NEW YORK — Bradlees Inc.’s apparent move to liquidate is expected to spark a spirited chase for its prime real estate in the coveted Northeast market.
As expected, reports surfaced last week that Bradlees had signed a deal with Gordon Brothers Group LLC to hold going-out-of-business sales at its 105 stores, and an imminent bankruptcy filing was expected in order to conduct the liquidation.
Bradlees did not return phone calls seeking comment. Gordon Bros. declined comment.
The liquidation would represent the demise of yet another regional discounter, but should spark a spirited auction for Bradlees’ prime locations in the crowded Northeast market.
Many competitors have been lusting over Bradlees’ locations given the lack of construction of new malls and strip centers, as well as problems finding spots to construct new stores due to zoning regulations. Some national chains, particularly Wal-Mart, have had major difficulties moving into the New England area because of protests by local interests. Quickly moving into a former Bradlees unit would solve many chains’ Northeast expansions problems.
“I expect fairly aggressive bidding activity by both discount stores and specialty stores,” said Michael Exstein, at Credit Suisse First Boston.
Bradlees now operates 105 stores, primarily in Massachusetts (35), New Jersey (30) and Connecticut (17). Other store locations include New Hampshire, Pennsylvania and New York. Bradlees’ average store size is 78,000 square feet, ranging from 60,000 to 90,000. Many of the recently opened locations are larger, such as a Staten Island store that opened in May.
Kohl’s and Target are generally expected to head the list of acquisition candidates since both are fairly new to the Northeast, but many retail observers expect Kmart and Wal-Mart will look to fill in some regions. Although the stores may be a small size for some, many stores have been becoming crafty with real estate in order to expand in the tight Northeast market. Both Kohl’s and Wal-Mart gutted the back offices of many former Caldor stores to substantially increase the selling space.
A few also expect expanding big-box specialty chains to be interested, with many citing Home Depot, H&M, Staples, Lowe’s, Best Buy, Old Navy and Costco as possible occupants.
The key location appears to be Bradlees’ flagship at Union Square, a store between University and Broadway in Manhattan. The six-level unit, with 143,000 square feet of selling space, is the chain’s second-largest store, after the 147,000-square-foot Yonkers unit. Before Bradlees opened in November 1994, Mays Department Store had a store there.
“The area has become a great shopping area and centrally located near all the subways,” said Walter Loeb, at Loeb Associates. “There’s a resurgence in that area that is very important.” Target, H&M and Home Depot have all been rumored this year to be looking at the Union Square store. Other possible takers for the location are Sears and Nordstrom, which both are said to be looking for a presence in Manhattan.
Kohl’s is expected to be the most aggressive bidder because of its wild success this year in opening up 33 stores in the New York metropolitan area. Volumes in those stores has been running 33 percent higher than initially planned.
“The (tri-state) stores opened extremely strong and right now are running at or above planned levels, so you suspect that they want to further cluster the market and leverage advertising and distribution costs and build some more brand recognition,” said Mark Picard, at Lazard Freres.
J.P. Morgan’s Shari Schwartzman Eberts said a Bradlees’ bankruptcy “could be good news for Kohl’s as Bradlees stores provide an attractive real estate opportunity, particularly in Massachusetts. Additional Northeast expansion could provide the next positive catalyst for Kohl’s stock, particularly given its great success in the New York metro area this year.” Many expect strong bidding because of the much-better-than-expected prices fetched in the liquidation of Caldor leases in early 1999. Kohl’s, Wal-Mart, Kmart and Ames grabbed most of those locations. About 60 percent of Bradlees stores had direct market overlap with a Caldor location, but the overlap is smallest in Massachusetts. Bradlees is based in Braintree, Mass.
The ongoing liquidation of Grand Union is also fetching high prices, indicating that scarce real estate in the Northeast is driving prices up.
Eric Bender, an analyst at Ladenburg Thalman, earlier this year put out a report that estimated Bradlees’ shareholders could get up to $10 a share in a liquidation given Bradlees’ good real estate, although he noted Friday that “there’s lots of risk in a reorganization when you’re talking about bankruptcy and liquidation.”
Bradlees’ shares closed at 22 cents, down 16 cents, in Nasdaq trading Friday.
