Retailers face dim prospects

The odds are good that a swath of familiar store names could disappear.

In past economic downturns, troubled retailers could file for bankruptcy protection, shed leases on stores that weren't making money and re-emerge a smaller, more profitable firm.

Things are much different.

The credit crunch, combined with the facts that consumers have significantly pulled back on buying and real estate has fallen out of favor, means retailers limping into the crucial holiday season probably won't survive.

Experts believe 2008-2009 will rival the 2002 recession when 32 chains filed for bankruptcy and wiped out the likes of Crown Books, Frank's Nursery & Crafts and HomeLife.

"We have dropped a pebble in a well and haven't heard the bottom yet," said Howard Brod Brownstein, principal at NachmanHaysBrownstein Inc., a turnaround firm in Philadelphia.

"The best retailers are monitoring the health of their vendors and good vendors are looking hard at the creditworthiness of retailers. Everybody's at DEFCON3."

So far this year, 17 retailers have filed for bankruptcy reorganization, up from seven in 2007 and six in 2006.

Wickes Furniture and Sharper Image have already gone away. Whitehall Jewelers, Linens 'n Things and Shoe Pavilion are liquidating.

Discount department store chain Mervyns decided recently that it would go out of business after failing to find a buyer.

Circuit City Stores Inc., the struggling Henrico County-based chain, is exploring strategic alternatives. It might close at least 150 locations and slash thousands of jobs to avert filing for bankruptcy protection, the Wall Street Journal reported nearly two weeks ago.

Private-equity firms, once flush with cash and eager to buy retailers for their real estate, aren't in the hunt.

"There is less of a population of people to sell these things to and it is creating more difficulty for those retailers to get out of those leases," said Jeffrey Hecktman, chairman and CEO of Hilco Trading LLC in Northbrook, Ill., one of the nation's largest liquidation firms.

Linens 'n Things, for example, held a bankruptcy auction for 85 leases and sparked interest in only five, said Laura Davis Jones, who represented secured noteholders in the bankruptcy.

Two years ago there would have been interest in all 85 leases and "some serious bidding," Jones said. She predicts 30 percent to 40 percent of retailers already in Chapter 11 won't be able to reorganize.

Under Chapter 11, creditors are held at bay while the company works on a reorganization plan. A change in the 2005 bankruptcy code has, in essence, given retailers less time to reorganize. More are liquidating.

There are exceptions. Steve & Barry's, a discount clothing chain that took a short hop through Chapter 11 this summer, found a buyer and emerged with fewer stores and an infusion of capital.

For most retailers, getting that type of funding is a long shot given the credit crunch.

"The sheer number of lenders lending to the retail environment has dramatically decreased in the last two years," said Scott Avila, managing partner with CRG LLC, a Los Angeles-based turnaround firm. "There's just not that many parties in the game."