Sears has a bigger problem than plunging sales (SHLD)

Sears has a bigger problem than plunging sales: dwindling inventory.

The companies that supply Sears with the TVs, toys, and clothing for sale in its stores are growing increasingly concerned about the retailer’s ability to pay its bills, and some are cutting back on shipments to stores as a result.

That means Sears and Kmart stores are receiving less merchandise to sell, which is a grave problem for a company that’s trying to avoid a possible bankruptcy by reversing years of sales declines.

Sears said this week that One World Technologies, one of its top tool suppliers, threatened to cancel its contract with Sears unless the retailer agreed to cut back its orders. One World Technologies cited concerns about the Sears’ ability to pay its bills, according to a lawsuit filed by Sears on Monday.

Sears says it has always paid its suppliers on time and claims One World Technologies is trying to take advantage of “negative rumors” and media reports about Sears’ viability to change the terms of its contract.

The tool vendor, which is a subsidiary of China-based Techtronic Industries, isn’t the only supplier that is giving Sears trouble.

Last week, Lampert told the Chicago Tribune that several vendors had been treating Sears like a “pariah” and questioning its ability to pay for orders “because there are a lot of articles that are speculating, and there are elements of truth, but they’re certainly designed to scare people.”

An empty are of a Sears store in Richmond, Virginia, showcases Sears’ problems with declining inventory.Business Insider/Hayley Peterson

“If you’re a vendor, and want to do business with us, then you have to treat us like a customer,” he said. “You don’t treat us like a pariah.”

Reuters spoke to three suppliers in March that are also cutting back shipments, refusing bigger orders, or demanding earlier payment from Sears.

A Bangladesh-based textile firm told Reuters that it has drastically cut back shipments to Sears for the upcoming holiday quarter, and that it’s reevaluating accepting new orders to protect itself against the risk of nonpayment. The company declined to be identified.

Another supplier, Arnold Kamler, CEO of New Jersey-based bicycle manufacturer and importer Kent International Inc, told Reuters that Sears tried to purchase more bikes from them last year “because a lot of their current suppliers were either cutting them off or limited them on credit.” He said he declined Sears’ request.

A Sears store in Richmond, Virginia.Business Insider/Hayley Peterson

Suppliers have been worried about Sears’ financial health for a while, but their concerns really accelerated in the last half of 2016.

It’s a problem that has been underreported because so few suppliers are willing to discuss the matter openly for fear of triggering a Sears bankruptcy or disrupting their relationship with the company.

But the issue is readily apparent in stores, where empty shelves and barren wall displays showcase the impact of the company’s declining inventory.

Visits to Sears stores in Richmond, Virginia and Woodbridge, New Jersey revealed a clear lack of inventory.

At both stores, it appeared that employees tried to spread out the merchandise to fill the store. Regardless of their efforts, many areas of both stores were nearly empty.

A Sears store inside the Woodbridge Center Mall in Woodbridge, NJ.Business Insider/Sarah Jacobs

The company is under pressure from years of plunging sales, which have been cut in half since 2007, and it has lost more than a quarter of its executive team in the last five months.

Lampert has said that the company is committed to restoring profitability and continuing retail operations with a smaller physical footprint. But if suppliers are cancelling orders, that will severely hamper the company’s efforts.

Sears is also facing a looming debt payment from a $500 million loan facility that’s maturing in July. The company said it’s in talks with lenders and will provide an update on the payment before the end of May.