Click here to subscribe today or Login.
The international credit crunch moved close to home last week in the very public struggle of the Boscov’s department store chain to find money to stock store shelves for the important back-to-school and holiday seasons. In truth this is about more than access to credit; a “perfect storm” of circumstances combined to put the nation’s largest family-owned retailer in the headlines.
First, there’s no denying the economy is slow, as the increasing cost of filling tanks and worries about future heating bills drive consumers to keep a tight hold on their wallets. Sales of home accessories are particularly weak, because fewer families are moving.
That’s not likely to change for another year, as newly cautious lending institutions pull back on the kind of easy credit that has led to a mountain of foreclosures as teaser interest rates reset at the same time many buyers find their house worth less than they owe.
“There’s plenty of money to lend,” said John Sumansky, chief information and finance officer at Misericordia University, and a Ph.D in economics. But, “you have to have really good credit now.”
Boscov’s also was tripped up by some unfortunate timing, buying 10 former Federated Department Stores locations in early 2006 just before the mortgage debacle revealed itself. That now looks – with 20/20 hindsight – like an ill-advised attempt to ramp up growth and reach new markets.
The transaction saddled the company with debt that seemed manageable at the time – industry insiders speculated that Boscov’s got what seemed to be a very attractive deal – only to run head-on into an economy crippled by spiking gas prices and the collapse in the housing sector.
Unfortunately, Sumansky said, there’s no easy way out. “There may not be as much money (for business loans) as before because many lending institutions had to eat bad loans; they lent money out that they’ll never get back again.”
Brokerage house Merrill Lynch provided ample evidence of that last week when it sold $30.6 billion in securities to a private equity firm for one-fifth of their book value. The real value of the complex financial instruments could be even lower, since Merrill also guaranteed payment of about 75 percent of them.
What happens next for Boscov’s? Reliable industry sources say that if it can’t arrange financing on its own the Reading-based chain may have to embrace a private equity takeover or perhaps even file for bankruptcy. There’s a cautionary tale on the West Coast that illustrates the perils of both moves; regional department store chain Mervyns was bought by a PE firm in 2004 and last week declared Chapter 11 bankruptcy.
But the Mervyns experience contains a silver lining. Almost immediately after declaring, Mervyns secured $465 million in financing to keep its stores open and shelves stocked. No matter what the process to get there, let’s hope that’s what happens to Boscov’s and its downtown Wilkes-Barre store.