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Bankruptcy Bell Tolls: Steve & Barry’s Model Collapses Under Crunch

The Steve & Barry's business model officially collapsed on Wednesday, the victim of razor-thin margins squeezed even more by tight credit.

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The Steve & Barry’s business model officially collapsed on Wednesday, the victim of razor-thin margins squeezed even more by tight credit and the reluctance of shoppers to either drive or spend.

The troubled retailer of low-priced chic apparel and footwear and 63 of its affiliates filed a voluntary Chapter 11 petition in Manhattan bankruptcy court after a cash crisis highlighted by its default on a $197 million asset-backed loan from GE Commercial Finance Corporate Lending. A feverish search for $30 million in needed financing ensued and apparently failed, despite talks with potential buyers and investors, among them Sears Holdings Corp. financing ensued and apparently failed, despite talks with potential buyers and investors, among them Sears Holdings Corp.

Even if the company can emerge from bankruptcy in some fashion, it will likely bear little resemblance to the way the firm has operated since it was founded 23 years ago.

In their first public statement about the chain’s difficulties, the founders and co-chief executive officers, Steve Shore and Barry Prevor, said, “High costs of materials and fuel prices have increased our cost of goods and cost of operating. At the same time, our customers are not in a position to pay higher prices, impacting our operating margins.

“Our customers are feeling the pain of high food and gas prices and declining home values, and many of them are being forced to shop closer to their homes and cut back on discretionary purchases,” their statement continued.

Yet, even with these challenges, the pair said their 276 stores in 39 states had registered a 70 percent increase in total sales this year through the end of May, along with a 15 percent increase in same-store sales and a 25 percent increase in average store sales.

Annual sales are believed to be in excess of $1 billion, much of that attributable to the retailer’s various celebrity licenses. In its statement, the company said its “exclusive branded lines of merchandise created with high-profile entertainers and athletes have performed exceptionally well.”

The company disclosed nothing about its plans to close stores, but did say that it had reduced corporate and field staff positions by 172. It’s obtained financing from secured lenders to use cash collateral for operating needs.

Some sources saw the store’s emergence from a bankruptcy, either as an acquisition or a scaled-down reorganization, as a long shot.

Stevan Buxbaum, executive vice president of Buxbaum Group, an appraisal and liquidation firm, took a dim view: “Steve & Barry’s is most likely a liquidation. While there’s talk of Sears looking at the company and some of its assets, that’s not going to happen. The reason is there’s no proof that Steve & Barry’s ever had a working model. The margins were too low. This was just a momentum play. The numbers never worked because there was insufficient margin to sustain the business.”

According to Buxbaum, the retailer kept opening stores to sustain its high growth rate, and landlords offered advantageous lease terms to avoid the risk of empty sites. Buxbaum isn’t optimistic about the likelihood of new tenants for any vacated sites because “there is no growth at retail.”

The company has been criticized for lack of transparency during its recent swoon and didn’t state the size of its losses. Neither was that information available in its Chapter 11 petition because Steve & Barry’s hasn’t yet filed a schedule of assets and liabilities. The petition did state that assets were between $500 million and $1 billion, with a similar range for its liabilities. The petition also said that the company expects there will be some funds available to pay unsecured creditors, but gave no indication of what the potential payout might be.

Among its top trade creditors were a number of landlords, including Simon Property Group of Indianapolis which, with $2.2 million owed on leases, was the fifth-largest unsecured creditor. Also making the top 30 list of unsecured creditors in the leasehold category were CBL & Associates of Chattanooga, Tenn., $1.2 million; General Growth Management Inc. of Chicago, $1.2 million, and Westfield Corp. Inc. of Los Angeles, $812,030.

Most of Steve & Barry’s better-known fashion labels — Bitten by Sarah Jessica Parker, Dear by Amanda Bynes and Eleven by Venus Williams, as well as a group of TV-related brands from CBS Consumer Products — are believed to be licensed, but licensing obligations don’t appear to have figured in the cash crunch. However, because these labels aren’t owned by the company, there’s no guarantee that they would be included in a sale.

Of particular popularity among consumers has been Bitten by Sarah Jessica Parker, launched in June 2007. Sources familiar with the Bitten label say it is owned by Parker. Requesting anonymity, an attorney familiar with the license said the line could be transferred to another licensee, a possibility in the bankruptcy, but would require Parker’s approval.

Other sources with knowledge of the Bitten operations said Steve & Barry’s is current in its royalty payments to Parker under the licensing agreement.

According to bankruptcy court papers, the largest unsecured creditor is Zheng Yong in Nhlangano, Kingdom of Swaziland, for $3.9 million. Other top trade creditors include: Texport Syndicate in Andheri, Mumbai, $3.3 million; Yixing City in Shanghai, $2.5 million, and Gildan Activewear in Quebec, $2.5 million.

For now, the retailer is exploring options regarding the sale of the company or selected assets to repay its outstanding debt.
Shore and Prevor added that the company has invested more in capital expenditures in the last year, but has yet to have the opportunity to “fully realize” the planned returns from those investments.

In addition, many suppliers had cut off access to service and supplies, and money the store expected to get from mall operators in some cases hasn’t materialized.

“Landlords have stopped remitting contractually owed payments for construction and store opening work performed by Steve & Barry’s,” the co-ceo’s said. “As a result of all of this, our loans have gone into default, and we have had no alternative but to file Chapter 11 to enable continued operations.”

Expressing “grief and disappointment,” the two also said that they had “been through 23 years of economic cycles, but we never thought it would be possible for things to change so quickly and dramatically. We brought on the best advisers and experts in the industry, but we were not able to find a solution without filing for Chapter 11 protection.”

Court papers said the company hired Weil, Gotshal & Manges as its bankruptcy counsel; Conway, Del Genio, Gries & Co. as financial adviser, and Goldman Sachs Group Inc. as investment banker.

 

For now, all its stores will remain open with business operations functioning normally. The company’s gift cards and store credits continue to be honored, and its return policies remain in place. Steve & Barry’s also said suppliers will be paid under normal terms for goods and services provided after the July 9 filing date.

At last year’s WWD/DNR CEO Summit, Andy Todd, president of the company, quoted basketball star Stephon Marbury as being incredulous when he saw Steve & Barry’s $10 basketball shorts and $12 jerseys, prompting him to develop the Starbury Collection of inexpensive basketball sneakers and apparel in tandem with the stores.

“How do you do that?” the athlete asked about the low prices.

The market, like the athlete, is still waiting for an answer.

 

 

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