Steve & Barry's files for Chapter 11, to explore sale
By
Andria Cheng, MarketWatch
Last update: 4:33 p.m. EDT July 9, 2008
NEW YORK (MarketWatch) -- Steve & Barry's filed for Chapter 11 bankruptcy protection Wednesday, becoming yet another victim of the retail downturn and declining credit markets that have clammed up retailers' access to financing.
The Port Washington, N.Y.-based chain, which offers cheap fashions featuring celebrities such as Sarah Jessica Parker, said that it will explore a sale of the company and/or its assets to repay outstanding debt. The retailer will initiate cost-cutting moves that will begin with slashing 172 corporate and field-staff positions.
Steve & Barry's 276 store locations in 39 states were open Wednesday and conducting business as usual. The company has 9,600 employees worldwide, including 8,600 in the United States, according to spokeswoman Wendi Kopsick. No decisions have been made about store closings, she said.
While Steve & Barry's has an industry-wide same-store sales gain of 15% from its tie-up with celebrities such as Venus Williams and Stephon Marbury, it has gotten into a liquidity shortfall because of the declining credit markets, which have shut off access to financing. Higher commodities and fuel prices also increased the retailer's costs as economy-battered shoppers cut back on discretionary purchases. The company that touts clothing and accessories for $8.98 or less also didn't get helped by its razor-thin margins, analysts said.
A filing by Steve & Barry's dealt another blow to economy-battered shopping-mall owners that paid millions of dollars per store to lure the chain into empty spaces as large as 100,000 square feet, analysts said. Malls in general have been contending with declining traffic and lackluster sales of mall tenants such as Macy's Inc., analysts said.
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'The metrics couldn't work. Discretionary merchandise in this economy is the last thing you want to sell.'
— Howard Davidowitz, Davidowitz & Associates
"The generally poor environment for apparel retailers has reduced funding for our suppliers, landlords and for our company," Steve Shore and Barry Prevor, the co-founders and chief executives, said in a statement. "Since mid-2007, difficult credit markets have caused delays in store openings and landlord reimbursements for store-opening expenditures advanced by the company, which have created cash shortages."
Steve & Barry's last year invested substantially more in capital expenditures than the amounts reimbursed, making it unable to realize planned returns from these investments, the company said. Store delays have caused inventory and fixtures to sit idle while incurring interest and storage costs, further reducing liquidity, the company added. Many suppliers that became nervous also cut off access to services and supplies, while landlords stopped remitting contractually owed payments for construction and store-opening work performed by the company.
The retailer has been in discussions with Sears Holdings Corp. about a bailout or a partial sale, The Wall Street Journal reported earlier Wednesday. It also could become a wholesaler with its licensed apparel and accessories, analysts suggested.
"They generate tremendous traffic because they had a tremendous amount of fashionable clothes," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York retail consulting and investment banking firm. "But the metrics couldn't work. Discretionary merchandise in this economy is the last thing you want to sell."
Other retailers that have filed for Chapter 11 protection include Linens 'n Things and Sharper Image.
Many if not all of Steve & Barry's stores could close, the Journal reported, without identifying where it obtained the information.
Steve & Barry's found itself in a financial pinch after it defaulted on a loan made in March by General Electric Co.'s commercial-lending unit, and failed to secure other financing, the New York Times reported, citing people close to the situation.
The company, which claimed annual sales of about $1.1 billion, was hurt by its strategy of running on razor-thin profit margins and of opening stores in distressed locations with special payments from landlords, the Times reported. The strategy became unsustainable recently as the economy weakened, the newspaper said.
Steve & Barry's said Wednesday that its locations are in economically challenged areas with household-income levels, crime rates and population trends that have caused other retailers to abandon the neighborhood.
Old buddies
Childhood friends and co-founders Shore and Prevor got the idea for a cheap-clothing chain after they sold screen-printed T-shirts for $1 at flea markets across Long Island and New Jersey.
They opened their first Steve & Barry's in 1985, selling licensed collegiate clothing at the University of Pennsylvania. The success of that store led them to expand to other universities across the country and eventually, in the late 1990s, to their first mall-based location near Detroit.
In addition to selling licensed collegiate clothing and licensed apparel featuring brands such as Hershey, the retailer began to thrive on a string of celebrity-tied clothing.
In 2006 Steve & Barry's partnered with NBA star Stephon Marbury to sell a line of clothing and shoes, including the $8.98 Starbury II basketball sneakers that Marbury wears on NBA courts, according to the company's Web site.
Last year, Sarah Jessica Parker's Bitten line of T-shirts and dresses was launched with great fanfare. Other celebrity tie-ups include deals with tennis star Venus Williams and NBA star Ben Wallace.
Andria Cheng is a MarketWatch reporter based in New York.
