk about the end of the department store. The lower end of the market became crowded with discount retailers: Zellers and Kmart battled it out, and in 1994, the dreaded Wal-Mart, which had overtaken Sears in the United States as the leading retailer, set up shop in Canada by buying Woolco.
Big specialty retailers, some based in the United States, began invading Sears's turf, department by department: Future Shop in electronics, Sleep Country Canada in mattresses, Brick Warehouse and Leon's in furniture, Home Depot in hardware, and Toys "R" Us in toys. Big American clothing chains such as Gap Inc. chipped away at apparel.
A new CEO, Paul Walters, was brought in to help reposition the company, and the retail gods gave him a gift: In the late 1990s, his archrival, Eaton's, collapsed. Sears swallowed its competitor, converting seven of its key stores into upscale boutiques that retained the Eaton's name (but now with no apostrophe and a lowercase 'e'). It then launched an unusual marketing blitz – still remembered to this day – based on the colour aubergine.
The campaign costs went through the roof, and that wasn't the only project Walters was spending big money on. Sears had already poured $250-million into Eaton's, more than $100-million over budget, partly due to expensive renovations, such as moving store escalators from one location to another. Eventually, Alan Lacy, chairman and CEO of Sears Roebuck in the United States, began to get impatient with the cost overruns.
In 2001, he decided he'd had enough, and sent in Mark Cohen, a marketing and merchandising executive from the U.S. head office, to replace Walters as CEO and get the spending under control.
Mr. Cohen, now director of retail studies at Columbia University Graduate School of Business in New York, recalls that when he arrived, he found executives "spending like drunken sailors." He remembers, for instance, that the executive suite he inherited from Walters had been lavishly finished with oak panelling, solid oak furniture and had its own adjoining board room, living room, dining room and kitchen.
By early 2002, Mr. Cohen had decided to scrap the Eaton's experiment, bringing those flagship stores under the Sears Canada banner. With that behind him, he got to work on Sears, which had been neglected. Mr. Cohen also looked at potential acquisitions, including swallowing the Brick furniture chain or Mark's Work Wearhouse, which were on the block. In fact, during this period, Sears considered merging with Hudson's Bay Co. George Heller, then CEO of the Bay pushed for the union, Mr. Cohen says, but Sears turned up its nose at the deal. HBC still owned the Zellers chain, and it was too much of an "albatross" to make a deal work, he says.
Ultimately, Sears fired Mr. Cohen amid disagreements with Mr. Lacy, including the former's refusal to follow the lead of the U.S. parent in selling its financial-services division and launching a new Sears Grand chain that also sold groceries. Mr. Cohen had failed to meet financial expectations, the company said; he contends his strategy would have worked in the long run. The outspoken Mr. Cohen was also rumoured to be a contender for Mr. Lacy's job, creating more tension between the two men. In the end, Mr. Cohen walked off with at least $16.6-million, to be replaced by Brent Hollister, a long time Sears Canada executive.
The money man arrives
Back in Chicago, the American Sears head office was having its share of trouble too. Kmart Holding Corp. and Wal-Mart were nipping at its heels. Lurking behind the scenes, however, was a potential saviour – a wealthy hedge fund manager named Eddie Lampert.
Intense and intensely private, Mr. Lampert is a money man. He previously worked for Robert Rubin, who later became U.S. treasury secretary, in the risk arbitrage department at Goldman Sachs before launching his own hedge fund, ESL Partners LP, with $28-million in seed capital and a plan to make long-term investments in undervalued companies. Kmart was his largest investment – he brought the company back from the brink after its Chapter 11 bankruptcy protection filing. Bringing it around wasn't easy, though. The cost-cutting was intense and the number of stores was cut by almost a third.
