posted on April 16, 2008 09:23:55 PM new
Retailing Chains Caught in a Wave of Bankruptcies
By MICHAEL BARBARO
Published: April 15, 2008
The consumer spending slump and tightening credit markets are unleashing a widening wave of bankruptcies in American retailing, prompting thousands of store closings that are expected to remake suburban malls and downtown shopping districts across the country.
Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.
But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.
Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.
The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.
Retailing is a business with big ups and downs during the year, and retailers rely heavily on borrowed money to finance their purchases of merchandise and even to meet payrolls during slow periods. Yet the nation’s banks, struggling with the growing mortgage crisis, have started to balk at extending new loans, effectively cutting up the retail industry’s collective credit cards.
“You have the makings of a wave of significant bankruptcies,” said Al Koch, who helped bring Kmart out of bankruptcy in 2003 as the company’s interim chief financial officer and works at a corporate turnaround firm called AlixPartners.
“For years, no deal was too ugly to finance,” he said. “But now, nobody will throw money at these companies.”
Because retailers rely on a broad network of suppliers, their bankruptcies are rippling across the economy. The cash-short chains are leaving behind tens of millions of dollars in unpaid bills to shipping companies, furniture manufacturers, mall owners and advertising agencies. Many are unlikely to be paid in full, spreading the economic pain.
When it filed for bankruptcy, Sharper Image owed $6.6 million to United Parcel Service. The furniture chain Levitz owed Sealy $1.4 million.
And it is not just large companies that are absorbing the losses. When Domain, the furniture retailer, filed for bankruptcy, it owed On Time Express, a 90-employee transportation and logistics company in Tempe, Ariz., about $30,000.
“We’ll be lucky to see pennies on the dollar, if we see anything,” said Ross Musil, the chief financial officer of On Time Express. “It’s a big loss.”
Most of the ailing companies have filed for reorganization, not liquidation, under the bankruptcy laws, including the furniture chain Wickes, the housewares seller Fortunoff, Harvey Electronics and the catalog retailer Lillian Vernon. But, in a contrast with previous recessions, many are unlikely to emerge from bankruptcy, lawyers and industry experts said.
Changes in the federal bankruptcy code in 2005 significantly tightened deadlines for ailing companies to restructure their businesses, offering them less leeway.
And the changes may force companies to pay suppliers before paying wages or honoring obligations to customers, like redeeming gift cards, said Sally Henry, a partner in the bankruptcy law practice at Skadden, Arps, Slate, Meagher & Flom and the author of several books on bankruptcy.
As a result, she said, “it’s no longer reorganization or even liquidation for these companies. In many cases, it’s evaporation.”
Several of the retailers that filed for Chapter 11 bankruptcy protection over the last eight months, like the furniture sellers Bombay, Levitz and Domain, have begun to wind down — closing stores, laying off workers and liquidating merchandise.
In most cases, the collapses stemmed from a combination of factors: flawed business strategies, a souring economy and banks’ unwillingness to issue cheap loans.
Bombay, a chain with 360 stores, was considered a success in the furniture world, after its sales surged from $393 million in 1999 to $596 million in 2003.
Then the chain decided to move most of its stores out of enclosed malls into open-air shopping centers. It started a children’s furniture business, called BombayKids. And it started carrying bigger items, like beds and upholstered couches, with higher prices than its regular furniture.
Consumers balked at the changes, hurting Bombay’s sales and profits at the same time that its expenses for the ambitious new strategies began to grow. The timing was unenviable: By early 2007, the housing market began to falter, so purchases of furniture slowed to a trickle.
The company was running out of money, but banks refused to lend more. “They did not want to take the chance that we might not repay the loans,” Elaine D. Crowley, the chief financial officer, said in an interview.
In September 2007, Bombay filed for bankruptcy protection. The highest bid for the company came from liquidation firms, who quickly dismembered the 33-year-old chain. Bombay, which once employed 3,608, now has 20 employees left. “It is very difficult and sad,” Ms. Crowley said.
The bankruptcies are putting a spotlight on a little-discussed facet of retailing: heavy debt.
Stores may appear to mint money by paying $2 for a T-shirt and charging $10 for it. But because shopping is based on weather patterns and fashion trends, retailers must pay for merchandise that may sit, unsold, on shelves for long periods.
So chains regularly borrow large sums to cover routine expenses, like wages and electricity bills. When sales are strong, as they typically are during the holiday season, the debts are repaid.
Fortunoff, a jewelry and home furnishing chain in the Northeast, relied on $90 million in loans to help operate its 23 stores, using merchandise as collateral.
But by early 2008, as the housing market struggled, the chain’s profits dropped, meaning its collateral was losing value and the amount it could borrow fell.
In better economic times, the banks might have granted Fortunoff a reprieve. But with a recession looming, they refused, forcing it to file for bankruptcy in February. In filings, the chain said it was “facing a liquidity crisis.” (Fortunoff was later sold to the owner of Lord & Taylor.)
Plenty of retailers remain on strong footing. Arnold H. Aronson, the former chief executive of Saks Fifth Avenue and a managing director at Kurt Salmon Associates, a retail consulting firm, said the credit tightness and consumer spending slowdown have only wiped out the “bottom tier” companies in retailing.
