Even as the industry digested the news of a bankrupt Mervyns, rumblings grew of another potential Chapter 11 filing by a major retailer: Boscov’s Department Stores.

Sources told WWD that Boscov’s could file for bankruptcy as early as Monday, depending on whether it is able to secure a cash transfusion. Sources also said the owning families might inject more cash into the chain to prevent a bankruptcy filing, but after making a nearly $30 million contribution within the last month, there’s a greater chance that additional capital might not be forthcoming.

While the news about Boscov’s addressed the issue of “who’s next?,” others were focused on the equally pressing question of what is next for Mervyns, the $2.5 billion California-based midtier department store with 177 units in seven Southwestern and Western states. Many observers of the national and West Coast retail scenes were left pondering if the regional chain can emerge from the grueling bankruptcy process but, perhaps more critically, what its role would be in a retail world increasingly dominated by national chains like Kohl’s Corp. and J.C. Penney Co. Inc., discounters like Wal-Mart Stores Inc. and Target Corp., and nimble specialty and off-price retailers.

“Mervyns just can’t seem to compete well against Kohl’s,” said San Francisco-based retail analyst Jeff Green of Jeff Green Partners. “Kohl’s strategy has been to open a number of stores simultaneously and come in strong, especially in markets like Southern California. It was an effective way to muscle into the market and Mervyns couldn’t help but take a big hit there. They were seeing market share eaten right up.”

Mervyns “wasn’t in that same position” that would allow it to keep up with Kohl’s “big money strategy,” Green added. “It’s an aging brand,” he said. “They don’t do a whole lot of big marketing.”

Retail consultant Walter Loeb acknowledged that Mervyns had been “a vibrant company” in the past. “It had a good assortment,” he said. “Today, both the discount chains and the low-margin retailers have overtaken them in so many ways. It has been mismanaged for so long….The consumer has found other places to shop for value.”

But is there a place for it in the future? “Frankly, the low-end consumer in California and maybe Arizona would probably still shop at Mervyns, but then you would have to close so many stores to bring the operation to a profitable level,” Loeb said. “At that point, the operation would be so small that you would have to wonder whether it is still worth keeping open from an operational basis.”

Loeb considered the bankruptcy “inevitable. I think the company is irrelevant. It could be a liquidation.”

If a liquidation were to occur, it would put 177 retail spaces averaging 80,000 square feet into the “For Rent” category. The footprint could conceivably work for retailers such as The TJX Cos.’ T.J. Maxx and Marshalls divisions, Bed Bath & Beyond, H&M, Best Buy and Forever 21, which generally operate from similarly sized formats. Kohl’s could also avail itself of locations, although it tends to operate with a larger footprint.

Isaac Lagnado, president of Tactical Retail Solutions Inc., considers the timing of the bankruptcy at Mervyns telling. “The penetration of the back-to-school business at Mervyns, as a percent of the total business, was among the highest in the industry,” he said. “At one time, the number was 20 percent. Back-to-school has been a historical strength of the chain, far more than the typical chain.”

So with vendors and factors tightening the spigot at such a crucial period, Mervyns needed to act decisively to get help, in this case a $465 million debtor-in-possession facility, not yet approved, from a group led by Wachovia Capital Finance Corp.

Lagnado noted the chain’s troubles represented a reversal of fortune from events in the Eighties and Nineties, when Mervyns, then owned by Dayton Hudson Corp. (later Target Corp.), expanded rapidly and moved into states outside its West Coast base. Meanwhile, stores including Sears and J.C. Penney were struggling and the discounters had yet to fully reach their stride. In the late Eighties, the larger department store groups — Federated Department Stores, Allied Stores Corp. and R.H. Macy & Co. — were struggling with leveraged buyout-related problems of their own.

Especially since rumblings of credit difficulties at Mervyns began earlier this year, its downfall was for many not a question of “if,” but of “when.”

On Monday, the day before the chain’s Chapter 11 filling, David Simon, chief executive officer of Simon Property Group, told a Wall Street conference call, “We have always earmarked Mervyns to go away. The fact that it’s lasted this long is a testament to the guys who own it and operate it. It’s just been out-positioned between Penney’s and Target.…You see very similar tenants like Penney’s that are performing reasonably well, and it’s just that Mervyns was an afterthought at [former owner] Target and it’s not something that we haven’t anticipated.”

