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NEW YORK — The end of a rocky road has come for another regional discounter.
This story first appeared in the August 15, 2002 issue of WWD. Subscribe Today.
Bankrupt Ames Department Stores, which had been hoping for a coming-out party this year, is now going out of business.
The struggling mass merchant said Wednesday it will liquidate and close all of its 327 store locations. Management and its board determined that asset values can best be maximized for the benefit of all creditors by putting a halt to its operating losses by winding down the business, the company said in a statement.
Joseph R. Ettore, chairman and chief executive officer, said, “This was a wrenching decision, but the right course to take. Continued softness in sales, combined with tightening terms and slower shipments from our suppliers, have reduced our funds availability below critical levels.”
Credit analysts told WWD that they don’t expect much in the way of recovery for creditors. “There was a second lien on the inventory when Ames filed for Chapter 11. It was an incentive for vendors to ship. Now the bank owns everything. There’s nothing left for anyone else. I don’t even know if Ames will be administratively solvent,” one analyst said.
A company that is administratively insolvent, for example, can’t afford to pay the professionals that are hired in its bankruptcy case.
In addition, existing shares of Ames stock will be canceled, with shareholders receiving nothing.
As reported in WWD Tuesday, regional stores at high as well as mass levels, are under enormous pressure. Ames’ announcement to liquidate closely follows a similar decision by upscale chain Jacobson Stores, Inc.
With the economic recovery appearing weak, and a spate of high-profile bankruptcies in other industries, retailers seem to be in relatively good shape, according to credit sources. Two names to keep an eye on, they said, are One Price Clothing Stores Inc. in Duncan, S.C., and Gottschalks Inc. in Fresno, Calif.
“The era of the regional discounter was in the Sixties and Seventies. Today, the few that are left just don’t have the clout to compete,” said Isaac Lagnado, president of Tactical Retail Solutions. “Stores like Ames are so commodity-ized and have such little economies of scale that they have no reason for being. The signs have been abundantly clear for years.”
There has been a succession of regional discounters over the past two decades going out of business, including Hills, Jamesway, Caldor, Bradlees, and some have merged into others, like Zayre into Ames, which led to Ames’ first bout with bankruptcy.
With Ames near extinction, some retailers will vie to pick up its sites. “The most obvious player will be Kohl’s,” Lagnado said. “The chain is growing in markets where Ames operates and could fit with the footprint,” of typical Ames locations.
Another expected contender will be Value City, which a few years ago, tried to merge with Ames, but couldn’t work out a deal.
Other chains likely to pick up locations are Filene’s Basement, TJX, Best Buy, Bed Bath & Beyond, Ross Stores, Family Dollar, and Dollar General. As Lagnado noted, “the lowest tier of retail has been healthy and tends to get healthier during bad times. The dollar-store category is very good.”
In some cases, Target might pick up locations, but Target typically requires bigger boxes than Ames has to offer.
Gilbert Harrison, chairman of Financo, said, “With Ames folding, you have to ask whether Kmart will survive. The Ames liquidation proves that unless you have a direct strategy to differentiate yourself, particularly from Wal-Mart, and bring in the customer, you can not survive in today’s world. Wal-Mart has an unbelievable story and continues to grow.”
Ames filed for bankruptcy protection last Aug. 19, its second petition in 11 years. Retailers that file what is referred to as Chapter 22s when entering their second tour of bankruptcy court rarely exit. Bradlees, Montgomery Ward and Jamesway are examples.
In a letter to Ames’ associates, customers and supporters, Ettore wrote: “Our associates and managers have worked long and hard, trying to restore the viability of Ames. But despite those efforts, and the efforts of management to control costs and restructure our operations, the difficult environment for discount retailing and the continued slowness in the economy have made it impossible for us to deliver the volume we need to meet our obligations.”
The current plan for employees is to have store associates and managers report to work while GOB sales are conducted. Distribution center employees will also continue working to move inventory through the stores.