In November, 2004, a smiling Lampert appeared on the cover of BusinessWeek magazine next to the words: The Next Warren Buffett? That same month, he announced Kmart would take over Sears for $11-billion (U.S.) to create the third-largest U.S. retailer. Within the company after the takeover, Mr. Lampert was an enigmatic and remote presence. Even though Sears had long been headquartered in a suburb of Chicago, he led the company from his offices in Greenwich, Conn., and later from his home in Miami, through video conferences. He remained a mystery to many of the CEOs of Sears Canada, who never saw him come here and rarely, if ever, spoke to him. Instead, Mr. Lampert appointed a trusted representative to lead the Canadian board of directors.
"At the outset, Lampert was touted as some form of Warren-Buffett-like genius, when in fact all he did was slash operating and capital expenses," Mr. Cohen says. "A procession of puppet-like managers were called upon to do the bidding of the little man behind the curtain masquerading as a retail executive."
One of Mr. Lampert's first Canadian lieutenants was Dene Rogers, a native of Australia with an MBA from Yale University who had worked alongside him at Kmart to help slash its costs. He was dispatched to Toronto as a member of Sears Canada's board of directors in 2005 and became acting CEO the following year.
One of Mr. Rogers' first moves was to generate a cash windfall by helping sell off Sears's lucrative credit-card operation to JPMorgan Chase & Co. for $2.2-billion in mid-2005. But rather than reinvesting the proceeds in the company, most of the money was paid out in the form of a massive $1.5-billion dividend to shareholders. The largest shareholder was Sears Holdings, controlled by Mr. Lampert, which scooped up about 54 per cent of the payout. As part of the deal, Sears Canada would receive more than $100-million each year going forward from JPMorgan Chase. That revenue became an important part of the Canadian division's operating profit – sometime accounting for all of it – until the contract expired a decade later.
Next, Mr. Rogers rolled up his sleeves to take on a challenge he had some experience with: cutting costs. In late 2005, Sears laid off about 1,200 employees, and hundreds more went out the door the following year. He also trimmed expenses by sourcing more of the goods directly from suppliers overseas, cutting out importers and agents. He went to battle some of the chain's suppliers in 2007 when he retroactively cut the prices Sears would pay to some suppliers to make up for rising costs due to the soaring loonie. Some suppliers, such as beauty giant Chanel, packed up and left rather than take a cut.
Thanks to the liquidations and cost-cutting, "Sears Canada was a cash cow for Sears Holdings for several years," says Rogers. So it wasn't a complete surprise when Mr. Lampert made an attempt to privatize Sears Canada by buying out the minority shareholders in 2006. But it didn't go smoothly: Several large U.S. hedge funds with minority stakes opposed the move, led by Bill Ackman of Pershing Square Capital Management LP. Some independent board members resigned rather than back Mr. Lampert's offer, and it ultimately failed.
Meanwhile, Mr. Rogers continued to rein in costs, while trying to shift the company's corporate culture. It was a workplace in which employees had stayed for long periods and earned generous benefits, he says. He felt too many product purchasers were too close with domestic suppliers, so he replaced lifers with MBA graduates, many of whom knew little about retailing. He got rid of 60 per cent to 70 per cent of the fashion merchandising staff, a critical team at a retailer, noting that some planners couldn't use an Excel spread sheet even though it was a basic skill for the job. Sears Canada replaced defined-benefit pension plans with defined-contribution plans. "Some people weren't very happy about those changes," he acknowledges.
Ethel Taylor, a former senior executive at Sears who left in 2008, says "all craziness broke loose" when Mr. Lampert installed Mr. Rogers to oversee the Canadian operations. She says he "would run around at night checking people's offices to make sure everyone was working." She says he thought most of the staff were just lazy. "People were just so fearful. The environment was so negative." Rogers counters that wasn't the case, saying that his executive team was not ruthless nor unreasonable. "We were very compassionate," he says.
One thing is clear: Investments in the store interiors were not a focus. At the time, the big U.S. clothing chains were rolling out new upscale designs for their stores, with polished wood, recessed lighting and designer displays. But to this day, Mr. Rogers argues that retailers don't need to spend excessively on stores' appearance. "As long as the store is presentable and as long as the merchandise is presented so the customer can see it, a lot of the capital costs just don't make any difference," he says. "The stores weren't trashy."