Despite the coveted real estate, the move to liquidate was expected since Bradlees said in a filing on Dec. 12 that it was in discussions with its lenders to amend certain loan covenants before Dec. 23, when a revolving loan agreement expired. If it failed to get an agreement, it said it was considering alternatives, including “strategic combinations and partial or complete liquidation.” Bradlees also stopped making payments to suppliers on Dec. 9.
The chain reported a loss of $37.3 million in the first nine months ended Oct. 28 versus a net loss of $28.3 million the prior year. Sales fell to $1.05 billion, a 1.5 percent decline that was 4.4 percent on a same-store basis. Peter Thorner, Bradlees chief executive, blamed “higher gas and heating oil prices, an uncertain economic environment, new competitive store openings and a more promotional retail environment.”
Same-store sales declined 9.2 percent in October and 4.3 percent in November.
But many said the end of Bradlees was inevitable given the fierce competition in the Northeast from many national chains, particularly coming from the entry of Wal-Mart into the area. More recently, Target and Kohl’s entries into the Northeast were seen as particularly burdensome for Bradlees. Kmart and Ames, as well as other budget concepts such as Old Navy, were seen as taking market share from Bradlees.
“The competitive environment was intense in all the areas that the company traded in,” said Loeb Associates’ Loeb. “As a result of this, it was not achieving anywhere near the levels of sales it needed to survive. Nothing worked.”
Bradlees, founded in 1958, reached its heyday in the Seventies and Eighties when it positioned itself as the upscale discounter compared with Kmart, much like Target does now to Wal-Mart. The stores featured a greater focus on fashion and apparel than typical discounters and five-and-dime stores. They also featured a much more department-store like setting; with boutique-like departments, wider aisles, brighter floors and vivid signage.
Stop & Shop, which acquired the chain in 1961, spun off Bradlees in an initial public offering in 1992 with an aggressive expansion program. But Bradlees succumbed to a Chapter 11 filing in June 1995, blaming an overly aggressive expansion program, a poor retail environment and fierce competition in the Northeast.
Although Mark A. Cohen, who became chief executive in 1995, attempted to upgrade the chain, that approach failed to curb losses and Peter Thorner, who was credited with turning around Ames, became chief executive in December 1997.
Thorner moved to reestablish Bradlees as a discounter, lowering opening price points on certain items, reintroducing certain commodity products typical of a discount store, increasing the amount of opportunistic buys and decreasing promotions to focus more on every-day low prices. The firm closed about 40 stores in bankruptcy, from which it emerged in February 1999. Without the nuisance of long-time competitor Caldor, Bradlees sported double-digit same-store gains for much of 1999, culminating with a profit of $18 million in the fourth quarter of that year. Same-store sales for 1999 grew 11.7 percent.
But trouble lurked since many competitors — Kohl’s, Wal-Mart and Kmart — opened up in those former Caldor locations to present ever more formidable obstacles for Bradlees. “They were seriously undercapitalized and in early 1999, when things were bullish, it was fine,” said Bob Livote, retail credit manager at Solo Credit. “But a recession doesn’t bode very well for a company in a weak leverage condition.”
Many believed the banks could have given Bradlees a waiver to make it into 2001, but decided to make the move to liquidate given the a dismal odds for Bradlees turnaround.
“The banks probably felt that this company isn’t going to grow, and the competition is going to continue to keep coming,” said Eric Bender, retail analyst at Ladenburg Thalman. “Target isn’t going to stop coming and Kohl’s isn’t going to stop coming. So they said, ‘Let’s get our money and go.”‘
Most commended Thorner for making a decent effort to turnaround Bradlees, with a few even saying communications and payment to suppliers have been more consistent than in many past troubled situations.
But one analyst said Thorner should have conserved cash better in early 2000 to make it through the holiday season when signs of a deteriorating economy surfaced in early 1999. Another said that while Thorner should be commended, the chain never had the merchant skills to compete.
One observer said the smartest move Bradlees could have made would have been to merge with Caldor — the two held discussions while each was in bankruptcy — in order to gain enough scale to compete with the Wal-Marts and Kmarts. In 1999, Thorner said he was open to combinations and estimated that the chain would need to be at least $5 billion in volume to compete effectively with Wal-Mart, Target and Kmart. Bradlees sales in 1999 reached $1.54 billion.
“It’s unfortunate to see another retailer disappear from the marketplace,” said Stanley Officina, president at Sterling Factors. “As their customers continue to consolidate, it just becomes more troublesome for apparel manufacturers and importers.”