Byline: Jeff Siegel and Rich Wilner

NEW YORK--Caldor Corp. filed for Chapter 11 bankruptcy protection here Monday, after confronting a virtual cutoff of shipments by jittery vendors and factors reacting to a spate of dismal financial reports. Ironically, Caldor had been perceived by Wall Street as the strongest of the regional discounters and in the second quarter ended July 29 was profitable. The filing underscores the uncertain future for regional discounters nationwide and the likelihood those chains competing against Wal-Mart, Target and Kmart--the nation's biggest discounters--could be in trouble.
Bradlees Inc. was forced to file for Chapter 11 protection in late June. Ames came out of bankruptcy in 1992, and Jamesway Corp. emerged from Chapter 11 last January. "The inability to accept price increases and the high level of competition is affecting not just Caldor, but Jamesway, Hills and other regional discounters," said Janet Mangano at Midlantic Bank.
"Look at Wal-Mart's one-million-square-foot state-of-the-art distribution facility and its ability to move product, exploit private label, and it's clear how much at a disadvantage smaller discounters are," said Isaac Lagnado, publisher, Tactical Retail Monitor. Caldor, based in Norwalk, Conn., did $2.75 billion in sales last year. According to Lagnado, regional discounters around Caldor's size don't have the critical mass to compete and need at least $7 billion to $10 billion in sales to survive.
He noted that Caldor's average store size, at under 100,000 square feet, is 25 percent smaller than the current optimal footprint and 75 percent smaller than typical superstores.
Along with the filing, Caldor said it inked a $250 million debtor-in-possession credit facility with Chemical Bank. The deal is expected to restart the flow of merchandise in time for the Christmas selling season.
Don Clarke, chairman and chief executive officer of Caldor, said in an interview that the DIP financing will be augmented by roughly $250 million in cash collateral. In an emergency court proceeding Monday, Caldor received permission to use its cash collateral. That gives Caldor $500 million in available cash, far above any capitalization in the chain's history, according to Clarke.
The 166-unit discounter had come under a credit squeeze in the past six weeks, Clarke said. The executive blamed the squeeze on the "rapidly changing rule for capitalization" used by vendors and factors and on Caldor's failure to react to those changing rules.
Caldor said in bankruptcy court papers that although its fundamental business is "sound," it has recently been up against a "very difficult" retail environment, especially in the Northeast, which has resulted in declining sales and gross margins.
In its bankruptcy petition, Caldor listed liabilities of $882.9 million, including $466.6 million in unsecured debt and assets of $1.21 billion. Caldor shares fell 1 1/4 to 3 3/4 on the New York Stock Exchange Monday. Trading was very heavy, with six million shares exchanging hands.
Factors and vendors began to get nervous about Caldor in early August after the firm warned that profits for the second quarter would be down significantly due to severe pricing competition.
A few days later, the firm reported earnings plunged 60.2 percent to $3.3 million, or 20 cents a share, from $8.4 million, or 50 cents, a year earlier. Overall sales during the period rose 3.7 percent to $670.8 million, but same-store sales fell 3.5 percent. Same-store sales fell 10.4 percent in August, fueling more vendor anxiety.
Without a life net of financing, Caldor slipped into Chapter 11 just weeks later.
Caldor's Clarke said the liquidity problem began in early August with the banks refusing to rework the financing terms.
"The banks didn't want to lend any more money out of fear that the trade would change its terms and siphon out all the money," Clarke said. "At the same time, the factors wouldn't OK shipments until the banks lent more money."
Clarke said negotiations with lenders were held all last week and the possibility of closing a deal for financing and averting a Chapter 11 filing did not disappear until Saturday afternoon.
Clarke said Caldor came close to getting their bank financing during the crucial negotiating week. "I don't think it is appropriate to comment on how close we came to a deal," he said.
As reported, Caldor was negotiating a separate deal with General Electric Commercial Corp. for secured financing. Clarke said Monday that an agreement for an equipment sale lease-back facility with GECC, which could have averted a filing, was reached. "GECC then backed away from it," Clarke said.
Late Sunday night, the Caldor board voted for bankruptcy. On Monday morning, shortly before 8 a.m., the company filed Chapter 11, ending the liquidity problem. "Ever since Bradlees filed, there was a whole environmental change on how we were treated," Clarke said. "Bradlees' filing surprised a lot of people. I saw a general tightening by factors of lines of credit and credit availability. That, combined with a difficult retail environment, including tough second-quarter margins and a tough August, helped change the rules--like how much cash was required to be shipped."
He added, "If everyone was treated as usual, we would have been able to pay for goods through Christmas."
"Of course, some of the issue is our performance," he added. "We are going to look at and adjust our strategy, but this is not a company that needs to, or is going to, throw out our marketing strategy.
"I am frustrated that we had increased earnings and sales through the second quarter, but were forced into Chapter 11. Certainly we are responsible for our own deeds."
He noted some of the brighter sides of the business. Among them:
The DIP will facilitate five to eight store openings next year.
The urban store strategy is working well, and the first Brooklyn unit, opened last July, is a top performer.
No widespread store closings are needed, since most of the chain's 166 units are profitable.
The percentage of apparel, which has increased one point annually since 1987, will continue to grow.
Although the reorganization process was less than six hours old, trade debt began to exchange hands Monday afternoon, and a preliminary market pegged the debt 45 to 49 cents on the dollar, with some quotes up to the low-50s.
Caldor is scheduled to appear in court on Thursday to gain approval of a portion of its DIP facility.--Fairchild News Service

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