Ch. 11, M&A activity light: more exit bankruptcy than enter it - Annual Industry Report Top 150 - retail industry - Industry Overview

DSN Retailing Today, July 7, 2003 by Debbie Howell

Except for a handful of high-profile liquidations and mergers, 2002 was a relatively quiet year in retailing. The calm was a welcome respite from the devastation of 2001, when numerous chains shuttered stores or went bust, victims of tough economic times. And though the economy has not revived fully, a few retailers exited.

Kmart, which made news as the biggest retail bankruptcy in history in early 2002, grabbed the headlines again when it emerged from Chapter 11 in May. A considerably different chain now, Kmart is nearly one-third smaller, having closed 600 stores, including half of its supercenters. New ceo Julian Day, who hailed from Sears, has pledged a brand-focused merchandising strategy, yet the jury is still out as to Kmart's long-term survival given still-declining sales. Kmart's downsizing ended its longtime position as the second-largest discounter, with Target surpassing the leaner discount veteran in sales.

Other retailers that emerged included toy retailer FAO Inc., which had filed for bankruptcy protection in January and Frank's Nursery & Crafts, in bankruptcy since early 2001. Like Kmart, FAO shuttered numerous stores, an ironic twist given its acquisition of the bankrupt Zany Brainy chain in late 2001.

Those that emerged were in the minority however, with 10 bankrupt chains liquidating over the past 18 months. Ames was the largest, with its liquidation of 327 stores in August following a one-year period in bankruptcy.

Ames' demise due to slowing sales and tough competition from national chains whittled down the field of regional discounters. Others that have folded in recent years are Caldor, Bradlees, Zayre, Hills, McCory and Venture. Only a handful of regionals remain, some of which are struggling and others thriving, including ShopKo, Fred's, Duckwall-ALCO and Bi-Mart.

Early in 2002, Service Merchandise closed after failed attempts to change its model to one that could withstand competition. Others folding this past year were Mr. Rags, Today's Man, The Wiz, MJDesigns, Mars Music, Phar-Mor, Jacobson Stores and Dollarland, all of which had been in bankruptcy.

One segment of retailing bit hard last year involved music sales. Declining sales of prerecorded music due to the trend of downloading songs from the Internet led in part to the demise of The Wiz and the bankruptcy filing of Wherehouse Music. For some of the same reasons, Best Buy recently sold the 1,100-store Musicland chain that it acquired in late 1999.

On a positive note, however, the number of bankruptcy filings tracked by DSN Retailing Today declined considerably from the record high of 26 noted in 2001. Only six known cases occurred in 2002, followed by 10 so far this year.

Three of the filings were related to food retailing. The cancellation of a supply contract with Kmart led largely to food distributor and retailer Fleming's filing, while tough competition, primarily from supercenters, resulted in the bankruptcies of supermarket chains Penn Traffic and Eagle Food Centers. A couple of struggling apparel retailers also made the list: Today's Man and Mr. Rags, both of which subsequently decided to liquidate.

Most chains with a history of bankruptcy scaled back, accounting for about half of the estimated 20 store-closure programs implemented since early 2001. The largest was Kmart, with two rounds of closures that totaled 600.

Among those feeling the pinch of a tough economy that led to cost-cutting store closures dating back to early 2002 were Stein Mart, Musicland, Food Lion, Factory 2-U, Albertsons, Staples, Linens 'N Things, Toys "R" Us, Charming Shoppes and Kids "R" Us. This list was considerably shorter, however, than its lengthy counterpart for 2001 when record closures were noted.

As for mergers and acquisitions, only a few major deals took place this past year. Caution seems to be the mindset of many retailers in the tough economy, a contrast from the frenzied buying sprees that characterized the late '90s.

The largest deal of the year was the announced merger of Gart Sports and The Sports Authority, the top chains in the $75 billion sporting goods market. Combining these regionals will create the industry's first essentially national chain, with 385 stores in 45 states that generates sales of about $2.5 billion.

A move to become national also drove Dollar Tree with its acquisition of 96-store Greenbacks. The deal expanded Dollar Tree's reach to 47 states, moving the chain into markets that would have taken years to build organically.

In the automotive sector, O'Reilly Automotive and Advance Auto Parts grew through acquisition. Advance purchased 55 stores from bankrupt Trak Auto, while O'Reilly acquired two small chains. But these deals were peanuts compared with moves in 2001, when Advance bought 667-store Discount Auto Parts and O'Reilly purchased 85-unit Mid-State Auto Distributors.

Wal-Mart, meanwhile, recently unloaded its McLane distribution division and expanded internationally with two key deals. In December, the retailer acquired Puerto Rican supermarket chain Supermercados Amigo and increased its stake in Japanese food retailer Seiyu to 35%. In addition, Wal-Mart is among several international retailers vying for Safeway in the United Kingdom.