A leaner Sears emerges from bankruptcy, but can it survive?

In some ways, the “new” Sears has a lot in common with the company that filed for bankruptcy protection in October.

Its largest shareholder is now its owner. The U.S. Bankruptcy Court for the Southern District of New York approved a $5.2 billion bid by Sears Chairman Edward Lampert to buy the company through his hedge fund, ESL Investments, last week.

Plans outlined by ESL, including smaller stores and a focus on the retailer’s strengths – like appliances – sound like initiatives Sears has pitched before, as losses mounted in the years leading up to the company’s bankruptcy.

But early attempts to put the strategy in place were hampered by Sears’ past financial challenges, said Mohsin Meghji, Sears’ chief restructuring officer and managing partner at M-III Partners, an advisory firm hired by Sears.

“It is a high-quality management team but all of their horsepower was largely focused around legacy issues related to contractual obligations, debt leverage and liquidity management,” Meghji said.

“Is there a place for a niche, appliance-focused retailer called Sears? Sure. But it has to be executed really well, and previously it wasn’t done as well as it could have been,” he said.

Now, Hoffman Estates, Illinois-based Sears has another chance, this time with healthier finances after shedding debt, pension obligations and unprofitable stores in bankruptcy.

“As we embark on this new chapter, we look forward to continuing to build meaningful relationships with our members and customers, who rely on us for our trusted brands, services and convenience,” Sears said in a statement.

Experts who have watched the company’s struggles say it still has a tough battle ahead.

“There is a viable path, but it’s still a long shot,” said Craig Johnson, president of Customer Growth Partners, a retail consultant.

The new Sears will have 223 Sears and 202 Kmart stores, nearly half of which are in California, Florida, Pennsylvania, New York and Puerto Rico, according to court filings. That’s down from 687 when the retailer sought bankruptcy protection four months ago and 1,672 stores in January 2016.

Closing locations that don’t make money will help, but shrinking means giving up some of the economies of scale and power to negotiate with suppliers that bigger players enjoy, said Ray Wimer, assistant professor of retail practice at Syracuse University. Rivals like J.C. Penney and Kohl’s have more than 860 and 1,100 stores, respectively.

But even a smaller Sears is big enough to get some of those benefits, said Paula Rosenblum, co-founder and managing partner of RSR Research, a retail technology research firm.

“Vendors still want to see a healthy Sears,” Rosenblum said.

Lampert told the Wall Street Journal last week that he intends to sell or sublease some of Sears’ remaining 425 stores. Some of those stores are not profitable, and in financial forecasts ESL said it expected to bring in about $200 million a year through real estate sales over the next three years, according to court filings.

That means Sears could close more stores, though it’s also possible the company could continue leasing space in properties it sold or offset closures with new, smaller store openings.

In a business plan prepared as part of its proposal to buy the company, ESL said it sees an opportunity to invest in smaller stores like the new appliance-focused stores Sears opened in Texas, Colorado, Hawaii and Pennsylvania. Those stores are between 7,000 and 20,000 square feet, while a typical Sears averages 138,000 square feet. The smaller stores specialize in selling appliances, but customers can also order other Sears products.

While Sears rival J.C. Penney recently announced it would stop selling items like refrigerators, washers and dryers, the strategy makes sense for Sears, which customers still see as a destination for those goods, Johnson said. He thinks Sears has a shot to pull off a turnaround if it can scale back and focus on its strong suits, like selling appliances, tools, exercise equipment and mattresses and its home services business.

Rosenblum said that path would have been easier if Sears had acted sooner. It now faces competition from retailers like Home Depot and Lowe’s, which have been attracting a growing share of consumers’ appliance dollars. According to ESL’s business plan, Sears is still the U.S.’ third-largest appliance retailer, behind those chains.

“Do I want to buy a big-ticket item I know is going to last a long time from a company that I don’t know is going to last a long time? That’s the battle they’re going to be fighting,” Rosenblum said.

One of the most crucial tasks the restructured company faces will be finding someone to lead it.

‘Retail isn’t for amateurs’

Lampert was Sears’ CEO from 2013 until its bankruptcy filing in October. Since then, Chief Financial Officer Robert Riecker, Chief Digital Officer Leena Munjal and soft lines President Greg Ladley have collectively led the company.

ESL said it intends to conduct a search for a CEO “with a record of success in managing platform businesses and effectuating large-scale dynamic transformation” in a news release.

That means someone other than Lampert, with strong merchandising and turnaround credentials, retail experts said.

“Retail isn’t for amateurs,” Rosenblum said. “To me, the best hope is he finds somebody he can bring in to run the chain, come up with a plan he can support and he gets out of the way.”

Lampert told the Wall Street Journal he would remain Sears’ chairman but intends to bring in a new CEO.

“For long-term success, they don’t need a smart operator who can cut costs,” Meghji said. “The key to is to find the right blend of marketing and merchandising skills. It needs to be somebody who knows how to connect with a group of customers who want a long-term relationship with the Sears ecosystem with both the retail network and the services platform.”

Despite the uphill battle, “I wouldn’t bet against these guys,” Meghji said. “I think there is a big segment of America who would like to see Sears rise again.”