Suppliers challenge Sears on multiple fronts in Ch. 11
- Some of Sears Holdings' suppliers that have furnished inventory on consignment object to the retailer's plans to liquidate 142 stores in bankruptcy. The suppliers — among them Rosy Blue, watchmaker Invicta, Clover Technologies, Scents of Worth (owned by Perfumania, which exited bankruptcy last year) and Vijay Gold — said in their respective objections that Sears' plans for going out of business sales don't offer protections for consignors, who own the products but supply them to retailers, according to court filings.
- Separately, Sears also faces a fraud lawsuit, filed a day after the retailer filed for Chapter 11, from a clothing maker. In Gear Fashions filed a suit seeking nearly $840,000 in damages from Sears, its CEO Eddie Lampert and the hedge fund he controls, according to the Chicago Sun-Times, which notes that Sears "seemingly canceled" payments on merchandise that was supposed to be paid for between Sept. 28 and Oct. 25. The complaint said that Lampert, ESL and Sears "knew or should have known" that Sears was "facing insolvency" when representing itself to suppliers, according to the Sun-Times.
- Some of the retailer's suppliers, many of which have been scaling back their relationship with Sears for the past two years of financial turmoil at the company, are also "keeping their distance" from Sears after it filed for bankruptcy, according to Bloomberg and other media outlets. Bloomberg reported that some vendors, worried about payment, have stopped shipping to Sears following its filing, and they have heard little from the company beyond a letter.
Sears has had a troubled relationship with its suppliers over the past two years. Last year, the company sued a couple of them, as Sears aggressively sought to protect its interests and those suppliers tried to protect their own from a retailer that looked very much on the brink.
More problematically, in past years and months, suppliers scaled down shipments to Sears and tightened credit terms. In the two weeks before Sears entered Chapter 11, as rumors of a possible filing emerged, 200 vendors stopped or refused to ship to Sears, according to the company.
If those same suppliers refuse to ship or keep credit tight or nonexistent while Sears attempts to reorganize in bankruptcy, the result could be calamitous, leaving shelves without stock during the holiday season and liquidity threateningly tight.
Suppliers have reason to be wary. Historically, vendors relied on a reorganizing company's word and bankruptcy financing when shipping to a retailer in Chapter 11. But the case of Toys R Us proved disastrous for suppliers, who kept shipping to the toy seller while it had essentially defaulted on its debtor-in-possession loan and faced liquidation. Even after a settlement in July, suppliers to Toys R Us are expecting only a fraction of what they were owed for goods shipped early in the year.
As for Sears' consignment suppliers, they may have reason to be afraid as well, after the Sports Authority bankruptcy called into question who had rights to the proceeds of consignment inventory sold in liquidation sales.
There is no guarantee the same that happened to Toys R Us and Sports Authority suppliers couldn't happen to Sears suppliers. Knowing that leaves them to mitigate risks as they need to, which in turn can create new risks for the retailer.
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