By  on August 5, 2008

Another day, another retailer files Chapter 11. In what is becoming a major trend of this economic downturn, Boscov’s on Monday joined the growing list of retailers thrown into bankruptcy as the combination of consumer caution and the credit crunch forced the middle-market chain into Chapter 11. The 97-year-old firm, based in Reading, Pa., filed a voluntary Chapter 11 petition in Delaware for bankruptcy court protection and is considering a sale of the chain. Speculation immediately pointed to Belk Inc. as a possible buyer, but other observers questioned whether the Charlotte, N.C.-based chain is either interested in or capable of making such a deal and expanding beyond its core Southeast base. The filing Monday puts Boscov’s in the company of the larger Mervyns, which filed for bankruptcy a week ago, and Goody’s Family Clothing Inc., which took the same step on June 9. More so than Goody’s, Boscov’s and Mervyns were in areas that have been particularly hard-hit by economic difficulties, with the troubles in Boscov’s inland middle-Atlantic markets predating the current downturn. Finally, tightening credit terms from factors and the more pronounced recent slowdown in consumer spending hurt the retailer. Steve & Barry’s, Shoe Pavilion, Whitehall Jewelers and Linens-N-Things also have sought bankruptcy protection this year. Boscov’s, which operates 49 stores in six states, posted sales of slightly more than $1.25 billion in 2007. Sources said it could close 10 unprofitable sites, including seven of the 10 that it bought from Federated Department Stores Inc., now Macy’s Inc., in 2006, and seek to find a buyer as its exit strategy from bankruptcy proceedings. In a declaration by Michael J. Hughes, executive vice president for capital development at Boscov’s, the company is seeking court approval of a $225 million debtor-in-possession credit facility with Bank of America as the administrative agent. The retailer plans to file a reorganization plan by Oct. 22 and hopes to exit bankruptcy proceedings during the first quarter of 2009. Hughes said in his affidavit that the “collapse of the housing market, skyrocketing energy and gasoline prices and steadily increasing food costs resulted in a decline in discretionary spending by consumers.” He noted the tightening of the credit markets added to the constraints of the broadline retailing industry that already had “operated on thin profit margins,” which in turn resulted in inadequate liquidity levels. Described as the largest family-owned, full-service department store chain in the U.S., the typical Boscov’s store serves smaller, middle-market communities. Hughes said the stores and Web site feature a “broad and deep mix of competitively priced styles and national and private label brands, as well as specialized departments, such as beauty salons and eye care outlets. Eight locations also have an in-store restaurant called The Greenery. Boscov’s counts as competitors Macy’s, Wal-Mart Stores Inc., Kohl’s Corp., J.C. Penney Co. Inc., Sears, Roebuck & Co. and Kmart Holding Corp. The Boscov and Lakin families, which own the company, had injected nearly $30 million to shore it up in the past month. The filing ended discussion about whether they would be willing to give another cash infusion to their firm. The retailer pointed out in court papers that it still operates departments many other stores have exited, such as greeting cards, household appliances and toys, a point of differentiation of which it has been historically proud, but which also has driven up its operating expenses. According to Hughes, Boscov’s has 9,500 employees and relationships with more than 3,000 vendors worldwide. For the three months ended May 3, it posted sales of $263 million. Boscov’s said it had $538 million in assets and $479 million in liabilities at that time. According to the affidavit, liabilities include $122 million owed on a senior secured credit facility that includes $35 million in outstanding letters of credit, a junior secured term-loan agreement, unsecured trade debt and lease obligations. The largest unsecured creditor listed in the bankruptcy court filing is Jones Apparel Group Inc., headquartered in Bristol, Pa., holding trade debt of $3.1 million. Kellwood Co., based in Chesterfield, Mo., is second, holding a trade claim of $2.6 million. Other top unsecured creditors listed in the bankruptcy petition include: Dunner, New York, $1.3 million; GMAC Commercial Credit, New York, $1.2 million; Hanes, Winston-Salem, N.C., $1.2 million; Phillips-Van Heusen Corp., Bridgewater, N.J., $1.1 million; Adidas, Spartanburg, S.C., $1 million; Levi Strauss & Co., New York, $834,285; Polo Ralph Lauren Corp., Greensboro, N.C., $781,988; Rosenthal & Rosenthal Inc., New York, $624,954, and Liz, North Bergen, N.J., $548,855. “When