"Recession like" economy hitting retail hard...

[DKW 86 7,883]

Cant technically call it a recession until we see three quarters of negative growth, but close enough for now...

April 15, 2008

Retailing Chains Caught in a Wave of Bankruptcies

By MICHAEL BARBARO

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

.

[LegalEagle 22]

I thought it was two consecutive quarters of negative growth.

Some of the confusion over being in a recession or not is caused by such a definition. By using the definition, you can't identify a recession until it is 6 mos. or more old.

I think we are in a recession, but we'll have to wait to see. . . Well, that's not a good working model. If the economy sucks and it has been sucking long enough to be felt be the middle class, that's a recession (or worse) as far as I am concerned.

I'll leave it to you to define "sucks" and "sucking"! *grin*

[otterinbham 0]

I keep getting conflicting signals. While retail sales dropped in February, they came back a bit in March. The banking clients I have seem fairly calm about things. Of course, Southern banks have proven much more conservative in their lending than counterparts elsewhere, so their exposure is much less.

As I've contended before, the recession will more likely be highly regional in nature, hitting California, the Rust Belt, the Northeast, and Southern Florida much harder than the Southeast. For example, the numbers of foreclosures in Alabama have actually dropped 20% over the same period last year. That's not exactly a bellweather for hard times here. Office occupancy rates are up. And while residential construction has fallen off a cliff, commercial construction is continuing apace, due mainly to a lack of inventory in the market.

The banks are about 2/3rds of the way through their problem, having written off their losses on the 2007 books. At the same time, I'm seeing a very rapid uptick in capital spending over the past 2-3 weeks.

My guess? I think we'll go through about 3 more months of economic uncertainty in the South, while the effects will linger elsewhere well into 2009.

[BamaGrad03 0]

Just like the foreclosure numbers today...Nevad is the one taking the hardest it.

All the areas: California, NY, Florida, and Nevada that were the MOST out of control for a few years with the housing market...are taking the hardest hit.

[CCTAU 3,494]

But...But...But....the TV said we are in a recession.

I agree it's pretty much contained in the couple of industries..housing, auto, and not getting any help from oil. But our economy is not dieing like it did back when we really did have a recession.

If we announce plans to drill in GoM and in ANWAR, OPEC would ease their grip. But we can't do any of these things due to resistance from the left.

I do think that if this administration could sit down with OPEC and explain a few facts of protectionism to them, we might see some relief in the energy sector. If we see lower prices at the pump, all this talk of recession would disappear.

[tgr4lfe 220]

But...But...But....the TV said we are in a recession.

I agree it's pretty much contained in the couple of industries..housing, auto, and not getting any help from oil. But our economy is not dieing like it did back when we really did have a recession.

If we announce plans to drill in GoM and in ANWAR, OPEC would ease their grip. But we can't do any of these things due to resistance from the left.

I do think that if this administration could sit down with OPEC and explain a few facts of protectionism to them, we might see some relief in the energy sector. If we see lower prices at the pump, all this talk of recession would disappear.

No kidding, gas in Franklin, TN hit $3.45/gal yesterday afternoon, already. I figured it would hit $3.50 around us in the middle of May. It will be $4/gal by June or July if something is not done. This is NUTZ! I won't be able to afford to even drive my Chevy truck to work, thus the reason I am trying to sell it, but b/c of market no one wants to buy a truck right now!!

[Ranger12 53]

No kidding, gas in Franklin, TN hit $3.45/gal yesterday afternoon, already. I figured it would hit $3.50 around us in the middle of May. It will be $4/gal by June or July if something is not done. This is NUTZ! I won't be able to afford to even drive my Chevy truck to work, thus the reason I am trying to sell it, but b/c of market no one wants to buy a truck right now!!

...and just think about the fact you are talking about regular unleaded. Diesel has been over $4 a gallon and that is why our grocery bills are getting bigger even though we may be buying the same or even cutting back.