Most associate and managerial positions at headquarters in Rocky Hill, Conn., however, will not continue during the liquidation, Ettore said. In his letter, the ceo said 420 positions at headquarters were eliminated Wednesday. Some were asked to stay on to help with the liquidation.
According to information from the company, associates whose positions ended Wednesday will be paid through that day, with final paychecks mailed to their homes. Associates can still use their store discounts through Saturday.
Up for sale are store fixtures and equipment, company-owned real estate and other assets.
In the case of Ames, sources in the factoring community had expected the troubled chain to go belly up last year. However, with the softening economy and vendors needing a place to ship goods in light of industry consolidation from the last retail bankruptcy spurt during the mid-to-late 1990s, creditors were willing to give the chain more than its fair share of allotted time.
Some creditors also deemed that much of Ames’ value was tied up in its real estate, hoping that a delay in pushing for a liquidation would buy time until assets — whether real property or a lease interest — could be sold. Landlords were also waiting on the sidelines keeping mum, financial advisors noted, because the rental market doesn’t look too bright for replacement tenants.
In the last two months, Ames hit a critical stage when it found itself out of both time and money.
One source said Ames “ate up all of its availability in the last three weeks.”
The mass merchant secured debtor-in-possession credit facilities totaling $755 million when it filed last year, $700 million from G.E. Capital and $55 million from Kimco Realty Corp.
Nearly a month ago, Ames had $47 million in availability, but only $17 million that was accessible. The funding requirement carved out $30 million that could not be accessed, a typical maneuver in DIP facilities. With only $17 million to purchase merchandise during the critical back-to-school season for a 327-store chain, the bank crisis came to a head last week.
Ames filed court papers on Tuesday in Manhattan bankruptcy court seeking an emergency hearing, one to take place by telephone on Wednesday at 2 p.m. for approval to hire a joint venture between Gordon Brothers, the Nassi Group and SB Capital to operate the GOB sales.
Assuming bankruptcy court approval is granted, Ames said that GOB sales will start on Sunday, coinciding with the start of the back-to-school sales that will begin the day before. GOB sales are expected to last 10 weeks.
Ames said gift cards already purchased will be honored throughout the liquidation process. Merchandise bought before the start of liquidation can be returned for a refund through Aug. 25, but would require a receipt for the return. Items put on layaway prior to GOB sales may be picked up through Sept. 1. In addition, the Ames 55 Gold program, which offers a 10 percent discount to senior customers aged 55 and up who are enrolled in the program, will continue each Tuesday throughout the liquidation.
VF Corp. was a major supplier of jeans and other denim and sportswear products to Ames and a member of its creditors committee. Cyndi Knoebel, VF’s vice president of financial and corporate communications, noted VF would only disclose the degree of its exposure if it were to have a material effect on its earnings, which is so far not the case.
“Certainly, Ames had been a good customer but it has had serious problems for quite a while, so we’d been staying on top of the situation,” she said.
Shoe retailer Footstar Inc. said that it will post a second-quarter $9.2 million charge for bad debt in connection with the shutter of its leased footwear departments at Ames. The company also expects additional charges in the second half of the year for related inventory writedowns, asset impairment and severance costs.
Kimco Realty said the Ames liquidation won’t have a material effect on either its 2002 or 2003 operating results. Kimco, a real estate investment trust, leases eight sites directly to Ames. Rents at three of the locations were supported by guarantees from a national retailer, while rents from the sites without the guarantees account for less than 0.4 percent of Kimco’s total rental revenue.
In a research note issued Wednesday on the discount store segment, Mark Miller, equity analyst at William Blair & Co., wrote, “We estimate Ames’ annual revenues are approximately $2.5 billion, which represents about 70 percent of the $3.5 billion in sales that was surrendered by Kmart with its 283 stores closed earlier this year.”
Kmart has been operating under bankruptcy court protection since Jan 22.
Founded in 1958, Ames is a regional, full-line discount retailer with an associate base of 21,500. Ames operates 327 stores in the Northeast, Mid-Atlantic and Midwest.