Economy's Slide Sends More Stores Into Bankruptcy

Watching George Soros the other night on Charlie Rose's show, I was hesitant about getting as worked up as he is over the economy. Soros was singing the blues like B.B. King, telling us that the housing market was going to get worse before it gets better. That so many businesses - big ones - are filing for Chapter 11 (reorganization) protection tells me that his predictions cannot possibly be too far off the mark. People are scared and have quit buying. I have, but for different reasons.

RS



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chicagotribune.com
Struggles grow for retailers
Economy's slide sends more stores into bankruptcy
By Sandra M. Jones

Tribune reporter

April 12, 2008

It's a tough time to be a retailer, and it's expected to get tougher.

Wickes Furniture Co. and Bombay Co. have gone out of business. Levitz Furniture is liquidating. Sharper Image Corp. and Lillian Vernon Corp. filed for bankruptcy protection from creditors. And now Linens 'n Things Inc. is said to be facing Chapter 11 bankruptcy as early as next week.

Americans appear to be in no mood to shop. A day after the nation's retailers posted the worst March sales performance in 13 years, confidence among U.S. consumers sank to a 26-year low, according to one measure, as they worry about the value of their homes and the chances of losing their jobs.

Until recently, home stores have borne the brunt of the economic downturn. Now the troubles are spreading throughout the mall.

"Anybody dealing with the consumer this year is going to be very challenged," said Gerald Hirschberg, director at Standard & Poor's Rating Services. "Really only the top luxury retailers may come away from this relatively unscathed."

Retailers are particularly sensitive to downturns because they have fixed overhead costs that are difficult to trim quickly when sales slump. The stores are locked into leases and need inventory and staff to stay open.

Since January, S&P, the New York-based credit rating agency, lowered ratings on 14 of the retail companies it monitors and upgraded only two. Among the "weakest" retailers—those that Standard & Poor's has given its lowest credit ratings to—are Loehmann's Holdings Inc., Duane Reade Inc., Eddie Bauer Holdings Inc., BCBG Max Azria Group Inc. and Blockbuster Inc. Hirschberg said these firms, which Standard & Poor's calls "highly leveraged," are more vulnerable when the economy sours.

'March Badness'

Gimme Credit bond analyst Carol Levenson termed the dour March retail sales performance as "March Badness," noting that sales declines at stores open at least a year were among the biggest drops in six years: down 18 percent at Gap Inc., down 12.3 percent at Penneys, down 15.5 percent at Kohl's.

"I think consumers are worried there could be a protracted weakness in the economy," said Tiffani Co, an analyst at Fitch Ratings in Chicago. "Before it was high gas or housing prices. Now it's talk of recession and talk of unemployment. Even the luxury end is seeing a slight pullback. They're not facing a crunch, but they're still being more cautious."

Consumer spending, which accounts for more than two-thirds of the economy, is forecast to advance in the first half of 2008 at the slowest rate in 17 years, according to economists surveyed by Bloomberg News.

Linens 'n Things, which has seen its sales fall and its bonds plummet, has hired restructuring firm Conway Del Genio Gries & Co. to weigh options that include bankruptcy, people with knowledge of the agreement said, according to Bloomberg News. The chain is trying to negotiate with creditors including General Electric Co., said the people, who declined to be named because the discussions are private. The Wall Street Journal reported that Linens 'n Things may file for Chapter 11 bankruptcy protection by Tuesday.

Apollo Management LLC led a group of investors that bought Linens 'n Things in 2006 for $1.3 billion. Linens 'n Things didn't return requests for comment. Apollo Management spokesman Steven Anreder declined to comment.

Linens 'n Things competes with Bed Bath & Beyond Inc., the largest U.S. home-furnishings chain, which this week reported a second straight quarter of falling profit and forecast earnings declines for the rest of the year.

Wal-Mart Stores Inc. and Costco Wholesale Corp. are faring better, partly because they have big grocery businesses that keep people coming into their stores. Both retailers posted slight sales gains for March.

"If you look at the number of visits people make to grocery stores, they buy food more often than they buy clothes," said Charlie O'Shea, an analyst at Moody's Investors Service. "Once people get conditioned to coming into your stores, they start looking around. In this kind of environment, store traffic is pretty important."


Low-price lure
Steve & Barry's, the purveyor of university sportswear that has expanded into discount fashion, also has increased store traffic. The privately owned firm plans to add 50 stores this year to its U.S. base of about 270 stores, said Howard Schacter, chief partnership officer for the chain, where everything is typically priced under $20. As the economy turned tougher early this year, Steve & Barry's has been running a promotion where everything is priced at under $9.

"We are well-positioned for what is happening socially and economically in the country right now," Schacter said. "There is a shift in consumerism that is happening right now. The very shopper who a year ago in a million years wouldn't wear a garment for $19 or under is now wearing it as a badge of honor."

Bloomberg News contributed to this report.

smjones@tribune.com

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