In a blow to a number of fitness equipment suppliers, Sears, as expected, on Monday filed for bankruptcy protection. One fitness company, Icon Health And Fitness Inc., landed on Sears’ list of the top-20 unsecured creditors, owed $12.1 million.

Icon’s brands include NordicTrack and Pro-Form, which are both carried heavily at Sears.

As recently as 2013, Sears had been referring to the company as the nation’s largest seller of fitness-related products, and may still rank as the leader even as over a thousand Sears branded doors have closed over the last two decades.

“While Sears does not specifically break out exercise equipment sales, we believe it generates in upward of $1 billion in annual retail revenue from fitness equipment, making it the single-largest U.S. retailer of fitness equipment for the home,” SunTrust Robinson and Humphrey wrote last week in a note on Nautilus. “This would imply the company is responsible for ~15 percent to 20 percent of all fitness equipment sales at retail.”

Nautilus and the company’s licensed brand, Schwinn, both show minimal exposure to Sears versus other fitness brands, according to the retailer’s website.

In the SunTrust note, however, Michael Swartz, the lead analyst, pointed out that other fitness equipment sellers may become more cautious given any inventory glut that might be caused by a Sears’ liquidation during the holiday season.

Fortunately, Sears, which last turned an annual profit in 2010, isn’t yet moving to liquidate the chain. Reports arrived late last week that some of the company’s major lenders were pushing for an outright liquidation to avoid any bankruptcy restructuring phase.

As part of bankruptcy proceedings, Sears is asking the U.S. Bankruptcy Court for the Southern District of New York to shutter 142 locations toward the end of the year. The filing shows the company has 687 stores across the company’s Sears and Kmart banners and employs 68.000.

In the last two years alone, the company has closed more than 725 Sears and Kmart stores.

The list of 142 stores slated for closure have not yet been published, and the closing will be in addition to 46 stores that are slated to be closed next month.

Shortly after the bankruptcy filing was made, the company arranged $300 million in debtor-in-possession financing, which will allow the company to continue operating the business and paying employees while the company tries to restructure. Sears also said the company is negotiating an additional $300 million in financing from hedge fund ESL Investments, the company’s largest shareholder and run by Eddie Lampert, Sears chairman.

The hedge fund is also exploring potentially making a bid to buy “a large portion” of the retailer’s stores while Sears is going through Chapter 11.

As part of the bankruptcy proceeding, Lampert stepped down as CEO of the company.

Lampert was able to keep Sears alive with a series of debt deals through ESL but faced criticism for lacking a clear-cut turnaround strategy. He acquired Kmart in 2003 when the discounter emerged from bankruptcy and bought Sears a year later. In 2005, there were about 1,600 Kmart stores and 2,300 Sears brand stores in operation.

“Over the last several years, we have worked hard to transform our business and unlock the value of our assets,” said Lampert in a statement. “While we have made progress, the plan has yet to deliver the results we have desired, and addressing the company’s immediate liquidity needs has impacted our efforts to become a profitable and more competitive retailer.”

Management of Sears’ day-to-day operations shifts to a committee of Robert Riecker, the company’s CFO, and executives overseeing Sears’ digital, customer and apparel operations. Sears also appointed a chief restructuring officer in Mohsin Meghji, a partner of the turnaround management firm M-III Partners.

Sears’ Path to Bankruptcy

The 125-year-old retailer had been America’s largest retailer over much of the twentieth century. In 1991, Walmart surpassed them.

“For well over a century, Sears has been ‘where America shops,’” wrote Riecker in an affidavit filed with the court. “Throughout its long and distinguished history, Sears consistently has transformed its business to reach new customers and grow its market share.”

Riecker noted that Sears, in the company’s early days, focused on serving residents in rural, remote areas who previously did not have access to a wide variety of goods through the famed Sears’ mail-order catalog.

As the country’s population shifted in the 1920s and 1930s, Sears began opening up stores in urban areas. In the 1960s and ’70s, as families migrated to suburban neighborhoods, Sears took over anchor positions as malls began opening up across the country. The retailer became known as the leader in the tool, appliance, lawn and garden and automotive repair and maintenance categories.

By the ’90s and early 2000s, “big box” retailers became popular over traditional brick-and-mortar stores, and Sears merged with Kmart to add a big-box format to the company’s portfolio. Wrote Riecker, “Over the last 125 years, Sears routinely has adapted its business to navigate shifting population trends and consumer preferences. That agility allowed  Sears to flourish into one of America’s most trusted brands and, at one time, its most powerful retailer.”

