The Brick & Mortar Retail Meltdown, February Update

And private equity is all over it.

The brick-and-mortar retail meltdown – despite protestations to the contrary – continues with a mechanistic air of inevitability. This started in 2015, took off in 2016, and picked up pace and magnitude in 2017, a progression I documented along the way. Now in 2018, there has been a brutal January and here’s the even more brutal February.

Bon-Ton Stores filed for Chapter 11 bankruptcy on February 4. The filing by the regional department store chain based in Pennsylvania was the largest bankruptcy filing by a retailer in 2018. It had been discussing with its creditors a restructuring of its debts, but that had turned out to be fruitless.

This was a surprise to no one. In September, the company hired bankruptcy advisers to deal with nearly $1 billion in debt. In December, it defaulted on an interest payment. In January, after the 30-day grace period, it announced it had entered into forbearance agreements with some of its lenders. Over the make-or-break holiday selling period, sales fell 4.2%. On February 1, it announced more details on a new wave of store closings, involving 42 of its 260 stores. Liquidation sales in those stores began on February 1. Its shares are in the process of becoming worthless.

Bi-Lo is preparing to file for bankruptcy as soon as March and shutter nearly 200 stores, Bloomberg reported on February 16. The company, which owns the Winn Dixie, Harveys, Fresco y Mas, and Bi-Low supermarkets, is buckling under $1 billion of debt. About 50,000 jobs could be affected.

The low-margin supermarket business has entered a period of major upheaval – not from online competition which hasn’t taken off yet in the US, but from competitors with deep pockets that are barreling into the stagnating market, including the expansion plans of German deep-discounter Aldi, and the moves by the likes of Walmart and Target. Last year, Amazon vowed to churn the butter, so to speak, by acquiring Whole Foods. Even the private-equity owned combo of Albertsons, Safeway, and other chains is struggling mightily to stem declining same store sales.

For Bi-Lo it would be the second bankruptcy filing in nine years, having previously filed in 2009.

As so many times in these retailer bankruptcies, there’s a private equity angle. PE firm Lone Star had acquired Bi-Lo in a leveraged buyout, announced in late 2004, that loaded the company up with debt. As part of the agreement to get Bi-Lo to emerge from the 2009 bankruptcy, Lone Star contributed $150 million in capital; and in 2012, Lone Star provided $275 million to help fund the leverage buyout of Winn-Dixie. But since 2012, Lone Star as extracted at least $800 million from Bi-Lo via special dividends. Lone Star also extracted management fees from Bi-Lo. Bi-Lo had to borrow this money. Now it’s cratering under that debt.

Tops Markets filed for Chapter 11 bankruptcy on February 21, buckling under $1.2 billion in debt. The company with 170 supermarkets in New York, Pennsylvania, and Vermont, employing over 14,000 people, blamed “previous private equity ownership” that had “saddled the Company with an unsustainable amount of debt on its balance sheet.”

Morgan Stanley Private Equity had acquired Tops Markets during the LBO boom in 2007 and did “saddle” it with debt. So it’s easy for the executives at Tops Markets blame them. But it’s also self-serving and hilarious: In 2013, these executives at Top Markets — the ultimate insiders — acquired the company from Morgan Stanley and have been running the show for four years, doing their own saddling with debt.

The company has arranged $265 million in debtor-in-possession (DIP) loans to keep the doors open during the bankruptcy proceedings.

Toys R Us is stumbling closer to liquidation in the US. This too is a private equity story – the biggest one to fail so far in retail land. On February 21, CNBC reported that the company, which had filed for Chapter 11 bankruptcy protection last September and then got hammered by a terrible holiday selling season, is at risk of breaching a covenant on a $3.1-billion DIP loan that a group of lenders led by J.P. Morgan Chase had extended to fund its operations during the bankruptcy proceedings.

The covenant requires that the company keep a certain amount of cash on hand, but after bleeding through the holiday period, these cash levels are now at risk. The company hasn’t breached any covenants yet, it said, but if it is found to be in breach, the lenders could force it to pay back the entire loan immediately, which could force Toys R Us into liquidation.

But how much will there be left to liquidate? After obtaining court approval earlier in February to close 182 stores in the US and shed 4,500 workers along with them, Toys R Us is now planning to close another 200 stores in the US and lay off more people, the Wall Street Journal reported on February 21, citing its sources. This will slash the retailer’s footprint in the US by about half since the bankruptcy filing.

