Sears Suppliers Haunted by Ghost of Toys R Us

Since filing for Chapter 11 bankruptcy, Sears Holdings Corp. has been trying to convince suppliers to keep shipping it merchandise by touting the $300 million in financing it has secured so that its business can continue operating through the holidays.

But a growing number of manufacturers who themselves got hurt or watched others get burned by Toys R Us' quick demise don't want to take a chance.

Many manufacturers have already been keeping Hoffman Estates, Illinois-based Sears on a tight leash over the past few years as they watched its fortunes spiral downward. But their reluctance to work with the retailer heading into the holiday shopping season is a major blow to its survival. The fate of Sears, which also operates Kmart, depends on a critical flow of goods to its stores. Without a generous supply of merchandise, even the company's dwindling base of customers may not shop there, hurting sales even more.

Suppliers are still gun-shy after their experience with Toys R Us, which went out of business months after filing for Chapter 11 reorganization in the fall of 2017, leaving them with millions of dollars in unpaid bills. Vendors recovered only about 20 cents on the dollar.

As with Sears now, many suppliers were encouraged to continue stocking Toys R Us' shelves through the holidays, industry experts said. But Toys R Us announced it would liquidate its business in March after suffering a disastrous holiday season.

"Toys R Us was a game changer," said Kenneth Rosen, a partner at Lowenstein Sandler, which represents several Sears' vendors. "My clients want to work with Sears. They very much want to see Sears survive. At the same time, they don't want to get burned twice." He declined to name the suppliers, but he says he's advising them to give Sears credit "a week at a time."

The big worry is that after Christmas, Sears will either be a full liquidation, or that Eddie Lampert, the company chairman and the largest shareholder, will buy back a group of stores and the balance will be shuttered. As part of its bankruptcy restructuring, Sears plans to close 142 stores, leaving the company with roughly 500 by year-end.

Sears has been struggling for several years with bare shelves and displays. A visit to a store at Newport Centre Mall in Jersey City, New Jersey, a few days before the bankruptcy filing showed large areas on the selling floor that had no merchandising racks and bare wall displays.

In documents filed a week ago, Sears itself acknowledged the problem, noting more than 200 suppliers have stopped or refused to ship merchandise to the company in the two weeks heading into bankruptcy, further crippling its business.

The Toy Industry Association, a toy industry trade group, conducted a poll last week and found that 66 percent of its members surveyed were either not selling to Sears or Kmart or demanding cash payment on delivery, according to Steve Pasierb, CEO and president of the association. Twenty-six percent were on regular payment terms but not more than 30 days. The remainder was in between the two groups, he said.

Brett Rose, CEO of United National Consumer Supplies, a wholesale distributor of overstocked goods like toys and beauty products, hasn't shipped to Sears and Kmart since this past summer. Over the last year, it has demanded that Sears pays upfront before shipping to the retailer. That hasn't changed despite Sears' $300 million financing was approved by the bankruptcy judge.

"We will sell to them on the same terms as before the bankruptcy, which is pre-paid," Rose added.

Jay Foreman, president and CEO of Basic Fun Inc., a toy company based in Boca Raton, Florida, is still feeling the sting from the Toys R Us liquidation. His business was left with an unpaid bill of several million dollars and has held off shipments to Sears and Kmart days before the company filed for Chapter 11. Basic Fun must secure payment from Sears in advance or upon shipment at this point, he said.

Foreman noted the Basic Fun shipped Sears and Kmart over $2 million in merchandise in the last 12 months; historically, annual business with the retailer had been as high as $7 million. He said it only has about $85,000 in outstanding bills from the retailer. But he added that a financing agreement is "no longer good enough."

"It just seems like it's time to put these two retailers to sleep for good. Sort of like putting down a loyal old hound dog," Foreman wrote in an email.