Sears files for bankruptcy, and Eddie Lampert steps down as CEO

• Sears, once the largest U.S. retailer, has filed for bankruptcy.
• Eddie Lampert will be stepping down as CEO immediately, although he remains its chairman.
• As part of the bankruptcy, Sears will shutter 142 stores toward the end of the year.

Sears Holdings filed for bankruptcy protection early Monday after years of staying afloat through financial maneuvering and relying on billions of CEO Eddie Lampert's own money. Lampert, who has served as CEO for the past five years, will step down from that post, effective immediately, but remain chairman.

The 125-year-old retailer, once the nation's largest, said Monday it was appointing Mohsin Meghji, managing partner of M-III Partners, as its chief restructuring officer.

As part of the bankruptcy, Sears will shutter 142 stores toward the end of the year. It expects to begin liquidation sales shortly.

The bankruptcy filing comes more than a decade after Lampert merged Sears and Kmart, hoping that forging together the two struggling discounters would create a more formidable competitor.

Over the years, Lampert shed Sears assets and spun out real estate to pay down the debt. The company still has roughly 700 stores, which have at times been barren, unstocked by vendors who have lost their trust. Many of the stores have never been visited by younger generations of shoppers.

Also see: Here is a map of the 142 Sears and Kmart stores set to close

Lampert, who has a controlling ownership stake in Sears, personally holds some 31 percent of its shares outstanding, according to FactSet. His hedge fund ESL Investments owns about 19 percent.

But even with the bankruptcy filing, Lampert continues to invest in Sears. The retailer said Monday morning ESL is negotiating a $300 million debtor-in-possession loan to support it through its bankruptcy. That loan comes on top of an additional $300 million it has secured from investment banks.

"ESL invested time and money in Sears because we believe the company has a future," ESL and Lampert said in a statement Monday.

Lampert also expressed regret he couldn't get the necessary parties to agree to his last efforts to stave off bankruptcy.

Sears' creditors refused to agree on an out-of-court restructuring proposal that ESL put forward in September. They had little assurance by way of collateral or strategy, after years in which Sears' only shot at survival came by selling off parts of its business.

The board was in a perilous position. Its special committee had been tasked with approving Lampert's latest plan, a bid to buy his storied Kenmore appliance business and other brands.

Approving Lampert's offer would have helped Sears make its payment. But that would also thrust the board into the spotlight, potentially opening them to the threat of litigation from shareholders who might allege Lampert has stripped the business bare.

Homes to Hardware

That business was once a giant — the first "everything store" stocking everything from jewelry to clothing, from hardware to prefabricated homes.

It started with Richard Sears, who launched the Sears Watch Co. in 1886 to sell watches by mail. The company later evolved into Sears, Roebuck and Co., which expanded its offerings through a catalog. The convenience brought its products to America's most rural locations.

In 1925, Sears morphed a mail-order plant on Chicago's West Side into its first retail store. By the end of the year. Sears opened seven more stores. Eventually, Sears became the largest U.S. retailer, and its house brands like Kenmore and Craftsman earned spots as staples in homes across the country. Generations of children marked the holidays by paging through its holiday catalog, known as the "Wishbook," wondering if they would receive any of the toys inside.

As Sears success grew, so did its empire. It moved into Chicago's iconic Sears Tower, and for a time, owned financial services businesses like Dean Witter and Coldwell Banker Real Estate Group.

But big box retailer Walmart muscled in on Sears to become the biggest U.S. retailer in 1990. Sears' efforts to attract female shoppers by showing them the "softer side of Sears" and move into new businesses lines left it without an identity.

Those challenges didn't stop Lampert, the hedge fund manager who had already impressed Wall Street with his acumen when he seemingly turned around Kmart, which he bought in 2004. He acquired and combined Sears with Kmart in 2005, arguing that two ailing retailers were stronger together than apart. The financial guru saw valuable real estate, customers he could parlay from one store to the other and ample costs to cut.

The retail giant he created had a market capitalization north of $20 billion in 2006. The media began to wonder whether he was the "next Warren Buffett." Lampert could have sold off his investments then, but stayed on, steadfast in his vision of the combined retailers.

Meanwhile, Walmart and Target kept opening stores, as did Lowe's and Home Depot. Walmart touted its "everyday low prices," while Target served up "cheap chic." Lowe's and Home Depot provided a wider array of home improvement products for all kinds of projects, making it tough for Kenmore and Craftsman to compete.

Then, came a double blow.

Consumer spending slowed during the Great Recession, especially for big-ticket items like washers and dryers. Cash-strapped shoppers began using the internet to hunt down the best deals. Gradually, they began to spend more online and avoid the mall, fueling Amazon's rise. Sears' 140,000-square-foot stores began to seem monstrous as foot traffic declined.

Profits stop flowing

Walmart and others began to invest in their businesses to compete with Amazon, but Sears never had that chance. It simply didn't have the funds.

Sears' last profitable year was in 2010. A thinning cash flow has left little money to put back into the company itself, letting it become more irrelevant. For the past five years, the ratio of Sears' capital expenditures to sales has been less than 1 percent. That's even as its sales have more than halved in the same time period.

Sears has been in survival mode for more than a decade. Unable to rely on the Sears' business to pay the bills, Lampert instead sold or spun off many of its most valuable stores and brands.

Since its merger with Kmart, Sears has spun off its Lands' End clothing brand, sold the Craftsman tool brand to Stanley Black & Decker and closed hundreds of stores. It spun out 250 of its best properties into real estate investment trust offshoot known as Seritage.

Its key vendors, wary of Sears' future, demanded tighter payment terms. Some, like Whirlpool, stopped shipping all-together.

It has been grappling with a pension of roughly 100,000 retirees that, as of January, was underfunded by $1.5 billion, according FactSet.

It became a guessing game among analysts and onlookers whether each of Sears' last five holiday seasons would be its last. But Lampert kept surprising them, extending a lifeline in the form of loans from his hedge fund or finding them elsewhere each time bankruptcy looked inevitable.

Lampert, though, sounded the alarm in a Sept. 13 blog post. He pleaded for Sears' creditor's to agree to restructure, calling out the risks should they drag their feet.

"We continue to believe that it is in the best interests of all our stakeholders to accomplish this as a going concern, rather than alternatives that could result in significant reductions in value," he wrote.

By early October, it became evident that Sears' last Christmas before bankruptcy had already passed. Sears began to raise emergency financing to support the business through coming filing.

Now, the question will be whether Sears will be able to come out of bankruptcy. Retailers don't have a great track record of emerging. Several of late, like Toys R Us and department store Bon-Ton, have been forced to liquidate. It is difficult to make changes needed, like investing in e-commerce, stores and a company's brand, while still catering to creditors' demands.

See also: Timeline: The rise and fall of Sears

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