Mr. Lampert and Mr. Rogers had achieved great success cutting costs at Kmart, for a while. And at first it worked at Sears Canada as well. The company was in a position to pay out a second massive dividend in 2010, this time the amount was $753.4 million. Again, Sears Holdings was the main beneficiary – its ownership stake had increased to 73 per cent. But soon after, things started to get worse, fast. In 2011, the company posted a net loss of $50.3-million – a huge drop from the $125-million profit posted the year before. Sales slipped from $4.9 billion to $4.6-billion over the same period, and the stock dropped from $26 a share to $17.
In June of 2011, Mr. Rogers decided to leave Sears, moving back to Australia to head a discount retailer called Target (not affiliated with U.S.-based Target Corp.). "It wasn't like we went through a whole bunch of change and shareholders didn't benefit," he says of his time at Sears. "The kind of changes that took place with people and the culture bore good fruit."
A flash of hope
When Calvin McDonald arrived at Sears as its new CEO in June of 2011, he stood out from the store's previous leaders. For starters, he was Canadian, and many of his predecessors were not. He had a lot of retail experience, having spent the previous 18 years rising up the ladder at Loblaw Cos. Ltd., and while his background was in food, the youthful-looking 40-year-old obviously had a taste for fashion. He dressed well and eventually became a poster boy for Sears in a chatty new Look Report magazine he launched to tout the store's latest trends, borrowing a page from Loblaw's iconic Insider's Report.
McDonald kept himself in top shape, running marathons and competing in triathlons, even jogging to and from the office many days. To mark the 60th anniversary of Sears's Wish Book in 2012, he hand-delivered the catalogue to several homes on the same London, Ont., delivery route he had when he was a young teen. Staff took to the personable new boss, a stark contrast from the secretive Dene Rogers.
"They liked the fact that this guy was from Canada and delivered Sears catalogues when he was 11," says Peter Myers, who worked at Sears for more than 35 years before he was among 2,900 employees laid off in June.
Mr. McDonald formulated a plan to turn the company around by focusing on "hero" categories such as appliances, mattresses, baby goods, dresses, coats and footwear, and dropping departments such as toys and electronics from the stores while still offering them online. He beefed up private labels, taking a page from Loblaw's playbook. He lowered prices, loosened the return policy and started to remodel stores.
He began to see signs of improved results, but he says the board of directors wouldn't approve his requests for the money he needed to execute his plan, even though he had been selling off store leases for cash. Under Mr. McDonald, the retailer sold seven leases to some of its top locations in deals totaling more than $360-million. But rather than reinvesting money, capital spending fell from $101.6-million in 2012 to $70.8-million the following year and $54-million in 2014, a fraction of that of other retailers its size. Eventually, he determined that he had joined a company that knew only one approach to retail: cost cutting. There was no plan to grow, nor the money to do it.
Looking for possible alternatives, Mr. McDonald quietly began preliminary discussions with a number of potential buyers for the company, but the talks went nowhere, he says. He was at the end of his rope, and felt that without the backing of the board, there was no more he could do. During his tenure the share price had dropped to around $12, and he left in September 2013.
"I was there to win, I was there to transform the business and I didn't achieve that," he says today. "I'm the first to take responsibility and say: 'I didn't achieve what I wanted to achieve.'"
The next two years were a blur. Chief operating officer Doug Campbell replaced Mr. McDonald and lasted for just a year. A former U.S. marine pilot, his mandate was to sell Sears but he didn't find a suitor. After him, Ron Boire, a U.S. retail veteran who had worked at Sears Holdings, Best Buy and Toys "R" Us, tried to follow a strategy similar to that of Mr. McDonald. But he left in the summer of 2015 when he got the top job at U.S. bookseller Barnes & Noble.
