BANKRUPTCY: Linens 'n Things
May 5, 2008
Things is the latest sign that the retail sector is becoming leaner
and meaner amid a difficult consumer environment.
On Friday, the bedding- and home-furnishing retailer filed a
petition in bankruptcy court in Delaware and said it would close
120 underperforming stores, almost a quarter of them in California.
Ken Perkins, president of research company RetailMetrics LLC,
said the bankruptcy stems from a combination of operating issues
and the lagging economy.
``There's clearly a shakeout going on in the retail industry
which will continue through the rest of the year,'' he said. ``I
think the weaker players are going to be in difficult shape here.''
The Clifton, N.J.-based company said economic factors such as
the decline in the housing market, tightening credit markets and a
downturn in consumer discretionary spending, particularly in the
housewares and home furnishings sector, led to a ``precipitous
decline'' in profitability and liquidity.
The factors worsened in the first quarter of 2008, the company
said.
Linens 'n Things named Michael Gries of the restructuring firm
Conway Del Genio Gries & Co. as chief restructuring officer and
interim chief executive. Current CEO Robert DiNicola will become
executive chairman. The company's Canadian stores _ which Linens 'n
Things said are among the best performing stores _ are not included
in the filing.
The filing is expected to be a boon to rival home-furnishings
retailer Bed, Bath & Beyond Inc.
``The number of stores Linens 'n Things is closing is equivalent
to almost 15 percent of Bed Bath & Beyond's core store base, so
there is significant opportunity to gain market share,'' said
William Blair & Co. analyst John C. Murphy.
In a note to investors on Friday, Deutsche Bank analyst Mike
Baker said 50 percent of Bed, Bath & Beyond stores overlap with a
Linens 'n Things store within three miles. He estimated the
bankruptcy could conceivably add as much as 18 cents per share to
Bed, Bath's annual earnings.
But the news is not as good for Linens 'n Things' parent, New
York private investment firm Apollo Management. Apollo took the
company private in 2006 for $1.3 billion.
``The rapid spread of the retail recession caught Apollo and
other Wall Street firms by surprise,'' said Burt P. Flickinger III,
managing director of the consumer industry consulting firm
Strategic Resource Group.
With competition from Bed, Bath & Beyond, department stores and
other specialty stores, ``Linens 'n Things too often had older
locations and smaller stores that didn't have the depth and range
of products,'' he said.
Bankruptcy will eventually make the company a better competitor
in the space, Flickinger said. Filing for Chapter 11 under the
bankruptcy code frees a company from the threat of creditor
lawsuits while it reorganizes its finances.
``Apollo knows how to restructure a bankrupt business,''
Flickinger said. ``The business will be smaller but it will be more
stable.''
That downsizing will create more vacancies at malls _ but it
could also provide some mall operators the opportunity to adjust to
the current economy, real estate experts said.
``Although the magnitude of this bankruptcy filing cannot be
disputed, recent bankruptcy filings and store closings create new
opportunities for other retailers to acquire space in the nation's
shopping malls,'' said Dan Ansell, a partner at Greenberg Traurig
LLP and chairman of its real estate operations division. ``It also
creates opportunities for shopping centers to redefine their tenant
mix and thus adapt to current economic trends.''
Consumers are likely to lose out as well. Brian Riley, senior
analyst at research firm The TowerGroup, estimates the filing will
freeze about $42 million in consumer gift cards, affecting about
400,000 customers. While consumers may think of the gift cards as
cash, the bankruptcy court considers gift cards as debt, and
therefore holders are not necessarily going to get paid.
Linens 'n Things, which operates about 589 retail stores in 47
states, joins specialty retailers Sharper Image Corp. and Lillian
Vernon Corp. in seeking bankruptcy protection.
And Flickinger said this may just be the beginning.
``There is going to be a record number of store closings through
bankruptcy in the next 150 to 1500 days, as the retail recession
becomes the worst the U.S. has seen in 30 years,'' he said.
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