Best Buy plans to shutter all of its roughly 250 mobile phone stores by the end of May, CEO Hubert Joly told employees on February 28 in an internal memo, reported by CNBC. These smaller-format stores of around 1,400 square feet are mostly located in malls; some are in strip malls. They were launched about 10 years ago, when all was still well in brick-and-mortar retail land.

It happens category by category as commerce shifts to the Internet: Music stores and video stores were the first to get wiped out, then bookstores, then department stores. Now sporting goods stores, and toy stores. They’re the primary stores at malls. Read… Brick & Mortar Meltdown Hits These Stores the Most

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  34 comments for “The Brick & Mortar Retail Meltdown, February Update

  1. Robert says:

    LBO-s continue to be legal, but how do you create laws against an a morally neutral activity in the land of the free? (Not being sarcastic here)

    SO THE LBO-s CONTINUE, Rich people who produce NOTHING OF VALUE get richer. Companies are destroyed as per your columns. 10-s or 100-s of thousands of people lose their jobs, benefits, pensions.

    And useless rich people continue to earn or extract untold billions.

    And in FREE America, we cannot really pass laws against a free activity.

    Besides, the useless rich people own two of the three branches of government. Do they own the judiciary as well ? Oh, and I forgot, they own the guardian of liberty, the so-called “free press” , also .

    Geez this is hopeless.

    • mvojy says:

      I continue to say LEVERAGED BUYOUTS SHOULD BE BANNED. If you won’t bet your own money then it’s not legal gambling. Too bad the last President didn’t do this immediately in his first term. The American worker suffers due to layoffs because of greedy management.

      • Jim Mitchell says:

        Whenever I read of these catastrophes I am reminded of how Tony Soprano busted out Dave’s sports store in the first season of The Sopranos. These PE guys prey upon weakness and build nothing.

      • Juanfo says:

        Bankers can’t take money directly out of pension funds and stuff their pockets with it. So they lend themselves the money to buy these broke companies. Then lend themselves some more money to keep them artificially propped up while they move the money out of the company’s account into their own personal accounts.
        Is the LBO a loophole that allows bankers to funnel money out of pension funds and into their own personal offshore accounts?
        Why do ordinary people keep giving these criminal bankers their hard earned money?
        Final question: fed prints money, gives it to banks, banks give it to shell companies. Shell company owner keeps the money. Obviously the fed, banker and shell company owner are all the same person.

    • alex in san jose AKA digital Detroit says:

      Something something the tree of liberty must occasionally be watered with the blood of tyrants something?

      • Janis says:

        …The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants…

        Thomas Jefferson

    • None says:

      You think this destruction of companies is bad. On the contrary, it is creating effeciencies. Money must move toward other endeavors. If it means killing a company so be it. Yes people will lose that job but they will gain another when a different company opens. People just need to be prepared-most of the time. Have a savings account, stay informed of your companies strength in the market place. Be nimble be adaptive.

      • Robert says:

        I believe that some very good companies have been destroyed. But I might be wrong. So — if there is a study that showed this — COMPANIES ULTIMATELY DESTROYED as a result of having been LBO-ed — were ALREADY on a terminal glide path to ultimate destruction . . . then I would say three cheers for your analysis, and also its necessary result.

        But I am not so sure. Which makes your analysis not 100% true ( but it might be 67% true ) and also a bit mean to those whose jobs have been destroyed along with their [not on a glide path to destruction] companies.

        I was laid off twice in my career, both over the age of 50. I learned to have more sympathy and compassion than I already had. School of hard knocks and all that.

        • Mad as hell says:

          Ultimately, this comes down to the individual. Individuals think that a company should “be loyal to its employees”. The leaders / stockholders of the company consider it a cash generating machine by any means possible. If you go through your life, depending on someone else’s falsehoods, and story telling for your livelihood, YOU are the problem. These companies are headed by people, and bought out by people getting theirs. What is the employee getting? Deeper in debt, making life decisions depending on a payment stream that is anything but guaranteed. Then everyone cries about how people are losing their jobs. Why does anyone, anywhere think that a “career” should even be a thing? Today, EVERYTHING is a gig. Period. And a thinking person, coming out of college (or high school) should consider ANY job that they are lucky enough to obtain – especially if it pays any good wage, a temporary thing. Then, when ultimately the company folds, or is bought out, they already have taken steps to take care of themselves financially instead of being left with bills and no revenue stream. Start young, save often and DO NOT EVER listen to any “leader”. Know business law. And consider all bankers to be vampires, and their offering – debt, used only when absolutely necessary, to be extinguished and exorcised as quickly as possible.

