Earlier this week, Sears Holdings, operator of Sears and Kmart branded retail stores in issuing what is termed a “going-concern” warning to the company’s investors, evoked special, and added concerns among its supply chain partners. In its annual report, the retailer indicated “substantial doubt exists related to the company’s ability to continue as a going concern.”

That message alone precipitated a 12 percent selloff in the company’s stock on the news of this statement.

The retailer’s CFO moved to calm the waters in a blog post that indicated that such a disclosure was in line with new FASB regulatory reporting requirements and did not reflect management’s expectations for the near-term health of its business operations. Declared was that “We (Sears Holdings) are a viable business that can meet its financial and other obligations for the forseseeable future.”

Unfortunately, this week’s required statement will cause other reactions and added concerns.

After several years of cumulative billion dollar operating losses coupled with selling off valued real estate and associated branded businesses such as Lands End, Sears Hardware Stores and the Craftman’s tool brand itself to compensate for operating losses and maintain working capital needs, landlords, suppliers, services provider and indeed, consumers, will make individual judgements.

Any of our readers who have experienced similar types of financially strained environments can well relate to how quickly the supply chain begins to respond to financially concerning news regarding a key customer’s ability to pay debts. They do so because in retail, suppliers take on a considerable burden in inventory ownership and elongated payments for such inventory. Recent actual bankruptcy declarations from other retailers such as Sports Authority in 2016, had certain suppliers scrambling to recover existing consigned inventory located in actual stores. The controlling private equity owners of that retail chain filed lawsuits with more than 160 suppliers challenging supplier claims to consigned inventories. According to reports at the time, upwards of $85 million in shoes and other gear that were on the shelves in retail stores were contested. The supplier lawsuits were a means to challenge who gets the bulk of compensation when consigned goods are sold in store closings or in discounted sales. Courts subsequently ruled in favor of some supplier claims.

In an October 2016 blog posting, we called Supply Chain Matters reader attention to Jakks Pacific, the fifth largest designer and marketer of toys and consumer products featuring a wide range of popular branded products and children’s toy licenses, announcing the suspension of supplying products to retailer Kmart. The stated reason was concerns related to the financial health of the retail chain and to minimize risks of not being paid for inventory. Yesterday, a published report by Reuters indicates that suppliers are doubling down on defensive measures including reducing unit shipments, asking for better, or up-front payment terms or refusing to accept expanded volume orders. In one example cited, a Bangladesh apparel firm, working on production needs for the 2017 holiday period later this year, has already scaled-back production lines working on Sears orders. Insurance companies that once provided policies to Sears vendors to protect for nonpayment are no longer doing so.

Suppliers become very concerned and word spreads to transportation and logistics providers supporting a financially distressed retailer. Inventory, and inventory movement becomes static or disrupted.  If readers have had the opportunity to visit a Sears store recently, as we have, you may have noticed that holiday merchandise such as jewelry and shoes from the past holiday season remains in stores, yet to move off the shelves, despite markdowns.

And so, it goes in a cascading sequence of events.

Sears Holdings may indeed have a viable plan to mitigate and resolve its latest warning, but that plan needs to address managing the effects among its retail supply chain.

In the end, consumers and shoppers will serve as the ultimate judge and make their own judgements regarding Sears and Kmart. Obviously, the financial numbers would indicate that some consumers have turned elsewhere.

Suppliers and trading partners should not be faulted for protecting their own financial interests, especially in light of today’s retail industry environment of consumer’s permanent shifts towards online buying. Bankruptcy declarations among retailers have taken yet another toll since the 2016 holiday period.

Once or twice burned, the new word for suppliers vigilant and protective to self-needs.

Bob Ferrari

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