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.