Bankruptcies, closings and M&As: as fittest forge ahead, casualty count multiplies - Annual Industry Report - Statistical Data Included

DSN Retailing Today, July 8, 2002 by Debbie Howell

Retailers faced a tough year in 2001 as the recession and the terrorist attacks dealt a double blow to the economy. A record number of companies went bankrupt or bust, while merger activity was relatively subdued.

The most shocking news undoubtedly was Kmart's bankruptcy filing early this year and its decision to shutter 283 of its 2,114 stores. Significant changes in strategy attempted as part of a turnaround plan were apparently too ambitious in the face of the troubled economy and stiff competition. Kmart had been losing ground for years to astute rivals Wal-Mart and Target.

Kmart's latest makeover in 2001 failed to resonate with shoppers, including its new everyday low pricing strategy that instigated price wars with Wal-Mart and Target. The holidays weren't kind to Kmart; comparable store sales declined 1% and contributed to the chain's record $2.42 billion loss for the year. Making matters worse accounting practices under former ceo Chuck Conaway are still under investigation, with earnings restated for three quarters of 2001.

Even with Conaway gone and new ceo Jim Adamson now guiding the company, questions remain about Kmart's long-term viability. Kmart has even hedged on its goal of exiting bankruptcy by July 2003.

But Kmart hasn't been the only discounter fighting for survival. In recent years, regional chains have closed, including Caldor, Bradlees, Zayre, Hills and Venture, and now Ames has returned to the spotlight as a question mark. Many of these discount chains found it impossible to compete with Wal-Mart and Target, which have grown bigger, better and more sophisticated.

Ames, which entered bankruptcy in August for the second time this decade, closed 151 stores last year, dropping its base to a level slightly above that of its merger in 1998 with 155-unit Hills. With these closures, Ames has withdrawn from Illinois, Indiana, Kentucky, Tennessee and North Carolina.

Vendor uneasiness and inability to quickly close a $55 million financing deal prompted Ames to file Chapter 11. The retailer's goal is to reduce long-term debt, reverse last year's loss of $813 million and emerge from bankruptcy this year. Even more than Kmart, Ames was battered by the recession. Overall sales dropped 17.7% and comps declined 12.5% for the fiscal year ended Feb. 2, 2002.

Another pioneer in discounting, McCrory Corp., went bankrupt for the second time and liquidated its 200 remaining stores in November. McCrory spent the past year converting its variety stores to a dollar format, mainly under the name Dollar Zone. At its height, McCrory operated more than 600 stores.

Retailers of all types got slammed by the economy. Service Merchandise, in bankruptcy since 1999, called it quits after suffering a horrible holiday sales period. The remaining 218 stores were shuttered earlier this year, ending the chain's 42-year run and a six-year streak of sales declines.

Several home goods chains folded, including Lechters, House2Home, HomeLife Furniture and HomePlace. For financially troubled HomeBase, the switch in format from home improvement warehouse to home decor was intended as its salvation, yet the House2Home chain that debuted in late 2000 with much fanfare filed for bankruptcy and shuttered all 42 stores in November.

The demise of pure-player dot-coms continued in full force last year, with Webvan and eToys among the largest and once highly touted online retailers disappearing.

Picking up the pieces were financially healthy companies that were able to capitalize on the troubles of rivals, such as Tractor Supply's purchase of the bulk of Quality Stores units. Quality, once the nation's largest farming goods retailer, had filed Chapter 11 in November and its assets were sold a month later at an auction. Tractor Supply added 85 new stores through its successful bid and instantly became top retailer in that specialty niche.

A similar scenario played out for toy retailer The Right Start, which purchased bankrupt Zany Brainy in September and then scored a real coup with the buy of FAO Schwarz two months later. The company is now called FAO Inc.

Earlier in the year, Icelandic retailer Baugur Corporation bought bankrupt Bill's Dollar Stores, merged the 410-store chain with its 20-unit Bonus Dollar Stores chain and renamed the company Bonus Stores Inc. Bill's has now become profitable under executive leadership that hailed from Wal-Mart.

Some of the industry's largest retailers made strategic buys this past year. They included Sears' agreement to acquire catalog retailer Lands' End, Wal-Mart's purchase of Puerto Rican grocer Supermercados Amigo, Best Buy's pick up of Future Shop and Gart Sports' purchase of Oshman's Sporting Goods.

Sears is hoping to rev up its softer side with apparel retailer Lands' End, a strong brand name that appeals to a higher income demographic than the typical Sears shopper. Lands' End apparel will make its way into Sears stores this fall, while the retailer will continue to operate 16 Lands' End outlet stores.

For Wal-Mart, which has been staking out more international territory in recent years, the purchase of 35-store Supermercados Amigo would have slipped under the radar except that it showed the retailer's commitment to food and marked the first purchase of a pure supermarket chain. Larger implications are that Wal-Mart could use more such acquisitions to quickly grow its Neighborhood Market concept, which now stands at 33 units in the United States.