  2. TheDona says:

    I have been patiently waiting to see Albertson’s big demise. They remind me of the Macy’s cycle. Buy up all the beloved regional stores and then try half-ass to be everything to everybody.

  3. michael Engel says:

    Big fish throw the little fish out of the ocean, leaving them without
    It happens in media and the little minnows are scared !

  4. James Levy says:

    And yet, somehow, with all these people losing their jobs, the official unemployment numbers don’t move. And then they tell us that wages are growing, at least a bit. So these people are losing their jobs in retail, and then going on to get better-paying jobs? Really? On what planet does that happen in the aggregate.

    By one hundred and fifty years ago or so governments throughout the advanced Western world started to seriously and systematically gather statistical information in order to more efficiently regulate, tax, and prepare for war. The idea was that you needed to know what was going on before you could act intelligently (ironically, 19th century Liberals, i.e. capitalists, loved rational planning, be it in business, farming, transport, or government). Now, it’s like descriptions of the later Roman Empire: no one knows what’s going on, the people at the top are hermetically sealed off “for their own protection” and because they are so wackily wealthy compared to the ordinary run of humanity, and the will and ability to muster resources to solve problems is utterly lacking. Boy, are we in trouble.


      I know exactly what is going on, but it is not easy to articulate Fractal Geometric patterns in the Macroeconomic Cycles that are forcing mean reversion onto the betting architecture of REITS, Commercial RE, & Residential RE, Banks, Hedge Funds, BIG Box Retail, Dry Bulk Shipping, Commodities, Investment Banking, Infrastructure & Capital Projects, Aerospace, Commercial Aviation, Mining, Offshore Oil, et cetera.

      Benoit Mandelbrot wrote about Misbehaviour of Markets before he died, and as far as I am concerned only Mandelbrot understood what was happening right after Lehman imploded whereas his colleagues the world over missed the serendipity that Mandelbrot was capable of articulating at that juncture. The misbehaviour he was attempting to point out has never been resolved, and it is only a matter of time before the 08 Great Financial Crisis reiterates the same pattern of market crashing that manifested in 08. Dept-to-GDP of whole countries has paralleled the debt leveraging of systemically Too-BIG-to-Fail Bank Holding Companies which means that the TBTF banks have to be broken up, and so too does the overtly overleveraged Central Banking System that currently controls the servicing of debts that are no longer actually serviceable from a mathematical standpoint. Greenspan mistakenly assumed he could kick the can down the road indefinitely, and he intentionally prevented mean reversion on the stock markets, housing markets, and pretty well nearly all markets.

      When the next implosion strikes we will witness the systemically weakest banks like Wells Fargo, Citibank, Deutsche Bank, et cetera, implode, and not be able to withstand the stress. Micro-crashes will crop up with greater repetition before the whole system implodes analogous to the 08 GFC. The bankruptcies will continue each and every quarter just as the M&A increases monopolies. Free market ‘Capitalism’ will become increasingly suspect in light of the monopolization of whole key controlling industries that are controlled in few hands. Tyranny will be noticeable, and inequality will increase to the point of system breakdown.

      Complexity Theory can help explain our collective demise of what we once knew of Capitalism, and Free Market Capitalism.


      • Carlos says:

        Average lifespan of a civilisation, 250 to 400 yrs ….. it’s only downhill now !

      • mitch says:

        Sorry, but blah, blah ,blah. The reality is that the internet changed retail, period. Guys like Bezos spotted the opportunities first. Why would anybody open a business and carry inventory, and hope to sell this inventory at a profit, when Bezos just opens a website and takes a bite of every sale and others pay and supply inventory???
        This revolutionary business model is now being recognized throughout business, most definitely in banking, govt and sadly socially. Individuals with tech savvy or who can pay for the best tech savvy will ruthlessly exploit any new openings. I am 61 yrs old.
        The internet changed everything except human nature.

  5. Tom Welsh says:

    Yup, no doubt about it: America is becoming great again!

