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Sears insists it's paying its vendors as reports swirl about spat with toymaker

Kmart store
Frederic J. Brown | AFP | Getty Images
Kmart store

Sears responded Friday to reports that Jakks Pacific has suspended shipments to its Kmart stores ahead of the critical holiday season, saying it has "always paid" its vendors for the orders it has placed.

Jakks, the fifth-largest U.S. toy company, told investors on its third-quarter earnings call Thursday that it had halted shipments to a "major U.S. customer," which was presumed by some to be Kmart. A Wall Street Journal report, citing sources familiar with the matter, also linked the companies together.

Without specifically naming Jakks, Sears CFO Jason Hollar said in a statement Friday that "there are occasionally disputes over prices, allocations of product and other terms through the course of negotiations."

"We can tell you that we have had a longstanding relationship with Jakks," he said.

On its call, Jakks told analysts the company decided to stop shipping its "Star Wars," Disney Princess and other products to "one of the largest U.S. retailers."

Jakks said it made this "difficult" decision after conversations with advisors, including large banks. It said this suspension in shipments was one reason its revenue fell 10 percent during the quarter, to $302.8 million.

"We came to the conclusion that at this time based off of what we have seen and what we have read with regards to the retailer that it would be best served for our company to suspend shipments to this retailer to minimize any risk going forward," CEO Stephen Berman said.

The holiday season is crucial for the toy industry, and accounts for roughly half of its annual sales, according to The NPD Group.

A spokeswoman from Jakks Pacific declined to comment further. Jakks products were still available on Kmart's site Friday morning. A source close to Sears said Jakks accounts for only a small percentage of Kmart's overall toy business.

Conversations about Kmart's future were a topic of interest at a recent toy fair in Dallas, BMO Capital Markets analyst Gerrick Johnson told CNBC. At that event, three or four vendors asked the analyst whether they should ship product to the chain.

"It was definitely something they were concerned about," Johnson said.

Though he hasn't spoken with Kmart or Sears about the reported halt in shipments to their stores, Johnson said he couldn't imagine the retailer being anyone else. However, he added, suspended shipments to Kmart wouldn't explain all of Jakks woes, as the retail chain only accounts for some 2 percent of the $19.4 billion toy industry, Johnson said.

Meanwhile, Jakks' competitors are performing well, including a 14 percent lift in revenue at Hasbro. That means even if Hasbro had made a similar decision to halt shipments to a major retailer, the toymaker still would have posted a robust sales increase during the quarter, Johnson said.

Speculation that Kmart is headed for a chainwide closure has been swirling in recent months — chatter that Sears CEO Eddie Lampert has vehemently denied. In September, Moody's downgraded the company's speculative-grade liquidity, saying that it was uncertain about the "viability of the Kmart franchise" given its "meaningful market share erosion."

Also that month, a source familiar with the matter told CNBC that Kmart plans to close 64 stores in mid-December. The chain had 883 locations at the end of the second quarter, down from 963 a year earlier. The retailer has closed more than 400 of its locations since the second quarter of 2011.

In a blog post on the company's website earlier this month, Lampert addressed what he called "frequent false and exaggerated claims surrounding our Kmart business."

"Recent reports have suggested that Kmart will cease its operations," Lampert wrote. "I can tell you that there are no plans and there have never been any plans to close the Kmart format. In fact, we've been working hard to make Kmart a more fun, engaging place to shop, powered by our integrated retail innovations and Shop Your Way. To report or suggest otherwise is irresponsible and is likely intended to do harm to our company to the benefit of those who seek to gain advantage from posting these inaccurate reports."

Kmart's revenue dropped 10 percent, to $2.2 billion in the second quarter. The chain's revenues have been slashed nearly 40 percent over the past five years.