Regionals and no. threes feel the heat: Ch. 11, M&As and store closings

DSN Retailing Today, July 5, 2004 by Debbie Howell

One of the most unforgiving eras in retailing has subsided. Compared with a large number of retail casualties and bankruptcies in recent years, fallout has been minimal this past year. At the same time, merger activity is picking up, indicating the retail business may be entering a boom phase as the economy mends.

That's not to say the industry has been immune from headline-grabbing industry shakeups. The bankruptcy filings of FAO and KB Toys along with massive store closures from these toy chains and segment leader Toys "R" Us added up to one tough year for toy retailing. Specialists faced market share loss to discounters such as Wal-Mart while battling a 3% decline in industry toy sales for 2003.

FAO, which filed for bankruptcy protection twice last year, decided to liquidate most of its assets, including its Zany Brainy and Right Start chains. KB Toys also went bankrupt and announced it would shutter about 375 of its 1,240 stores. Then Toys "R" Us, while still managing a profit last year, decided to shutter its freestanding Kids "R" Us and Imaginarium stores before the holiday season.

In all, the number of retail bankruptcies tracked by DSN Retailing Today more than doubled in 2003 to 14. Through the first half of this year, six more have occurred. But that's a significant improvement from the record of 26 filings in 2001.

Apparel retailers Gadzooks, Clothestime, Today's Man and Mr. Rags made the list, along with supermarket chains Penn Traffic and Eagle Food Centers. Music proved to be another difficult segment, with filings from Tower Records, The Wiz and Wherehouse Music as that industry battled declining sales due to the growth of Internet downloads.

Nine chains folded over the past 18 months, all but two of which had been in bankruptcy. Gateway was the latest, closing all 188 of its retail stores as the company returned to its roots as a computer manufacturer and direct sales company. Others were Bonus Stores, Clothestime, Mr. Rags, Today's Man and The Wiz, while Toys "R" Us essentially shuttered Kids "R" Us and Imaginarium units.

Perhaps the most surprising liquidation of the bunch was Bonus Stores, a dollar store operator that Icelandic retailer Baugur Group bought in early 2001. Despite the phenomenal success of other extreme-value chains, Bonus Stores apparently struggled, with the company closing 239 stores last year and then selling the last 97 at bankruptcy auction to Variety Wholesalers, a franchise operator of extreme-value stores. History may have been a handicap, since the retailer formerly known as Bill's Dollar Stores was in bankruptcy when Baugur bought it.

For relatively healthy retailers, downsizing was still top of mind, though not to the degree experienced in 2001 and 2002. Several food retailers shuttered stores, including Winn Dixie, Nash Finch, Albertsons, Grocery Outlet, Ralph's, Kash n' Karry, Penn Traffic and Food Lion. For most, declining food share was a problem along with incursion of alternative food formats, such as supercenters and warehouse clubs.

Department store retailers also had it tough. Federated announced it would close five stores, while Lord & Taylor, a division of May Department Stores, shuttered 32 units. Three of The Great Indoors stores went dark as owner Sears admitted this upscale home improvement and decor format had not met expectations.

On a positive note, several chains exited bankruptcy last year and others initiated public offerings. Kmart emerged from Chapter 11 in mid-2003 and more recently has shown a profit as a newly reorganized company with a back-to-basics strategy. Others leaving bankruptcy were Tower Records and Snyder's Drug Stores.

In the sporting goods sector, IPOs arose. Gander Mountain became public, while Cabela's and Bass Pro Shops have filed paperwork or shown interest in following suit.

And if merger activity so far this year is any indication, the retailing landscape is ripe for a new wave of consolidation. Several major deals have already taken place or are pending, including JCPenney's divestiture of its Eckerd drugstore chain, Target's sale of Marshall Field's to May Department Stores and Sears unloading of National Tire & Battery to TBC Corp. In each case, these deals represented a new mindset in corporate retail strategy related to focusing on core formats.

Earlier in 2003, Gart Sports set the stage for big deals in its merger with The Sports Authority, creating a 385-store chain. Other mergers of size included Boise Cascade's purchase of OfficeMax, FedEx picking up Kinko's and CompUSA buying Good Guys, to name a few. In international deals, Circuit City purchased Canadian retailer InterTAN, while Wal-Mart bought Brazilian supermarket chain Bompreco and increased its stake in Japanese retailer Seiyu to 37.8%. The Home Depot bought Mexican home improvement chain Home Mart, Staples expanded to the United Kingdom, with its purchase of Globus Office World and natural foods supermarket chain Whole Foods added the Fresh & Wild food chain in England.