Restructuring debt key to Ames recovery - Ames Department Stores Inc - Brief Article - Statistical Data Included

DSN Retailing Today, Sept 3, 2001 by Mike Duff

ROCKY HILL, CONN. -- The only thing less surprising than Ames' recent filing for Chapter 11 bankruptcy is the resolve of its veteran ceo Joe Ettore, who has vowed to put Ames' financial house in order and reorganize the business to provide long-term viability.

For vendors and observers who have watched retail consolidate to fewer and fewer big players, the filing was ominous. For analysts, it was a necessary concession to market conditions. For Ames, it was an opportunity to restructure debt and create a financial platform that will sustain it until customers begin to spend more money in the stores.

Ettore told DSN Retailing Today that vendor uneasiness and the length of time required to close the $55 million Kimko financing deal had been the immediate factors leading to the bankruptcy filing because suppliers began to curtail shipments. Yet, he expressed confidence in the company and even had a rough goal for Ames' emergence from Chapter 11, which he projected for sometime in mid-2002.

"We tried everything we could to avoid a filing," he said. "The Kimko agreement was the key to getting into Back-to-School quickly. But it took too long to line up. We had an agreement on June 26, but it didn't get finally approved until six-and-a-half weeks later. By this point, a lot of vendors were holding back waiting for the finalization. Since Back-to-School was not being shipped in all departments, our inventory was being depleted in certain categories.

"In departments where we were well-stocked--like children's apparel, furniture and stationery--we had sales increases vs. chain sales decreases. We felt that if we had had the inventory we would have had a better chance of getting through July and August, but we finally took the road we had to take."

Ames' credit facilities with GE Capitol and Kimko, totaling $755 million, have rolled over into its debtor-in-possession financing. Next year, the previously announced closing of 47 underperforming locations should help Ames improve its bottom line performance, particularly in the second half, Going forward, Ames must address the concerns of various parties with an interest in its bankruptcy proceedings and develop a consensus on its Chapter 11 exit.

The reaction of creditors, said analyst Eric Beder of Ladenburg Thalmann. will have an impact on whether Ames can move smoothly through the bankruptcy process. Chapter 11 has important advantages, particularly given that financial relief will help offset the effects of the slow economy.

Still Ames has at least five classes of creditors, and the most vulnerable may challenge the retailer's reorganization plans unless it demonstrates its emergence will serve the company's best interests. He noted, "The key here is, can Ames get all those people together and keep going."

Tucker Anthony analyst Steve Richter said Ames' relationship with its vendors is another crucial factor. "The vendors need to believe Ames can come out of this. At the end of the day, I think the vendors want Ames to succeed and they'll work [with them]. But the retail climate is so brutal."

Ames is focusing on two types of debt in their efforts under Chapter 11. One is the debt acquired in the post-Hills acquisition period, and the other is remaining lease payments from the 32 Ames stores, 31 of which were former Hills locations set for closure last year. The closings were completed in the first quarter of fiscal 2001 with a recorded charge of $139.3 million. About $88.8 million of this represents continuing lease obligations, and the company would like to jettison as much of the debt as possible.

Of course, hanging over the Ames bankruptcy is the specter of Hills. Yet analysts, vendors and Ettore agree no one could have anticipated the economic downturn the United States entered when the Hills deal came up. Ettore noted that as many original Ames locations had been closed as Hills in the latest round of 47 store closings, which he said should be the last ones necessary. Stores were selected on a store-by-store basis, with the exception of those unites in the Indiana market.

Indiana had not responded well to Ames' entrance via Hills, he noted, and the withdrawal of the stores in this state was essentially a strategic move. Ames retains one store in Gary, Ind., but regards it as part of the Chicago market.

Ettore said reorganizing debt and maintaining the confidence of vendors and creditors are Ames' focus. "My goal is to get the company back where it could and should be."