the court approves the DIP financing and we review the company’s budget and cash-flow forecast, we will consider a change in our credit opinion,” said Bob Carbonell, chief credit officer for Bernard Sands, a credit-checking firm. Most factors and credit agencies had supported Boscov’s until a few weeks ago, when word started to filter through the credit community that the company wasn’t paying many of its vendors. According to one credit source, who over the weekend visited one of the stores Boscov’s is shuttering, “The store I went to is showing its age. Worse is there was very little inventory on the sales floor.” Meanwhile, despite the low demand for retail acquisitions in the U.S. market at this time, some executives began speculating about who could be a potential buyer for the retailer and help it exit bankruptcy proceedings. One name that was being whispered by credit sources and others is Belk. A credit analyst said Belk has looked at Boscov’s before and is likely interested in expanding its territory. Boscov’s back in 2005 had considered putting itself up for sale, but decided to remain independent, selling a portion to management outside the Boscov and Lakin families. Belk is no stranger to acquisitions, but its interest in additional purchases is questionable. The Charlotte, N.C.-based department store, the largest privately held retail operation of its kind, acquired 47 Proffitt’s and McRae’s department stores from Saks Inc. in 2005 and then 38 Parisian units from Saks the following year. Retail experts said Belk can thrive by offering small-town America, a fertile, yet underserved market, life after Wal-Mart. While Belk is in a few larger markets, such as Charlotte, most of its stores are in towns with populations of about 20,000 and median household incomes of $30,000. Focusing on small-town America also avoids direct competition with retail giants, often leaving Belk as the only purveyor of higher-end, branded apparel for consumers who don’t want to or can’t make a trip to a metropolitan area. While the demographic match may be sound, the geography and financial elements may not match. Sources said Belk is continuing to absorb its acquisitions from Saks and, while fascinated by the question of how it would fare elsewhere, is reluctant to venture outside the Southeast, where it is well established and operationally efficient. It also is not immune to the economic pressures facing most retailers in the current environment. Hughes said in court filings that Boscov’s is exploring whether a third-party sale for “substantially all of debtors’ assets is in the best interest of the debtors’ estates.” It has also hired Lehman Brothers to explore the possibility of raising new capital for the retailer. However, as one credit analyst observed, “raising capital might be tough in the current environment, particularly since most of Boscov’s assets are encumbered by liens and other secured interest in connection with existing pre-petition financing facilities.” Regionals such as Boscov’s and Mervyns have been hard-hit by the economy in the past few months, and Boscov’s February 2006 acquisition of 10 units from what is now Macy’s did nothing to help its bottom line. Emanuel Weintraub, president of Emanuel Weintrab Associates, commented, “If you are selling the middle class, as Boscov’s is doing, and you’re competing with everyone from Wal-Mart to Macy’s, you’re at a huge risk today. It was hubris to think that they could buy 10 stores from Macy’s after the May acquisition and grow 25 percent profitably. “Things weren’t as tough then as they are now,” he continued, “but the world wasn’t in great shape at that point either. They needed a better crystal ball than the one they had.” Macy’s sold those stores as part of a disposition strategy after it bought May Department Stores Co. in 2005. At the time, the acquisition was supposed to have been a major growth vehicle for Boscov’s. However, those sites “have not generated the increases in profit and cash flow anticipated by the debtors,” according to court papers. Seven of those sites will be shuttered. Boscov’s has inked a deal with Gordon Brothers Retail Partners for the sale of those locations and three others. The auction would be on Aug. 13, with going-out-of-business sales for the closed sites to begin Aug. 15. The transaction is subject to better offers. Court papers said the GOB sale is expected to bring in $34 million for just the value of the liquidated inventory. The stores slated for closure include three in Maryland, in Glen Burnie, Owing Mills and Baltimore; five in Pennsylvania, in Monroeville, North Wales, Langhorne, Pittsburgh and Harrisburg; one in Virginia, in Danville, and one in New Jersey at the Monmouth Mall in Eatontown.

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