Tuesday, April 15, 2008

Knock knock – retail bankruptcy here

Eight retail chains, including Levitz and Sharper Image, have declared bankruptcy. And, they’re not all.

Rumor says Linens ‘n Things is next, possibly later this week. (Disclosure for local readers; there’s a Linens store here in Cedar Hill, suburban Dallas.) But that’s not all.

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 Times story says.

Part of the problem is the credit crunch. Banks are getting tighter on their lending to retailers, not just would-be homeowners.

Here’s why the credit crunch is a problem for many of these retailers:

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.

But, of course, this year’s holiday sales were relatively light.

And, the news for many of these companies isn’t good for either today or tomorrow:
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.

And, while bigger, older retailers aren’t in danger of bankruptcy, many, like J.C. Penney, are scaling back on expansion plans.