What Led to the Sears Downfall? A Financial Breakdown

Sears was once a dominant force in American retail, with a vast network of stores and a trusted brand name. However, financial missteps and strategic failures led to its dramatic decline. Once considered an innovator in department store shopping, Sears struggled to adapt to changing consumer preferences and increasing competition.

Declining Retail Sales

Sears’ financial troubles stemmed from a prolonged decline in revenue. Same-store sales consistently fell throughout the 2000s and 2010s, with a 7.4% drop reported in 2016. This decline was particularly damaging as retailers rely on steady foot traffic and repeat business to maintain profitability.

A major issue was the failure to modernize stores. While competitors like Target and Walmart invested in renovations and technology, Sears locations became outdated. Dim lighting, disorganized shelves, and uninspiring product selections discouraged repeat visits and eroded brand loyalty.

E-commerce further accelerated Sears’ struggles. As online shopping grew, retailers like Amazon and Walmart adapted quickly, capturing more consumer spending. Sears was slow to build a strong digital presence, with a cumbersome website and inconsistent inventory. By the time it attempted to improve its e-commerce operations, it had already lost significant market share.

Excessive Debt Burdens

Sears’ decline was worsened by mounting debt. As revenues fell, the company relied on borrowing to fund operations and refinance obligations. By its 2018 bankruptcy filing, Sears had over $5 billion in liabilities, much of it tied to high-interest loans and sale-leaseback agreements.

One damaging financial maneuver was asset-backed loans, where Sears pledged real estate and inventory as collateral. While this provided short-term liquidity, it also limited restructuring options. Many of these loans carried restrictive covenants, further reducing Sears’ ability to invest in long-term growth.

The company also engaged in sale-leaseback transactions, selling properties and leasing them back. While this generated immediate cash, it created long-term lease obligations that became unsustainable as store sales declined. These agreements locked Sears into fixed rental payments, making cost-cutting efforts less effective.

Pension Obligations

Sears’ financial troubles were compounded by massive pension liabilities. For decades, the company maintained a defined benefit pension plan, which required ongoing funding even when revenue declined.

By the mid-2010s, Sears’ pension obligations exceeded $5 billion. The Pension Benefit Guaranty Corporation (PBGC) flagged it as one of the most underfunded plans in the country. Sears frequently deferred contributions and sought regulatory relief, but these short-term fixes only delayed the inevitable.

To address the deficit, Sears transferred ownership of certain assets, including real estate and brand rights, to the pension fund instead of making cash contributions. While this provided temporary relief, it also meant critical assets were no longer available to support broader financial restructuring. Creditors argued these transactions shielded valuable assets from liquidation, complicating bankruptcy negotiations.

Asset Liquidation Strategy

As financial pressures mounted, Sears turned to asset liquidation. The company owned a substantial portfolio of real estate, including prime retail locations. Instead of selling these properties outright when valuations were higher, Sears initially attempted to monetize them through structured deals, such as spinning off assets into Seritage Growth Properties, a real estate investment trust (REIT) formed in 2015. This raised over $2.7 billion but meant relinquishing control over some of its most valuable locations.

Beyond real estate, Sears sought to extract value from its private-label brands. Iconic names like Kenmore, Craftsman, and DieHard had strong brand recognition. The Craftsman brand was sold to Stanley Black & Decker in 2017 for approximately $900 million, though structured payments meant Sears only received a portion upfront. Kenmore was also put up for sale, but a deal never materialized, limiting Sears’ ability to raise additional funds.

Bankruptcy Proceedings

By 2018, Sears’ financial situation had deteriorated to the point where bankruptcy became unavoidable. Mounting losses, declining sales, and an inability to secure additional financing left the company with no viable path forward. On October 15, 2018, Sears Holdings Corporation filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York, listing $6.9 billion in assets against $11.3 billion in liabilities.

Under Chapter 11, Sears sought to reorganize rather than immediately liquidate. The company secured $300 million in debtor-in-possession (DIP) financing to maintain operations. However, creditors questioned whether Sears could return to profitability.

A turning point came in early 2019 when a bankruptcy auction determined the company’s fate. ESL Investments, the hedge fund controlled by former Sears CEO Eddie Lampert, submitted a $5.2 billion bid to acquire the company’s remaining assets, including 425 stores and the Kenmore and DieHard brands. Despite opposition from unsecured creditors who argued the bid undervalued assets, the court approved the sale, allowing Sears to continue operating in a reduced capacity under Lampert’s ownership.

Creditor Disputes

As the bankruptcy process unfolded, tensions between Sears and its creditors escalated, leading to prolonged legal battles. Unsecured creditors, including suppliers and landlords, contested the asset sale to ESL Investments, alleging Lampert had orchestrated financial maneuvers that benefited himself at their expense. They pointed to transactions such as the Seritage REIT spinoff and the sale of Craftsman, arguing these deals stripped Sears of valuable assets while leaving creditors with diminished recovery prospects.

The dispute culminated in a lawsuit filed in 2019 by Sears’ unsecured creditors against Lampert, ESL Investments, and former board members. The lawsuit alleged fraudulent conveyance, claiming Sears had transferred assets to Lampert-controlled entities at below-market prices, depriving creditors of fair compensation. In 2021, a $175 million settlement was reached, with Lampert agreeing to pay creditors to resolve the claims. While this provided some financial relief, most unsecured creditors received only a fraction of what they were owed, highlighting the challenges of recovering funds in a complex corporate bankruptcy.