A retail source with knowledge of Mervyns operations noted, “Mervyns really does cater to a value-oriented consumer who has been hit very hard by all these macro issues, and you have to remember that Mervyns operates a lot of stores in areas that have been hit hard, like Las Vegas and Southern California.”

The source said Mervyns has mostly lost market share to Penney’s and Kohl’s, its two most direct competitors. However, Mervyns caters to an average household of four which has annual income of $50,000, whereas Penney’s and Kohl’s typical customers are more affluent, with household incomes of $60,000 and $65,000, respectively. After those two chains, Mervyns’ toughest competitors are Wal-Mart, Target and Family Dollar Stores, the source said. “There is no question that Penney’s and Kohl’s have been on the attack,” the source said.

But Mervyns’ problems go back many years to when the company was still owned by Target, which backed off its investments in the chain after its profitability declined in the Nineties.

After Mervyns was bought by private equity concerns in 2004, the retailer underwent a portfolio cleansing that shuttered nearly 90 stores, leaving the chain with many stores in good locations. Not long after that process, approximately three years ago, about 10 stores were opened in stronger locations than Mervyns had occupied previously. Among the best are those situated in the Del Amo mall in Los Angeles, among the nation’s largest shopping centers, and in San Francisco, Oakland and Pleasanton, Calif.

Since the sale of the real estate portfolio by its private equity investors, Mervyns stores are all leased.

“Suppliers need Mervyns, but this is going to be a fight for survival,” the retail source said. “The customer has a lot of shopping choices.”

Jack Kyser, chief economist for the Los Angeles Economic Development Corp., said the bankruptcy could have a visible effect on Southern California since many Mervyns locations are in poorer neighborhoods where finding new tenants in the midst of an economic downturn will be especially difficult.

“The key will be what happens to those sites and if Mervyns can do something to get out from under this,” Kyser said. “Things don’t look good, except if they can make some savvy real estate moves now, but there are not many large retailers out there as potential tenants in Mervyns’ spaces.”

Mervyns’ real estate assets were separated from the operating company after Target sold the retailer to a consortium including Sun Capital Partners Inc., Cerberus Capital Management LP and Lubert-Adler and Klaff Partners LP in 2004.

The real estate holdings were put into eight entities, all of which begin with MDS, such as MDS Realty Holdings I. The MDS entities did not file for bankruptcy and are now one of Mervyns’ landlords. Numerous sales have followed, including a sale-leaseback involving a joint venture of Developers Diversified Realty Corp. and Macquarie Trust, which acquired 36 stores for $396 million in 2005, and Macerich’s acquisition of 43 units for $430 million in February. Developers Diversified Realty said last week that Mervyns, its second-largest anchor retailer, was current on all payments.

Economic headwinds certainly provided no shelter for Mervyns as it battled against insolvency. In June, with the national unemployment rate at 5.5 percent, California’s stood at 6.9 percent and Nevada’s at 6.4 percent. Arizona’s came in at 4.8 percent, below the national average. According to state and federal records, California’s unemployment rate has been at least 1 percent higher than the national average every month this year except February, when it was 0.9 percent higher.

The housing crisis made a substantial contribution to the crisis as well. Nevada, California and Arizona had the top three foreclosure rates in the country during the first half of 2008, with one foreclosure for every 23, 34 and 40 housing units, respectively. Total foreclosures for the year to date in California are 387,214, up 104 percent from the comparable months of 2007; in Arizona, 65,351, up 138 percent, and in Nevada 45,717, up 81 percent. Nationwide, foreclosures are up 59 percent so far this year, according to a national study conducted by RealtyTrac Inc.

But Mary Ann Domuracki, managing director of Financo Inc., thinks there could still be a place for the chain. “It’s a difficult retail and financial market and it’s not surprising vendors are skittish,” she said. “Mervyns has a long history and we would hope a strategic [buyer] sees value in its heritage and platform.”

