US department store operator Sears Holdings Corp is having trouble stocking shelves, as some vendors have fled while others are demanding stricter payment terms because of difficulties hedging against default risk.
The strain in Sears’ supply chain is exacerbated by the scarcity and high cost of a type of vendor insurance known as accounts receivable puts, which ensure a supplier will be paid even if the retailer files for bankruptcy, according to interviews with Sears’ vendors and insurance brokers.
“It’s too expensive,” Michael Fellner, owner of Montreal-based women’s wear company Lori Michaels Apparel & Manufacturing Inc, said of the specialised vendor insurance. He said he stopped shipping to Sears, when his insurer stopped providing coverage.
Two other small vendors said they stopped supplying Sears this year because they could not afford the insurance, whose cost spiked after Sears warned in March of “substantial doubt” over its ability to continue as a going concern. They asked not to be identified discussing confidential commercial arrangements.
Sears’ vendors had previously benefited from support from Sears Chief Executive Eddie Lampert, who owns almost half of the company’s shares and is its largest lender. Through his hedge fund, ESL Investments Inc, Lampert invested in vendor insurance contracts worth $93.3 million in 2012, $234 million in 2013 and $80 million in 2014, according to filings with the US Securities and Exchange Commission.
Sears’ regulatory filings show no investment by Lampert in vendor insurance contracts since 2015. A Sears spokesman said the 55-year-old billionaire is not currently investing in these contracts and declined to say why.
As Sears’ financials deteriorated, other hedge funds such as Avenue Capital Group, and traditional credit insurance firms such as Euler Hermes Group SA, have also exited the insurance market, brokers and investors said. They did not specify the timing of their withdrawal.
The dearth of market participants has made the insurance contracts more expensive and harder to come by, putting pressure on Sears’ ability to maintain a robust inventory of goods.
Merchandise inventory at Sears, once the largest US retailer, fell to $3.4 billion as of July 29 from $4.7 billion a year ago, the company disclosed on Thursday. Sears has attributed the inventory decline to its transformation to an online-oriented business from bricks-and-mortar stores.
“We continue to work to manage our vendor relationships in a constructive manner, we will continue to ensure that our vendors deliver on their obligations to Sears,” Sears said in its second-quarter earnings statement. — Reuters
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