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Here’s what triggered the Sears death spiral into bankruptcy

Brian Sozzi

Can’t blame suppliers for wanting to get paid ASAP from a dying Sears Holdings Corp.

It’s that uncertainty on the retailer’s viability after eight straight years of losses that ultimately propelled the once iconic retailer into bankruptcy, according to details in the company’s new bankruptcy filing. In fact, the situation seemed to take on a life of its own in recent weeks amid rumors of a looming cash crunch and a possible trip through the bankruptcy courts.

“In the two weeks leading up to the commencement of these cases, approximately 200 hundred of the Debtors’ vendors have stopped or refused to ship merchandise to the Debtors, which has had a significant impact on the Debtors’ liquidity position,” Sears disclosed in the filing. The retailer says it has been unable to get key branded merchandise on its shelves as a result.

Sears estimates that it has been nailed by $2 billion of credit contraction among its many vendors in recent years. Certain vendors have demanded to be paid quicker, according to the filing, while others have pushed Sears to pay cash in advance as a condition of receiving additional merchandise.

Adds Sears, “This [vendor actions] has resulted in a nearly 78% reduction in trade credit and has required the Company to finance a significant portion of its inventory on its balance sheet, thereby limiting the Company’s ability to purchase inventory and, as a result, to operate its stores at productive levels.”

The ability to buy inventory on credit – underpinned by confidence in the company’s financial standing – is the lifeblood of a retailer. Once that confidence is broken, as is the case with cash-strapped Sears and other struggling retailers before it, such as Toys ‘R’ Us and RadioShack, it could raise the cost of doing business to insurmountable levels. In the end, a retailer enters a spiral of paying out cash quicker than is coming into the business by way of selling merchandise.

Sears may find it a little easier to get inventory while in bankruptcy protection, but not significantly so. “It’s easier for a supplier to give inventory post-bankruptcy because [the vendors] have priority,” explained bankruptcy expert Bill Norton to Yahoo Finance.

The 125-year-old former retail icon filed for Chapter 11 bankruptcy protection early Monday, crippled from years of losses and mounting debt. Sears plans to close about 142 money-losing stores by year-end. The company operates about 700 Sears and Kmart stores.

Sears lined up $1.875 billion in bankruptcy financing to extinguish its existing loans and keep the lights on at the chain through the holiday season. CEO Eddie Lampert will step down, but remain as chairman. Lampert is said to be “relieved” if not “happy” after the news, a source close to the situation told Yahoo Finance editor-in-chief Andy Serwer.

Lampert’s investment company, ESL Investments, plans to make a stalking horse bid for 400 profitable Sears and Kmart locations in the hopes of running them as a going concern.

Although it may nab some inventory beyond the holiday season for the stores it leaves open, the outlook for the chain surviving in any form is bleak experts tell Yahoo Finance. “It’s remote if they are around in any form after the bankruptcy,” thinks Jeff Schwartz at law firm McKool Smith.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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