HMV falls, Sears gets a glimmer of hope - retail 2019 off to a busy start

Stuart Lauchlan Profile picture for user slauchlan January 2, 2019
The UK's HMV faces its second collapse, while Sears might - maybe - rise from the ashes.

The retail sector’s woes in 2018 were extensively cataloged here at diginomica and any hope that the Holiday season might provide a better end to the year were to be vexed, although there’s a glimmer of hope for one US institution.

As 2018 wound down, the deadline approached for bidders to take over Sears, once the place where America shopped, but since October’s filing for bankruptcy protection, the most glaring example of destructive disruption in the legacy retail space.

With hours to go until the close of the 28 December cut-off point, Sears Chairman Eddie Lampert stepped up with two plans for the firm. The first would see him buy the retailer for around $4.4 billion and try to keep it operating, either as a 425 store chain or as a more modest 250 store network. The other plan, cheaper at $1.8 billion, would see him liquidate the assets and acquire its real estate for disposal.

ESL Investments, Lampert’s hedge fund firm which is pitching the first option via an affiliate, Transform Holdco, calls the proposal:

the best option to save tens of thousands of jobs and superior for all of Sears’ stakeholders to the alternative of a complete liquidation….Should our bid be accepted and succeed, we expect that the company that emerges from bankruptcy would offer employment to up to 50,000 associates.

The 125-year-old company currently has more than 68,000 employees.

Sears filed for bankruptcy on 15 October at which point it said it would close 142 unprofitable stores. That number was bumped up in November to include the closure of 40 additional stores. Then as 28 December, another 80 stores were added to the closure list.

So there’s a glimmer of hope, but things are not settled yet. Sears has until tomorrow to decide whether Lampert’s bids can be included in an auction against various liquidation bids that is due to take place 14 January. Those bids are built around selling off all the Sears assets as quickly as possible, raising the prospect of the firm vanishing by the end of the first quarter of 2019. One complication that might still halt Lampert’s plan is that the bids are contingent on ESL being freed from any liabilities related to pre-October 2018 transactions.

Scratched record

Meanwhile in the UK, record chain HMV has fallen into administration for the second time in six years, with slow Christmas trading banging the final nail in the coffin. The chain has been impacted by the decline in sales of physical digital media, such as DVDs and CDs, despite the resurgence of interest in vinyl. But the rise of streaming services and digital downloads has taken its toll, alongside pureplay online operators with superior supply chain capabilities and no physical outlets to support.

Private equity firm Hilco saved HMV back in 2013 for a reported £50 million. It closed 82 stores, but safeguarded 2,500 jobs and gave the brand a second chance. This appeared to be paying off with HMV’s share of the UK business for vinyl and CDs actually rising in 2017 to take 32.7% market share - ahead of Amazon.

But while the company was turning in profits - £8 million for 2017 - the underlying trend was downwards - 2016’s profit was £10.4 million. Nonetheless early in 2018, the expectation was that the business was essentially back on track with Hilco Executive Chairman Paul McGowan stating:

Despite the well publicised state of the UK retail environment, HMV remains profitable, demonstrating the success of the turnaround programme instituted five years ago.

But 2018’s retail turbulence took its toll, coinciding with a rise in consumers turning to digital streaming and download services. Christmas 2018 saw the UK market for DVDs fall by 30%, for example..

As of 2017, the firm remained profitable. It reported earnings of £8million for the year, down from £10.4million in 2016.

But the wheels came off when conditions really tightened on the High Street in 2018 and the number of people switching to digital services shot up.  McGowan’s message to the market had changed, telling the BBC:

Even an exceptionally well-run and much-loved business such as HMV cannot withstand the tsunami of challenges facing UK retailers over the last 12 months on top of such a dramatic change in consumer behaviour in the entertainment market.

As the year drew to an end, KPMG was appointed as administrator. Will Wright, Joint Administrator, said:

Whilst we understand that [HMV] has continued to outperform the overall market decline in physical music and visual sales, as well as growing a profitable ecommerce business, the company has suffered from the ongoing wave of digital disruption sweeping across the entertainment industry. Over the coming weeks, we will endeavour to continue to operate all stores as a going concern while we assess options for the business, including a possible sale.

My take

There was no chance that 2019 would be any less turbulent and busy for the retail sector and we’re certainly off to an interesting start. What fate awaits Sears will be determined pretty quickly one way or another; what happens to HMV is far less clear. As a business it was particularly vulnerable to digital disruptors. My local HMV closed back in 2013 as part of the store rationalization program, but the firm had only months ago opened a new outlet in town. I can at least console myself that I made a number of purchases there. Unfortunately it seems that not enough of us did.

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