During this time, Sears continued to liquidate its assets. Shortly after Mr. McDonald left, in late 2013, Sears sold five more of its store leases back to landlords, including the flagship at Toronto Eaton Centre, for $400 million. Again, rather than reinvesting the money, Sears Canada issued another special dividend, this time for $509.4 million – and again, most of the money went to Sears Holdings, which was controlled by Mr. Lampert.
The last-ditch effort
Brandon Stranzl, 43, a close associate of Mr. Lampert, was a suit-and-tie kind of guy when he surfaced at Sears Canada in 2015 as its chairman. But by the time he took the top operating role a few months later, he was showing up to work in jeans and hoodies. Boyish-looking with dark hair and a casual air about him, he dominated conversations, often interrupting other executives to provide his views. Bright, hard working and a consummate networker, he also had a mercurial temperament, several senior executives say.
Mr. Stranzl admits he could be passionate – but Sears needed shaking up. There was a lot of resistance to change, he says, and it needed to change. "The culture of this company was very complacent. Sears was arrogant. It was bureaucratic and it was complacent."
Soon after taking the top executive job, he hired Carrie Kirkman, a veteran merchant with a large Rolodex of industry contacts as president, but she left less than a year later. In a controversial move, Mr. Stranzl's wife Jennifer was hired to head up marketing, despite questions from some board members about a potential conflict of interest and bad optics. But Mr. Stranzl insists that his wife – a Harvard Business School MBA graduate who had experience in several executive positions, including vice-president of marketing at Dow Jones – was the right person for the job. He says it was difficult to recruit top talent at Sears, he recused himself from the hiring process, and the board got a letter from a law firm sanctioning the move. "We were lucky to have somebody of her calibre," he says. "The company was in complete disarray when I came… I treated her no differently than any other executive."
While several former executives say working with Mr. Stranzl could be trying, you couldn't accuse him of complacency. He dreamed big and pushed for massive change. But it was new territory for him: his background was in finance, not in retailing. Early on in his tenure, Mr. Stranzl spearheaded what he called Sears 2.0, a sweeping program designed to introduce off-price discounted designer lines in apparel and home goods – borrowing a page from the playbook of U.S.-owned retailer Winners and sister chain Home Sense.
Sears set up a new buying team for the off-price products, called "The Cut," including a staff of 27 in a New York office. In an unusual move for a Sears leader, Mr. Stranzl joined them on buying trips to Asia and India and brought along a large number of other executives. He set an ambitious goal for the company: to achieve $400-million in sales in the off-price home and apparel segments alone.
In theory, it was a good idea. In practice, the team purchased too many imported goods which got jammed up in warehouses – and there wasn't enough marketing to alert consumers about the new strategy, former executives say. Mr. Stranzl acknowledges he faced logistical snags when the off-price merchandise first arrived last fall because the systems at Sears couldn't process it fast enough. Some products for the holiday season didn't make it to stores until January, missing the hottest selling period of the year.
Another Stranzl strategy was to focus on a limited number of irresistible products that could be ordered in large volumes to draw in customers. One of his pet products last fall was a Kenmore blender which sold for $149.97, modelled on a $579.99 Vitamix.
Mr. Stranzl had hand-picked the colours (red and black), and personally approved the styling and packaging. The first 10,000 sold out quickly, prompting him to have more of them shipped in by air from China – at great expense – for last year's season. Whether the experiment was a success or not depends on who you ask. Armance Bartold, a senior planner who was laid off in June, says it was a misguided proposition that left the retailer about $300,000 in the red. Mr. Stranzl maintains that the blender made a profit—though he admits that shipping it in by air ate into its margins.
Perhaps Mr. Stranzl's most audacious idea of all was to try to reinvent Sears as a digital company with stores attached, rather than vice-versa. And he would do it by finally launching the online store Sears had tried – and failed – to launch so many times before.
