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February 18, 2019

U.S Retail Metldown: Expect The Largest Liquidation By Store Count

Brick-and-Mortar Meltdown for its new shareholders: All of them PE Firms.

By store count, this is likely the largest retailer liquidation in the US: Payless ShoeSource is planning to file for bankruptcy again later in this month – just 18 months after having emerged from its first bankruptcy. And this time, it will shutter all its remaining 2,300 or so stores in the US and Puerto Rico, let everyone go at those stores, and be done with it in the US.

Its stores in Canada and Latin America will be unaffected by the bankruptcy filing and liquidation, according to people familiar with the situation, cited by Reuters and the Wall Street Journal.

The specialty shoe retailer has been trying to sell itself in recent months, with the help of financial advisory firm PJ Solomon. But there have been no takers, the people said. And so now, the company moved on to Plan B, a second bankruptcy filing in the US and liquidation. The sources said the going-out-of-business sales would start early next week.

And so this would be it for another huge US retailer that had been bought by private equity firms, had then been gutted and stripped off assets, which left the debt-burdened retailer no means to invest in and build a vibrant online business and a functional fulfillment infrastructure, and so it totally missed the transition of shoe sales to e-commerce.

Even I, a veritable fossil on the Silicon Valley scale, buy all my shoes online because I have trouble getting what I want in the size I want at the brick-and-mortar stores. It’s too much hassle and too much of a waste of time to trot from store to store just to look for a pair of shoes. The internet has mastered this aspect of life.

Payless bankruptcy proceedings revealed just how easy it is for PE firms to strip out assets even shortly before a bankruptcy filing.

PE firms Golden Gate Capital and Blum Capital Partners acquired Payless in 2012 in a leveraged buyout when publicly traded Collective Brands was broken up. After Payless filed for bankruptcy in April 2017, aggrieved creditors filed a claim in bankruptcy court, alleging that Golden Gate Capital and Blum Capital Partners had siphoned over $400 million out of the company via a special dividend before the bankruptcy filing. The PE firms were concerned enough about this claim that they agreed to settle it in July 2017.

At the time of the bankruptcy filing in April 2017, Payless had 22,000 employees and over 4,400 stores in 30 countries.

When Payless emerged from bankruptcy in August 2017, it had shuttered about 700 of its US stores; Landlords of the remaining stores had agreed to cut their rents by an average of 30% to 50%; vendors had agreed to lengthen their trade credit by 60 to 75 days; and it had shed about half of its $838 million in debts, with senior creditors, who were owed $506 million, receiving 91% of the equity of the reorganized company. Junior lenders who were owed $145 million received the remaining 9% stake. These new stockholders included:
  • Alden Global Capital
  • Blackstone Group ’s GSO Capital Partners
  • Axar Capital Management
  • Credit Suisse Asset Management
  • Octagon Credit Investors.
So now they’ve got another bankruptcy on their hands, this time as shareholders at the bottom of the capital structure.

However, grand dreams were being hatched, and hype abounded, when it emerged from bankruptcy in August 2017. According to Reuters at the time, citing court filings and interviews with company representatives, Payless planned to open four mega stores in the US and invest $234 million over five years, “including on systems that will adjust inventory quickly in response to customer demand and improve its competitiveness on line.” And the hype was thick:

“There’s an extremely loyal Payless customer, who is basically a mother, who knows she can go into a store at any time and find a quality product at a reasonable price,” Payless’ lead restructuring lawyer, Nicole Greenblatt of Kirkland & Ellis, told Reuters.

The company has a business plan with a future, “the antithesis of what we’ve seen in other retail bankruptcies,” retail restructuring expert Christopher Jarvinen of law firm Berger Singerman, told Reuters.

Why all this hype? Because the new shareholders wanted to exit and needed to find someone quickly who’d buy their shares at a high price so that they’d come out with most of their skin intact. But after only 18 months of brick-and-mortar reality, they’re now throwing in the towel.

What remains are liquidation sales for cents on the dollar and probably no crumbs at all for shareholders.

Brick-and-mortar retailers, after PE firms stripped out their assets, including their real estate if they ever had any, that then file for Chapter 11 bankruptcy are notoriously difficult to restructure. Practically all of them sooner rather than later return a second time to bankruptcy court – infamously baptized “Chapter 22” – to be liquidated.

The low quality of the assets is one reason. The other reasons are operational: By the time a retailer goes bankrupt, it mostly has destroyed its brand, lost customers, and totally botched its lackadaisical efforts to get a vibrant business going online.

Courtesy of Wolf Richter via Wolf Street (More from Wolf Street here)  

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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