Crisis at Mervyns: Credit Concerns Mount Over Economic Woes

Lenders and credit analysts are jittery about the future of Mervyns, the $2.5 billion moderate-price regional department store chain.


Lenders and credit analysts are jittery about the future of Mervyns, the $2.5 billion moderate-price regional department store chain.

This story first appeared in the July 21, 2008 issue of WWD.  Subscribe Today.

Industry speculation focused on the possibility of a bankruptcy filing.

Mervyns, based in Hayward, Calif., has been hurt by the housing implosion in that state, and its core customers are being squeezed by rising gas and food prices, job cuts and tight credit.

“We are currently advising all clients to hold orders,” Bob Carbonell, chief credit officer for Bernard Sands, a credit-checking firm, said Friday.

A Mervyns spokesman declined to comment.

Credit sources said the factoring arm of GMAC Commercial Finance has stopped approving orders of goods to the chain, which has 177 stores in seven Western states. An executive at GMAC declined comment.

In May, the factoring division of CIT stopped its approval of orders for Mervyns. That left a few factoring firms, which provide finance and credit to apparel manufacturers and take on the risk of payment for client accounts, still checking credit terms. GMAC was among them, as were Wells Fargo and Millberg Factors on a few orders. Slowly, however, the factors have chosen to advise clients not to ship.

Credit sources said the department store had consistently returned telephone calls to vendors, factors and credit-checking firms until about a week ago, when all communication ceased. That has left credit analysts and executives at factoring firms nervous, with some wondering if a bankruptcy filing might be in the works sooner rather than later.

Buyers are said to be having a difficult time getting some goods to the stores since the factors stopped approving orders. Some vendors are still waiting to get paid for orders shipped, having undertaken the risk themselves after the factors withdrew, credit sources said. The impact on Mervyns of factors withholding approval is unclear. Since May, many vendors have chosen to ship anyway. However, with others still waiting to get paid, it’s uncertain how many orders they will continue to ship.

The expectation since May has been that the retailer could get some much-needed breathing room soon from the sale of five to 10 high-end store sites, or at least enough cushion to get through the important back-to-school selling season and into the fall.

In May, the retailer said 17 new Mervyns stores had opened since a consortium that included Sun Capital Partners Inc., Cerberus Capital Management LP and Lubert-Adler/Klaff acquired the company from Target Corp. for $1.65 billion in September 2004. The chain said the units reflected “its commitment to maintaining a dominant real estate position in California and the Southwest.”

That geographic region appears to be the essential cause of Mervyns’ ills. California, in particular, has presented challenges to most retailers, credit analysts said.

The Mervyns stores that are up for sale are in desirable, high-end sites that are rapidly becoming upscale and more affluent than the retailer’s typical customer profile, credit and real estate sources said.

Mervyns said in May that it hired DJM Realty LLC to sell those stores, and that the transactions were expected to generate “$25 million to $50 million in cash to fund operations and new growth initiatives.”

Although the financial sources said additional funding from the sale of the stores should buy the cash-strapped retailer more time, they cautioned that Mervyns would likely continue to be dogged by rumblings of distress because the bulk of its store base is where consumers are feeling the worst pinch.

The 59-year-old chain, which takes pride in being a family friendly department store, named former Levi Strauss & Co. executive John Goodman as president and chief executive officer in March. Goodman had been president and general manager of the Dockers brand. He replaced Rick Leto, who resigned in December after three years as ceo.

Among the original consortium that bought the chain, Sun Capital is said to have agreed to buy the Lubert-Adler/Klaff stake in Mervyns, although financial sources believe the transaction has not taken place. Spokesmen for Cerberus and Sun Capital did not respond to requests for comment.

Some financial sources said the consortium recouped a good portion of its investment shortly after the purchase through the sale of stores.

One of the bigger deals was in August 2005 when Developers Diversified Realty and Macquarie DDR Trust formed a joint venture for the $396.2 million purchase of 36 Mervyns units. After the sale, the venture leased the assets back to Mervyns for 15 years at an annual rent of $30.5 million.

Of the 36 sites sold, 25 are in California, five in Arizona, five in Nevada and one in Texas. Of the California stores, 12 are in Los Angeles and seven are in San Francisco.

Sources said when DJM Realty sells the five to 10 stores that are targeted, Mervyns’ ownership of most of its units will be minimal.

Mervyns stores are located primarily in regional malls, community shopping centers and freestanding sites.