Bankruptcy Watch: Eight Retailers in the Red

(NOTE: This story has been modified since its original posting.--Editor.)

An economic recovery that's more theoretical than practical for many people is keeping consumers cautious. That's spelling financial trouble for retailers in a number of different verticals: supermarkets (A&P), department stores (Sears), apparel (American Apparel, Hot Topic), books (Barnes & Noble) and entertainment (Blockbuster).

A few retailers have taken the step of filing for bankruptcy protection, a move that doesn't necessarily mean the end of a company's life (see Chrysler and General Motors). Home products retailer Gracious Home filed for Chapter 11 bankruptcy protection on August 13, joining furniture retailer Jennifer Convertibles, which filed last month. While many factors contribute to a company's filing for bankruptcy protection, it seems clear that the slowdown in the housing market has had a negative impact on retailers offering both big-ticket and more moderately priced items for the home.

Some retailers are being rocked by fast-changing technologies. Blockbuster has seen its business model superseded by new channels for delivering entertainment (via snail mail, online and on-demand) while remaining saddled with a network of brick-and-mortar stores. The rapid growth of electronic books and the "endless aisles" of product available on are shaking up brick-and-mortar book retailers like Barnes & Noble.

It's impossible to know in advance which companies will turn themselves around, which will continue to struggle and which will ultimately fail. However, the following list (presented in alphabetical order) identifies retailers who are surviving, not thriving.

A&P (The Great Atlantic & Pacific Tea Co.)
The supermarket retailer faces stiff competition in the Northeast and Mid-Atlantic regions where it operates. As part of a turnaround strategy, the company recently announced that it would close 25 underperforming stores (A&P operates 400-plus stores under a number of banners). For the quarter that ended June 19, total sales dropped 7.1% and comp store sales dropped 7.2%. The company has also had shakeups at the top: in July, food retailing veteran Sam Martin took the president and CEO titles, replacing Ron Marshall, who had been in the job only since January 2010.

American Apparel
A preliminary report of $7 million in second-quarter losses, with comp-store sales decreases of 16%, are troubling enough for the vertically integrated apparel manufacturer and retailer. Add in a subpoena from the U.S. Attorney's Office for the Southern District of New York over the resignation of Deloitte & Touche as the company's independent auditor, following Deloitte's expressions of concern about "material weaknesses" in the company's financial controls dating back to last year. American Apparel has rehired Marcum, its auditing firm from 2005 to 2008. Published reports suggest the company is also having problems with an $80 million rescue loan it received in March 2009 from Lion Capital.

Barnes & Noble
The book and music retailer recently announced that it was looking for a buyer, and published reports suggest a proxy fight is brewing between the chain's founder and largest stockholder, Leonard Riggio, and billionaire Ronald W. Burkle, who owns 19% of the stock. In the quarter that ended May 1, 2010, the company posted a net loss of $32 million, despite total sales of $1.3 billion that were 19% higher than sales for the same period in 2009. For the full fiscal year, which also ended May 1, the company's comp store sales declined by 4.8%.

The media/entertainment retailer is making significant efforts to partner with other companies in ways that will expand its delivery channels. Blockbuster is working with Comcast to offer its by-mail service to its customers, and plans to grow its Blockbuster Express presence to 6,000 automated retail machines deployed by NCR. The company is also expanding Blockbuster On Demand through partnerships with Verizon Wireless and two manufacturers of Blu-ray players. However, the retailer still posted disappointing results for the quarter ended July 4, 2010: a 19.7% drop in total revenues to $788 million, from $982 million from the same period in 2009. Net loss for the period was $69 million, affected both by store closings and declines in comp-store sales.

Gracious Home
The home products retailer, with three locations in New York City and an online business, filed for a pre-arranged Chapter 11 protection on August 13 as part of an overall restructuring plan. The company is operating on a business-as-usual basis during its bankruptcy.

Hot Topic
This youth-oriented retailer, which also operates Torrid stores offering apparel and accessories for plus-size women, had a net loss of $6.3 million for the second quarter, which ended July 31, 2010. That figure was nearly double the loss for the same period last year ($3.2 million). Total sales for the quarter dropped 4.9% to $150 million, with comp-store sales slipping 6.4%. Keeping up with trend-obsessed young consumers can be tricky, and mall-based retailers such as Hot Topic have suffered significantly from the poor economy.

(Although Hot Topic has posted quarterly losess in two out of the last four reporting periods, it is not burdened by execssive debt and and has actually built up cash and asset reserves in the past year. This story is not meant to indicate Hot Topic has any plans for a Chapter 11 filing, but rather that it is struggling in the current economy, and how it meets current challenges is worth watching.--Editor)

Jennifer Convertibles
The furniture retailer filed for Chapter 11 bankruptcy protection in July, citing liquidity problems brought on by substantial losses during recent periods. While net sales for the quarter that ended May 29, 2010 rose slightly compared to the previous year ($20.3 million in 2009 to $21.4 million in 2010), the company's losses widened, from $1.5 million in Q2 of 2009 to $4.7 million in 2010. Comp-store sales declined by 19.6% for the quarter.

Sears Holdings
Despite profitability improvements in its Kmart stores, Sears had a disappointing second quarter, reporting a net loss of $39 million for the period that ended July 31, 2010. While this amount was smaller than the loss of $94 million during the same period in 2009, other metrics are less encouraging. Total revenues for the period decreased to $10.5 billion from $10.6 billion in Q2 of 2009. Domestic same-store sales decreased 2.2%: 1.4% at Kmart and 2.8% at Sears Domestic. Broad-lines companies that have a significant brick-and-mortar footprint have been hit hard by the recession and its aftermath: even if they deploy cost-cutting measures to keep expenses down, these retailers will need a dramatic rise in consumer spending to reverse negative trends.

For related articles see: A&P Closing 25 Stores in Five States
A&P Sales Drop 7 Percent in Quarter, New CEO Takes Helm
Barnes & Noble, On the Sales Block, Will Add eBook Boutiques in Stores
Blockbuster Scores Big New Movie Edge Over Netflix, Redbox

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