To accomplish this, he created a new innovation lab called Initium in early 2016, setting it up in a hipster-friendly office separate from Sears Canada's stodgy headquarters. His goal was to get the new system up and working in just a matter of months – he wanted to launch before the crucial 2016 holiday season. But by August of that year, when Sears tested the new tech platform in Alberta, it was full of glitches. Its website was missing thousands of items, checkout carts didn't work properly, and orders were not getting to warehouses.
Some issues got fixed – but not all of them. November rolled around, and it was make-or-break time. Mr. Stranzl ordered his top IT team to shut off the old legacy systems entirely and operate only with the new one. This was just as the important holiday shopping period was arriving – retail companies often make all their profit for the year in that final, critical quarter.
Armance Bartold, the senior planner, was aghast. "I said, 'Brandon you can't do this,'" she recalls, adding that she was in the room as senior executives were discussing the decision last fall. "And his answer was, 'If we don't just cut the old systems, Sears will never change.' "
The new system launched. And it was a disaster. Merchandise that was in stock and available would disappear from the site for no apparent reason; changes to the site, such as adding a new price, took 48 hours to make; some bulky items, such as appliances, couldn't be shipped at all. "The inventory was there but because of the transition from legacy systems to Initium, it wasn't visible," says a former executive who was let go in June. "It was just a mess, a very big mess last Christmas."
Many Canadians who ordered gifts for their kids had to explain why they had nothing to give them on Christmas morning. The outrage in the weeks that followed was so intense, Mr. Stranzl decided to give much of the merchandise away for free or offer refunds to make up for the late deliveries. But for Mr. Stranzl, always the optimist, the setback was simply another lesson in his journey to reinvent Sears, particularly its e-commerce systems, and "take it to the next level." In a January internal email to staff he was unrepentant: "We will work out the launch kinks and grow to be the number one e-commerce business in Canada."
In looking back today, he says he was faced with both an old and a new tech system that were flawed. "It was risky to do nothing, risky to do something."
But Sears had suffered a big blow even before that. In 2015, JP Morgan Chase didn't renew its credit card deal with the retailer and Mr. Stranzl was unable to find as lucrative a replacement. "Of all the things that pushed the company into a really bad position, that was the biggest one," he says.
Mr. Stranzl was no doubt encouraged by the fact that his flurry of initiatives was beginning to show signs of improvements—Sears's same-store sales at outlets open a year or more, an important retail measure, rose in each of its last two reported quarters. But alas, it was too little, too late. Sales may have been heading up, but margins were collapsing and by its fourth quarter last year, Sears was drowning in red ink, posting a loss of $45.8-million. By the first quarter of this year, the losses had increased to $144.4-million.
The company was rapidly burning through cash and by March of this year, Sears was forced to borrow $300-million. By the end of its first quarter, its cash position had tumbled to $164.4-million, down 53 per cent from a year earlier. With liabilities of more than $1.1-billion, Sears was pushed to the brink. And then Mr. Stranzl made his most surprising move yet, at least from Mr. Lampert's perspective: He decided to seek court protection with a CCAA filing – and Sears began its final descent.
The end of Sears Canada
The demise of a large company can be a messy affair, and Sears Canada was no exception. When he originally joined the company, Mr. Stranzl was Mr. Lampert's man – but in the end, it was every man for himself. Mr. Stranzl lays much of the blame for the death of Sears at Mr. Lampert's feet, but Mr. Lampert counters that Mr. Stranzl's big plan to save the company was too risky, and he was acting on his own when he put the company into court protection.
According to an e-mailed statement from Mr. Lampert's ESL Holdings, "Eddie Lampert was not informed in advance that Sears Canada management intended to seek protection" in court, suggesting that Mr. Stranzl went rogue. Mr. Stranzl counters that he kept Mr. Lampert informed about preparations for the court filing until just a few weeks before it occurred, at which point he was legally prevented from providing a last-minute update.
The statement from ESL goes on to say that it originally raised concerns about Mr. Stranzl's Sears 2.0 strategy, cautioning that borrowing money to fund it would "be risky and unwise." But Mr. Stranzl did it anyway: "Despite this advice, management decided to proceed with these actions and the company's operating losses and cash drain ultimately hastened and worsened," the statement says.
