Sears Canada’s financial woes – it can happen to anyone

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Closing Sears store in Toronto
Toronto, December 28, 2013: The main entrance of a closing Sears department in Toronto.

There was a time when Sears Canada was on top of the world. Sears was an iconic brand.

Times have changed. The retail landscape in Canada has become more competitive with other strong retailers and the evolution of online shopping.

Sears Canada of today says it is unable to pay its bills and filed for protection from its creditors in Ontario Superior Court on June 22, 2017.

Included in the company’s financial restructuring plan is to close 59 of its 225 stores and to cut 2,900 jobs. Sixteen of these stores are in Ontario —but not in Oakville.

On July 13, 2017, the retailer will return to court to ask permission to suspend some payments to its underfunded employee pension plan, along with other retirement benefits.

All of this could have significant negative implications to its employees both past and current.

When there is not enough money to go around, secured creditors, like the banks, move to the front of the line.

Unsecured creditors, including past and current employees, often receive just a small amount of what they are owed.

The initial reaction by many was how can this happen with such a large and historically successful company? It can happen and it has happened before.

Remember the city of Detroit filed for bankruptcy in July of 2013. The population and business activity in the motor city had declined.

Companies large and small, as well as various levels of government, can be financially restructured, or declared bankrupt, if they are unable to keep up with their financial obligations to pay all creditors.

On a more personal level this can cause great financial hardship to individuals.

Bankruptcy laws do not require an employer to pay severance for workers who are laid off. 

Approximately 2,900 Sears Canada employees are expected to be laid off. Many of the company’s 16,000 retirees are fearful their pension, and ongoing benefits, may be reduced significantly.

The lesson that we can learn is there is always financial risk.

Nothing is 100 per cent secure regardless of how secure it might seem.

One of the most significant financial planning strategies is diversification.

Sometimes diversification is not easily achieved.

You can diversify your investment portfolio but a retired Sears Canada employee could not have diversified the source of his or her pension.

Sometimes we are faced with the reality of how to adjust after receiving a financial setback.

Will some Sears Canada employees and retirees have to continue working and reenter the workforce?

Do employees have other sources of revenue such as selling assets?

Will some have to decrease the amount they spend?

These are very difficult decisions and are a reminder to everyone that financial hardships can arise in anyone’s life, at any time.

It can be useful to assess your own financial risk.

Are there things within your control that you can do now that can decrease the risk?

 

 

Peter Watson is an agent of, and securities products provided by, Aligned Capital Partners Inc. (ACPI).  ACPI is a member of the Investment Regulatory Organization of Canada and the Canadian Investor Protection Fund.  The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Peter Watson Investments.