Sears Canada says there is 'significant doubt' about its future, ponders sale

'Mushy middle' department stores feel the squeeze as luxury and discount expand
Sears

Sears Canada, known for its catalogues that were a household staple for generations, says there is "significant doubt" about its future and it could sell or restructure itself.

The struggling retailer, which tried to reinvent itself last year with a new corporate logo, said it doesn't expect to have enough cash flow over the next 12 months to meet its obligations. It's the latest sign of how the retail sector is being upended by numerous factors, including the rise of online shopping.

"The company continues to face a very challenging environment with recurring operating losses and negative cash flows from operating activities in the last five fiscal years, with net losses beginning in 2014," Sears Canada (TSX:SCC) said in a statement.

"While the company's plans have demonstrated early successes, notably in same-store sales, the ability of the company to continue as a going concern is dependent on the company's ability to obtain additional sources of liquidity in order to implement its business plan."

‘Mushy middle’

In a retail world dominated by the likes of Amazon, Sears Canada has floundered, a relic of a bygone shopping era where the department store was king.

The rise of online shopping and a widening wealth gap are seen as factors squeezing mid-line retailers that try to be all things to all people, with customers now favouring either luxury retailers, such as Nordstrom or Saks Fifth Avenue, or discount shops like profit-machine Dollarama.

"Department stores have been suffering challenges for some time now," said Marty Weintraub, who leads Deloitte's national retail consulting practice for Canada.

"The notion of the mushy middle, which is try to be everything to everybody, is what folks are moving away from," he said.

Instead, there's been a rise in luxury retailers entering and expanding in Canada. Nordstrom now has five locations, with a sixth opening this September, while Saks Fifth Avenue operates two Canadian stores with plans to open at least two more.

One of the key shopping mall trends for this year is the addition of large-format stores to top malls, said a study late last year by the Retail Council of Canada. But for the most part, the department stores being added are high-end luxury retailers, said Craig Patterson, a research consultant for the council who authored the report.

The other thriving retail segment is deep-discount, said Mandeep Malik, an assistant professor at the DeGroote School of Business at McMaster University, pointing to Dollarama, Walmart and Costco as examples.

Shoppers are flocking to those shops for value, he said, whereas mid-line department stores fail to provide that or other unique features.

"Customers are, at the end of the day, very discerning," Malik said. "They measure value either in terms of economics or in terms of emotions."

Malik said Sears Canada has failed to meet customer expectations when it comes to service, choice and price, and it now finds itself trying to play catch-up in a hyper-competitive marketplace. Its decline is symptomatic of a broader trend in retail, he added.

"The mid-line department stores are getting squeezed out."

Job losses

Last week, rival Hudson's Bay Co. (TSX:HBC) said it is cutting about 2,000 jobs across North America in an effort to help it compete in an increasingly tough retail environment, partly due to the rise of e-commerce.

Sears Canada's announcement came as it reported a first-quarter loss of $144.4 million, more than double what it was a year ago. Its revenue slipped by about $90 million to $505.5 million, a decline of 15.2 per cent.

The company said it had expected to be able to borrow $175 million for additional liquidity, but that has been reduced to about $109 million. It said it also lacks other assets, such as real estate, that can be monetized in a timely manner.

"Accordingly, such conditions raise significant doubt as to the company's ability to continue as a going concern," it said.

Spokesman Vincent Power said in an email it's not clear yet whether there will be any layoffs at the company, which had about 16,000 employees as of the quarter ending April 29.

Still, Sears Canada maintained some positivity about its outlook, pointing to a 2.9 per cent increase in same-store sales, a key metric in retail that measures sales at locations open for at least a year. That came, however, as the number of its stores dropped. Sears Canada has 94 department stores, 23 Sears Home stores and 10 outlets.

The department store chain also postponed its annual meeting, which had been scheduled for Wednesday, until an unspecified date.