  6. OutLookingIn says:

    “I’m about to repeat what I said at this time last year and the year before … sooner or later a crash is coming and it may be terrific”.
    – Roger Babson September 15, 1929

    Most everyone laughed at Babson. His pronouncement then seems very apropos to present conditions.

  7. Megan says:

    Just out of curiousity:
    Why is the PE portion of the equation not liable for any of the losses?
    Why do they get to walk away from these messes with all the money?

    • Mike G says:

      I have to wonder who continues to lend PE vultures money for these heads-we-win, tails-you-lose looting operations.

      • TheDona says:

        Unfortunately Pension funds and endowments are part of the investment commitments to PE.

        • Gibbon1 says:

          The reason Pension funds loan money to these guys is ‘soft graft’ make the PE guys happy and they’ll give you the opportunity to get in on the deal from the other side.

      • Rates says:

        Well to do Americans will be a big percentage. As well as your pension funds, and other usual suspects. Basically in order for these guys to retire and live BIG, they have to rob from other Americans.

        Guns don’t kill Americans, Americans do.
        PE vultures don’t loot Americans, Americans do.
        Chinese peasants don’t rob Americans jobs, Americans do.

    • Wolf Richter says:

      Because their portfolio companies are the borrowing entities and carry the liabilities.

      However, due to some claw-back provisions in the bankruptcy code, these special dividends paid from portfolio company to the PE firm can become an issue. This was the case with Payless ShoeSource, whose $400 million special dividend before the bankruptcy was attacked in bankruptcy court. The issue was settled last summer.

  8. Nick Beuglet says:

    We don’t nee more government to help this problem. At the end of the day, it’s the banking system flush with cheap money which is allowing this behaviour to go on. They will be taking the losses and it will help those who remain in business. Once money starts to actually cost more than 0% again, this type of action will start to decline. Just remind your congressman that any bailout of the banks if off the table.

    • Robert says:

      From your post, and not a criticism :

      QUOTE : “Just remind your congressman that any bailout of the banks if off the table”


      But Bernanke and Hank Paulson and other of the Elite Bankster class got special late-night audiences with Congress and scared them into supporting Bankster Bailouts.

      BTW, that’s the Same Hank Paulson that scammed a 700 million dollar payday for himself while at G.S., as I remember, and also scammed himself right from the Giant Squid and into Treasury Secretary of OUR NATION.

  9. Bet says:

    I am willing to hazard squid involved
    Their blood sucking tentacles wrapped around anything they can squeeze a dollar out of

  10. raxadian says:

    How long until the mammoths know as malls or shopping centers finally disappear? Ten, twenty years more?

  11. Marc D. says:

    In one bright spot for retailers recently, Macy’s announced a good earnings report. They’ve been focusing on apparel, and doing better as a result. Of course, they had also closed quite a few stores over the last few years.

    • TheDona says:

      Smoke and Mirrors for Macy’s earnings. They closed 81 stores, laid off 10,000 people and sold off their flagship real estate among other RE. They also trimmed the advertising budget.

      This year they will lay off 5,000. and 11 more stores are on the hit list. Now that they don’t have all of that RE on the balance sheet….what are they really worth?

    • Wolf Richter says:

      Macy’s online sales are hot. The rest is dying.

      It went from three stores to one in San Francisco. It did similar cuts around the country. Same-store sales should have doubled if all its brick-and-mortar customers had continued to shop at the remaining stores. Instead, same-store sales inched up just 1.3% – after all these store closings!!! This was terrible news.

      • raxadian says:

        And earning reports can’t be really be trusted with so many companies having been caught doing “creative accounting” lately anyway.

        We will have to wait to see if those reports get “adjusted” later or not.

  12. Can’t wait to see how the Midtown Manhattan Nordstrom does when it opens next year in Central Park Tower. *popcorn*

  13. MaryR says:

    PE buyouts funded by piling debt onto the acquired entity should be illegal; pension funds should likewise be locked off from any contributions to operating costs or debt repayment external to the pension fund itself.

    Two simple rules and most companies could at least be protected from the buyout blood sucking leeches. We know the PE guys will not put their own money in, unless they can get it back out at no risk and nearly right away.

    This is not investment…it’s financial warfare where the winners and losers are known in advance. Clearly our regulators are complicit in this insanity.

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