Troubled Bankruptcy Past for KmartIn January, 2002, Kmart filed for bankruptcy protection presumably due to bad holiday sales and an outdated business model. Kmart eventually emerged from bankruptcy in mid-2003, and shortly thereafter became a profitable public company trading on the NASDAQ stock market exchange.
One Decade LaterToday, nearly ten (10) years from the date Kmart filed for Chapter 11 bankruptcy, Kmart is back in the news with reports that it, along with Sears, will close 100 to 120 stores due to dismal holiday retail sales. This news is in contrast to other stores within the same industry reporting strong holiday retail sales.
Retail PropertiesKmart and Sears appear to be struggling, while other companies within the similar retail industry, such as Target and Wal-Mart, have stores in many retail property locations that show positive holiday retail sales. Coupled with the fact that the other powerhouse retailers are having price wars amongst themselves does not bode well for either Kmart or Sears to find a way to recover quickly.
History May Repeat ItselfWith the announcement today that Kmart and Sears are closing at least 100 retail store locations, one has to wonder whether this will force Kmart back into bankruptcy, while bring Sears down with it. If such is the case, the chances of Kmart successfully emerging from another bankruptcy filing during these troubling financial times would seem woefully doubtful.
Ripple EffectsIf and when Kmart and Sears close down at least 100 retail stores, this will create further problems for the commercial real estate industry. Because both Kmart and Sears operate out of significant "big box" locations, commercial property owners of these retail property locations will be left with large vacant locations that may take several months or years to refill. Because other tenants within the same shopping center may have co-tenancy clauses within their leases, it will allow them to terminate their own leases early if and when Kmart of Sears vacate.
Losing multiple national tenants within a shopping center may also trigger Banks to reassess their loans for these commercial properties. If Banks end up applying pressure on the Landlords to refill their vacant locations fast or risk having the property foreclosed upon, property owners may be forced to provide significant rent concessions to prospective tenants.