In recent years, however, he wrote, “Economic forces adversely affecting the company’s traditional customer base, industry trends and global shifts in consumer behavior all have had a significant negative impact on the company’s performance.”

To address these challenges, Sears has implemented a number of initiatives, including expanding its online presence, reducing its physical footprint by closing unprofitable stores and reconfiguring others and creating new efficiencies in pricing, sourcing and supply chain management. In addition to considerable operating losses, Sears’ liquidity position has been negatively impacted by burdensome legacy liabilities, substantial cash interest expense and nearly $2 billion of vendor credit contraction.

Sears over the years had sought to monetize certain of the company’s assets, including certain real property and intellectual property or to pledge such assets as collateral to obtain additional financing to preserve liquidity.

The filing noted that ESL has long supported the company by providing financing and extending debt maturities, but the company now lacks sufficient liquidity to continue normal business operations.

Sears also took several steps to avoid a bankruptcy filing, particularly given the “inherent risk of liquidation that large retailers face in chapter 11,” wrote Riecker. The steps included reducing or collateralizing the company’s pension obligations by over $2 billion, cooperating with vendors as they contracted the company’s trade terms, thereby reducing the pre-petition amounts owed to such vendors and refinancing certain of the company’s debt facilities.

Riecker wrote, “The company has worked tirelessly in recent years to obtain the necessary runway to turn around the business and demonstrate its vitality. The substantial operating losses that the company continues to endure under its current format, however, have proven to be insurmountable. Therefore, the company must avail itself of the protections and tools under chapter 11.”

To support bankruptcy proceedings, Riecker noted that Sears appointed two new independent directors: Alan Carr, managing member and CEO of Drivetrain Advisors, and William L. Transier, CEO of Transier, to the company’s board. Sears also appointed Meghji to chief restructuring officer and a restructuring committee of independent directors was also formed, he noted.

Sears’ pre-petition senior secured asset-based revolving lenders agreed to support Sears’ operations by providing up to $1.83 billion senior secured super priority priming debtor in possession (DIP) asset-based credit facility with $300 million of new incremental capacity. In addition to the DIP facility, Sears intends to solicit, and has made substantial progress on a term sheet for, a $300 million junior DIP loan. Sears and the company’s advisors have determined that the proposed DIP financing, combined with the proceeds of contemplated going-out-of-business sales, should adequately address Sears’ liquidity need as the company continues discussions on a debt restructuring with key creditors.

Riecker said Sears believes “there is a viable path forward for a reorganization around a smaller footprint of profitable stores.” Approximately 400 of Sears and Kmart’s stores are four-wall EBITDA positive (before any lease concessions), and Sears plans to “sell these and other viable stores, or a substantial portion thereof,” as a going concern as part of the bankruptcy process. ESL is in discussions with Sears regarding becoming the stalking-horse bidder to support a sales auction.

Sears will also look to sell non-core assets such as intellectual property and specialty businesses.

The 142 stores Sears wants to close “operate at significant losses,” and their closing will provide access to “much-needed liquidity, eliminate the associated cash burn and take advantage of the winter holiday season.”

Riecker added that Sears will evaluate remaining stores as the bankruptcy proceeds.

Riecker concluded by stating that “time is of the essence,” with Sears losing approximately $125 million in cash per month in the course of operating their business. Wrote Riecker, “This burn rate is due, at least in part, to the discrepancy between the company’s operational capacity, which can support a business of the company’s previous size, and the company’s current, reduced footprint that has resulted from its ongoing store closure initiative.”

Sears hopes the “imbalance will be corrected” through a sale in bankruptcy proceedings and said much would depend on the cooperation and speedy response of stakeholders in the case.

Riecker wrote, “Will Sears be relegated to the dustbin of history, and will 68,000 Americans lose their jobs, or will Sears enter the next chapter of its life as an iconic American company, enduring yet another shift in the retail landscape? The answer to such question lies in the level of support and cooperation that the Debtors receive from each of their stakeholders—lenders, counterparties, vendors and employees—during these Chapter 11 Cases.”

Beyond Icon Health & Fitness, the list of the top unsecured creditors also included appliances, tool makers, consumer electronics vendors and other home categories Sears is known for.

The trade creditors included Whirlpool Corporation, owed $23.4 million; Frigidaire Company, $18.6 million; Winia Daewoo Electronics America, $15.2 million; Greatstar Int’l Co., :$10.3 million; Samsung Electronics America, $8.05 million; Apex Tool International, $6.6 million;  Black & Decker, $5.9 million; Eastern Prime Textile Limited, $5.8 million and Winner Industry Co., $5.4 million.

Photo courtesy Sears