December 30, 2008 in Business

Retail fallout looms

Experts say 160,000 stores will have closed by end of year
By ANNE D’INNOCENZIO Associated Press
 
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Fallout from the dismal holiday sales season promises to have a lasting impact on how the retail industry operates.
(Full-size photo)

Retail bankruptcies

Among notable retailers who have filed for bankruptcy protection since May:

Circuit City Stores Inc., the nation’s second-biggest electronics retailer, filed for bankruptcy protection last month as it faced pressure from vendors and consumers who aren’t spending. It plans to keep operating.

KB Toys filed for bankruptcy protection two weeks before Christmas, has begun to liquidate its stores and plans to shutter operations. It is the second time KB Toys has filed for bankruptcy protection; the first was in January 2004.

Parent Co., the operator of online toy seller etoys.com, filed for Chapter 11 bankruptcy protection this week and said it will consider selling some or all of its operations.

Linens ’n Things filed for bankruptcy protection in May. It announced liquidation sales at its stores in October after failing to find a buyer that wanted to operate the company.

Steve & Barry’s filed for Chapter 11 bankruptcy protection in July, then later abandoned plans to keep stores open and said it would liquidate.

Mervyns LLC filed for Chapter 11 bankruptcy protection in July and said it planned to begin liquidation sales at its remaining stores and wind down its business.

NEW YORK – The fallout from the horrific holiday season for retailers has begun, with the operator of an online toy seller filing for bankruptcy protection and more stores expected to do the same – meaning more empty storefronts and fewer brands on store shelves.

A rash of store closings, which some experts predict will be the most in 35 years, is likely to come across areas from electronics to apparel, shrinking the industry and leading to fewer niche players and suppliers.

The most dramatic pullback in consumer spending in decades could transform the retail landscape, as thousands of stores and whole malls close down. And analysts expect prolonged woes in the industry as the dramatic changes in shopping behavior could linger for another two or three years amid worries about the deteriorating economy and rising layoffs.

“You are going to see a substantial retrenchment in the retail industry,” said Rick Chesley, partner in the global bankruptcy and restructuring group at international law firm Paul Hastings. “The downturn has been catastrophic.”

A number of stores couldn’t even make it to Christmas. Circuit City Stores Inc. filed for bankruptcy protection last month. It plans to keep operating, but toy seller KB Toys, which filed for bankruptcy earlier this month, is liquidating its stores and will shut down.

The survival prospects for many more stores are dimming as more sales data come in about the crucial holiday shopping season, which can account for up to 40 percent of a retailer’s annual profit.

Holiday sales fell from 2 percent to 4 percent compared with a year ago, according to SpendingPulse, a division of MasterCard Advisors. Excluding gas and car sales, they dropped between 5.5 percent and 8 percent from Nov. 1 through Dec. 24, as key categories from luxury to electronics posted double-digit sales declines. Sales of electronics and appliances fell almost 27 percent, for example.

The retail casualties are expected to cut across all sectors as shoppers have slashed their spending on non-essentials.

About 160,000 stores will have closed this year and 200,000 more could shutter next year, said Burt P. Flickinger III, managing director of consulting firm Strategic Resource Group. That would be the industry’s biggest contraction in 35 years. In March and April of next year, Flickinger expects 2,000 to 3,000 malls to shutter.

AlixPartners LLP, a turnaround consulting firm, predicts that 25.8 percent of 182 major retailers it tracks are either facing major financial distress or will face a significant risk of filing for bankruptcy either next year or in 2010 – the highest level in the 10 years that the firm has been compiling the figures. That compares with the 4 percent to 7 percent that it predicted would face financial woes in the previous two years.

Among the most vulnerable are retailers that have debt coming due soon and had relied on solid holiday sales to generate cash, said Matthew Katz, managing director in the firm’s retail performance improvement practice. But he said he’s also watching merchants whose debt is not due until later in 2009 or 2010 but are paying big interest payments as they struggle with high debt loads and shrinking revenues.

Some of the retailers that analysts say they are watching carefully are struggling regional department store Bon-Ton Stores Inc., of York, Pa., and apparel retailer Goody’s Family Clothing Inc., which filed for bankruptcy protection in June but emerged from Chapter 11 in October.

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