Mr. Stranzl sees things differently. "I was actually trying to fix the retailer and turn it around," he says. "I don't think that was ever what he was trying to do." Mr. Stranzl says he doesn't think Mr. Lampert wanted to make a big bet on a retail turnaround. "He's never done that in the U.S. or here. He's never invested in retail strategies. He looks at return on capital."
As it barrelled towards liquidation, Sears laid off 2,900 of its 16,000 employees and closed 59 stores.
It launched a bidding war to find a buyer to keep the retailer running or suitors to pick up various pieces of the companies. From the start, a management group led by Mr. Stranzl planned to bid to save Sears.
Mr. Lampert teamed up with another major shareholder in Sears Canada and made sure he also had the option to submit an offer, although he ultimately never did.
The Stranzl bid was the only going-concern offer that Sears took seriously, but the company quickly concluded that it was inadequate in its financing and due diligence conditions. The company proceeded to make deals to sell off its crown jewels, including 11 of its best store leases, which were vital to viability of the Stranzl bid. He revised his bid twice, but Sears rejected it outright.
According to the ESL statement, Mr. Lampert didn't back the Stranzl's bid because of "the improbability of a going concern bid being accepted and the lack of confidence in the go-forward strategy, which did not represent a change from the approach that resulted in the company's insolvency."
The writing was on the wall. Sears was losing more than $1-million a day. It had defaulted twice on its debtor-in-possession lending, forcing it to pay an extra $2.7-million of the total $450-million of loans. The financiers were pushing for liquidation sales as soon as possible to cash in on the pre-holiday shopping rush and get a full return. On Friday the 13th, Judge Glenn Hainey of Ontario Superior Court approved a request from Sears to liquidate its remaining 131 stores, saying he was satisfied there was no viable alternative to a shutdown. And just like that, the retailer's remaining 12,000 employees were out of work.
'Massive amounts of neglect'
So who killed Sears Canada? The dust hasn't yet settled on its tragic collapse, but the accusations are already flying thick and furious.
There's no doubt that part of the problem was a majority investor who treated Sears like a cash-spinning asset, rather than a company that needed investment and sound management to adapt and grow in a challenging marketplace. Since 2005, Sears Canada has been a bountiful piggy bank for Lampert. During that period it paid out more than $2.9-billion in dividends, and the lion's share of that money went to Sears Holdings and ESL Investments, which were both controlled by the hedge fund manager. Meanwhile, the amount re-invested in the business to help it grow and adapt—as reflected by the capital spending – fell from $86-million in 2005 to just $27.4-million last year. Ironically, it's also likely that Mr. Stranzl's manic last-minute bid to save the company, which meant borrowing to bet big, ended up hastening its demise.
The retail sector as a whole is having a tough time. Amazon is stealing share, margins are tight, and only the strong survive. Over the last 20 years, Sears Canada had become a lumbering, out-of-touch dinosaur, and there's lots of blame to go around for that. The department stores which have survived long ago realized that they needed to specialize or die.
With Target and Wal-Mart dominating discount, the only place to go was upscale, and even there, as Hudson's Bay Co. is discovering, the going isn't easy. But it takes capital to adapt and capital to grow. Refusing to invest in the future of your business is almost inviting defeat.
"There's definitely been mismanagement," says David Tawil, president of Maglan Capital, a New York event-driven hedge fund. "It's been neglect—massive amounts of neglect."
The one thing that's clear, though, is that Canada has lost yet another once-iconic retailer, and that's a terrible shame. After all, there aren't many big Canadian retailers left. "It's such a sad situation," says Arthur Fleischmann, whose ad agency did marketing work for Sears back in the glory days when it was king.
"They were the original e-commerce company… They could have been Amazon. But they failed to stay relevant in product offering. Their stores are over-sized and outdated. And they don't stand for anything anymore."