The Deal
Sunday, November 8, 
7:16 am

Ever darkening clouds gather above retailers

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darkcloudretail.gifIt's no secret the retail sector resembles a bombed-out war zone currently. Companies from Midwestern apparel chain Harold's Stores Inc. to the parent of discount retailer National Wholesale Liquidators, NWL Holdings Inc., to electronics seller Tweeter Opco LLC have filed for bankruptcy protection in just the past few weeks. Giants such as Mervyn's Holdings LLC and Linens 'n Things parent Linens Holding Co. are liquidating after failing to attract buyers. Steve & Barrys LLC may liquidate even after finding a buyer -- Bay Harbour Management LLC, which paid $168 million in August. And conditions only seem to be growing worse.

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Advisory firm FTI Consulting Inc. predicts in its 2008 Retail Report that holiday season sales -- from the start of the month through January -- will decline 1% from last year. FTI projected a 3.6% gain last year; actual sales rose 3%. "For the past few weeks, the sector has watched the country's biggest retailers deliver tepid-to-terrible third quarter numbers and offer glum forecasts for the fourth quarter," FTI senior managing director, Bob Duffy, said in a statement.

According to an analyst quoted in a Tuesday Chicago Tribune article, Sears Holdings Corp. needs to "ring up terrific holiday sales" or "it's going to be fairly difficult for them to survive to the next holiday season." His opinion meshes with an unnamed source who told The Deal's Bankruptcy Insider in January that Kmart (now owned by Sears Holdings) "may once again be on the brink of Chapter 11."

Then there's Pier 1 Inc., the subject of a Ticking Timebomb article that ran in Bankruptcy Insider on July 21. On Nov. 17, the seller of decorative home furnishings and gifts said in a filing with the Securities and Exchange Commission that same-store sales in the quarter ending Nov. 29 could fall 16% to 18% from a year earlier. It forecast negative Ebitda of $16 million to $20 million before special charges. Pier 1 has posted sizable net losses in each of the past three fiscal years -- $96 million in 2008 -- and lost another $63 million in the first half of fiscal 2009, ended Aug. 30.

"While it does appear that the company can remain solvent in the near-term given its cash cushion, it is barely operating at subsistence levels," Goldman, Sachs & Co. analyst Matthew J. Fassler wrote. Shares closed at 87 cents on Monday, a drop of 79% since Sept. 30.

Given this terrible retail climate, then, just what is Mexican billionaire Ricardo Salinas Pliego doing buying up shares of bankrupt Circuit City Stores Inc.? Salinas, who controls retailer Grupo Elektra, broadcaster TV Azteca SA and lender Banco Azteca, snapped up 5.3 million shares on Nov. 12, 19.8 million shares on Nov. 13 and 5.2 million shares on Nov. 14, SEC filings show, to become the largest shareholder of the electronics retailer. Circuit City entered Chapter 11 on Nov. 10. Even in the best of times, buying the stock of bankrupt companies can be a futile exercise, as shareholders are the first to be wiped out in a restructuring. Salinas Pliego, however, obviously has faith in the future of Circuit City -- it did list $3.4 billion in assets against $2.3 billion in liabilities in court documents and plans to exit bankruptcy sometime after the first quarter.

Time will tell if the fourth-richest Mexican, worth some $6.3 billion, is sending millions of pesos down the rabbit hole. - David Elman




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