By Barbara Thau
NEW YORK–It’s no secret that the recent spate of retail bankruptcy filings underscore Darwin’s survival-of-the-fittest theory: Only the strong merchants will survive in a weak economy.
But there is another common theme: All of the recently bankrupt retailers—Fortunoff, Lillian Vernon, The Sharper Image, Domain, Wickes Furniture and Levitz—are owned by private-equity firms, which tend to be highly leveraged and carry more debt.
“Private-equity firms might have a shorter time fuse in terms of making decisions,” Arnold Aronson, managing director of Kurt Salmon Associates, told HFN. “If you’re working with other people’s money, there is not much of a leash.”
Insiders also pointed out that retailers are peripheral players in a tough, unforgiving economy.
“These are weak, marginal brands that are getting hit,” said Mark Montagna, a senior analyst with CL King.
Gilbert Harrison, chairman of investment Financo, agreed. “It is not unusual for such companies to file during a down market,” he said.
In addition to being smaller players in a troubled economy, each company also had individual problems.
“Some of it has to do with product cycles, [not leveraging] best business practices, bad execution compared with the competition, and the changing needs and desires of customers,” Aronson said.
Sharper Image’s downfall is tied to a reliance on too few products. In particular, the retailer misguidedly emphasized the much-maligned Ionic Breeze air purifier.
“They got crushed ever since the air purifier got lambasted by Consumer Reports,” Montagna said. And the product made up nearly “half their business and just about all their profit.”
Lillian Vernon faced different challenges.
“Lillian Vernon has been a diminishing brand for years,” Montagna said. Adding to the cataloger’s woes, “commodity prices have gone up on print; paper and shipping prices have gone up on mailing costs,” he said.
“We’re doing everything possible to keep business going and keep the brand alive,” Mark McGowan, Lillian Vernon’s vice president of human resources, told HFN at the time of the filing last month.
The Chapter 11 filing was prompted by Lillian Vernon’s inability “to secure financing to keep the business going,” McGowan said.
The business is now up for sale, and the retailer is aggressively pursuing a buyer.
The liquidation of Domain and Levitz and the Chapter 11 filing of Wickes Furniture speak to an industry in trouble.
“The furniture retailers are all going through a tough period and [we’ll see] what happens with them,” Harrison said.
The housing market malaise and subprime mortgage crisis are only compounding the furniture industry’s woes, Aronson said.
Analysts were mostly upbeat on Fortunoff’s prospects. Lord & Taylor’s parent company NRDC Equity Partners will acquire the specialty retailer.
Fortunoff “will re-emerge as a new format,” Harrison said.
NRDC is expected to open Fortunoff-branded home departments in Lord & Taylor’s stores.
Harrison added that more retail Chapter 11 filings are on the way. “The pattern will continue and we will see other marginal retailers file or reorganize over the next year,” he said.