Jason Asaeda, an equity analyst at Standard & Poor’s, told WWD, “Because the economy is so weak right now, I don’t know if [the bankruptcy] is going to have an appreciable effect on companies like Kohl’s or even, let’s say, a Target or a Penney’s. I think everyone is struggling to win dollars from consumers, so even if one competitor is in bankruptcy, I think it really depends more on the execution of merchandising and marketing on a company-by-company basis.”

In categories where there is brand overlap between Mervyns and its competitors, as there is in some cases with Kohls, “I think it really depends on how they are pricing. I don’t really see a huge impact on other companies right now,” Asaeda said.

The long-term effects could be different, however. While the Mervyns bankruptcy might not give a big boost to competitors immediately, it might set those companies up for better growth once the economy turns.

“In any given sector, as weaker operators exit the market or there is an acceleration in store closings, stronger operations tend to consolidate their market share,” said Monica Aggarwal, a retail credit analyst at Fitch Ratings. “Even if they don’t pick up stores, they have less competition.”

For many, the filing is a reminder of how quickly the innovator of one season can become the tired old formula of the years ahead. Certainly, with his different approach to merchandise assortment and pricing, as well as his trailblazing use of tabloid circulars, Mervyns founder Mervin Morris, who started the company in 1949, was among the most admired and imitated retailers in the U.S.

“Mervyns at one point in their history was an icon of what you would call big-box value retailing,” said Arnold Aronson, managing director of retail strategies Kurt Salmon Associates. “No question that Mervin Morris was a pioneer in the industry. He built Mervyns into a store that was emulated by many, including Kohl’s.”

That competitive pressure, along with the housing-led slump in California and other economic woes, proved to be too much for Mervyns.

“Mervyns is not an exception,” said Aronson. “Right now Mervyns is in the middle of this kind of perfect storm.”

As are many other retailers, especially other regional ones like Boscov’s, whose roots in the central and western parts of New York and Pennsylvania are deep and well-established.

Founded by Solomon Boscov, the 75-year-old chain is owned by the families of Albert Boscov, Solomon’s son, and Edwin Lakin, a son-in-law, according to the company. The stores were recapitalized two years ago, giving 5 percent of ownership to nonfamily management.

A phone call seeking comment on Boscov’s financial condition wasn’t return by press time.

However, within the last week, Boscov’s has become the latest retailer to lose support in the credit community.

Vendor and credit sources said the factoring arm of CIT’s trade finance group earlier this month put a “hold” on future orders to the Reading, Pa.-based chain. One source said CIT wanted more information from the retailer before committing to approval on future orders. CIT has not pulled support for back-orders. Consequently, recent orders that were approved, but not yet shipped, were not affected by CIT’s latest decision.

Several credit sources said CIT’s decision followed the path of other factors, such as GMAC and Milberg, which were among the first to hold approval on orders pending more information from the retailer earlier this month.

As with Mervyns, the problems at Boscov’s have been ongoing for several months. Some sources in the vendor community said they have been waiting for payment from Boscov’s on previously shipped orders and contacts in the credit community said that even some big-name vendors have experienced slowness in payment.

The problem now is that nearly half of its suppliers have stopped shipping merchandise. It was the same problem Mervyns encountered when it lost support from the credit community. Because of concerns of a bankruptcy filing, and account balances on shipped orders still unpaid, many vendors are no longer willing to ship goods and take on the risk of incurring an even bigger unpaid balance due.

Market estimates put Boscov’s sales at just over $1 billion, making it among the largest privately held department store companies in the U.S. The largest is Belk Inc., which had sales of $3.82 billion in 2007.

Boscov’s currently has 49 stores in six states in the mid-Atlantic region. The chain’s brand assortment includes Liz Claiborne, Tommy Hilfiger, Champion, Calvin Klein and Elizabeth Arden. Some stores also carry Clinique, Estée Lauder and Lancôme, according to the company.

Regional department stores have been hard-pressed to compete with national retail chains in the last few years, and that pressure has grown in recent months as consumers have shopped less and lenders have been more selective about their financing. In addition to Mervyns and Boscov’s, other regional retailers hitting difficulties include Goody’s Family Clothing Inc., which filed for Chapter 11 bankruptcy court protection in June.

Goody’s on Friday filed its disclosure statement, which is pending approval by the bankruptcy court before it can solicit votes from creditors regarding its plan of reorganization.�

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