“This recession dealt the final blow to these chains,” he said. But several big-name chains are looking vulnerable. Linens ’n Things, which is owned by Apollo Management, a private equity firm, is considering a bankruptcy filing after years of poor performance and mounting debts, though it has additional options, people involved in the discussions said Monday.
Whether more chains file for bankruptcy or not, it will be hard to miss the impact of the industry’s troubles in the nation’s malls.
J. C. Penney, Lowe’s and Office Depot are scaling back or delaying expansion. Office Depot had planned to open 150 stores this year; now it will open 75.
The International Council of Shopping Centers, a trade group, estimates there will be 5,770 store closings in 2008, up 25 percent from 2007, when there were 4,603.
Charming Shoppes, which owns the women’s clothing retailers Lane Bryant and Fashion Bug, is closing at least 150 stores. Wilsons the Leather Experts will close 158. And Pacific Sunwear is shutting a 153-store chain called Demo.
Those decisions were made months ago, when it was unclear how long the downturn in consumer spending might last. If March was any indication, it is nowhere near over. Sales at stores open at least a year fell 0.5 percent, the worst performance in 13 years, according to the shopping council.
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posted on April 16, 2008 10:12:02 PM new
Interesting article Roadsmith!
I have to confess I had a most frustrating time at our new Target Superstore today.
Let me start by saying I loved Target! I'd go into the store for light bulbs and come out with a cart full of treasures I didn't even know I wanted. I always spent at least $100. That was BEFORE they built this new store. This new store must be a prototype of the Walmartization of Target. It is HUGE with an attached grocery. They closed a less than 10 year old smaller store (located at the same intersection as a Walmart and Sam's Club) and built this new monster across the freeway in a new retail development (Home Depot is another monster store at the new site).
I went in with a small shopping list and started out at the far corner of the store to check out clothes to see if there were any deals. The clothes were ugly - tops all looked like maternity tops (baby-doll must be in). So I moved on to look for an iPod for my husband since he is going on an "around the world" trip tomorrow. (Don't want to hand mine over to him). They only had iPod Shuffles in stock. I decided to check out MP3 players instead but they only had a couple models of those and I didn't like them. SIGH Oh well - no iPod for Emil - he'll live.
I cruised the garden section - they always had such cute patio furniture and we need a little eating table on our balcony deck. The patio furniture section was tiny and the stuff looked like junk. SIGH.
I then moved on to the Health and Beauty department. I wanted to find a hair color product (going to Oregon on Saturday and want to spiff up) - instead of aisles full of different brands of hair color they had half an aisle and not what I was looking for. SIGH.
I did find Advil! Whoopee - one item marked off the list. I couldn't find another product I was looking for and I went up and down the aisles searching before deciding I would just have to pick it up at the CVS by my house. I did find cat food - not the same exact type of Iams I use but close enough. Two things off the list - on a roll!
I finally asked a stock clerk where I would find light bulbs - "around the corner and then around another corner" = half way across the store. I wanted new florescent bulbs in the chandelier mini-bulb size - they didn't stock those! SIGH
Ok, well I wanted to pick up salad and a couple of things on the grocery side of the store so I plodded through the aisles (getting tired at this point) and proceeded to the checkout with a nearly empty cart. Cat food, advil, salad, and a hot roasted chicken.
I told the clerk I hated the new store and couldn't find a thing. She told me I just have to ask a clerk for help in finding things. I tried to explain that they just didn't HAVE what I wanted but it was pointless - she barely spoke English. I paid my whopping bill (a far cry from my usual $100 +) and dragged myself to the car propped up by my shopping cart. I noticed as I put my items in my car that my chicken was missing so I went back in to the store to the same clerk. She told me that she sent my unclaimed bag to the Service Center ACROSS THE STORE! I went to the Service Center who said that they didn't get a bag from the cashier but finally figured out that the food was returned to the Deli (this was within 5 minutes of checkout!). So I went back to the Deli and got ANOTHER chicken (they had tossed out the one I purchased). Was I happy to get out of that place! Once in the car and on my way home I started to cry. I finally figured out that I was crying because I had "lost" Target - an old friend for the past 40 years! I won't be back. For the life of me I can't figure out why they needed such a big store because it seems like they only stock half of the stuff the smaller store did! I kind of feel that way about the new EBay too. Maybe I am just getting too old and cranky.
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posted on April 17, 2008 11:54:22 PM new
Neglus: I know how you feel. Every time one of those big stores I like to shop in supersize themselves, they lose me. Much too much walking miles and miles only to find that they don't have what I'm looking for.
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posted on April 19, 2008 03:54:39 PM new
AOl has recently asked its members to send in their observation of local chain stores.
Here is a partial list of 32 stores compiled by AOL which are not doing well-
Starbuck,Office Depot,Sears,JCPenny,Kmart,Ross,Johann's store,Children Palace,Pier I imports,Circuit City,Alberston,Rite Aid and more.
Wait till they get to the restaurants.
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Lets all stop whining !
