Bakers Footwear hopes to arrest a long-term decline in its business

Bakers Footwear hopes to arrest a long-term decline in its business

Trouble has been brewing for some time at beleaguered retailer Bakers Footwear Group; after all, the US company hasn’t turned a profit outside its fourth quarter in at least six years.

Its share price too has been in long-term decline, charting a downward curve since early 2006 – easily predating the economic meltdown – before the spiral accelerated as recession bit in late 2007. More recently, it hit a low of $0.26 a share on 20 August.

The restructuring plan announced this week is therefore designed to arrest a long-term decline in the business, but its timing has far more to do with Bakers’ short-term liquidity and its relationship with chief lender Crystal Financial – which approved the new strategy.

Under the plans, Bakers will shutter up to 77 stores, selling up to 52 to Aldo US and closing a maximum of another 25 of its worst-performing outlets.

The Aldo stores will be sold in three tranches, concluding in January, March and June respectively, while the under-performing shops will close down this autumn.

What will this raise? Up to US$6.375m from the Aldo stores, plus $6-8m from selling off liquidated inventory between October and next June.

But Bakers will also save up to $7m a year by slashing its workforce by up to one-third, most of that tally coming from staff currently employed at the stores to be sold or closed, plus some personnel based at the company’s St Louis headquarters.

The most high-profile staff departures merit their own paragraph in Bakers’ SEC filing on the restructuring: COO Joseph VanderPluym, chief planning officer Stanley Tusman and chief merchandising officer Mark Ianni were all “relieved of their duties” on 23 August.

That, along with the ending of the H by Halston licensing deal at the end of this year, is a clear sign that the restructuring plans are not just about saving cash, but also about finding a new direction for a troubled company, with a renewed focus on the Bakers brand.

Balance sheet concerns
However, for the moment the balance sheet remains Bakers CEO Peter Edison’s chief concern, as figures revealed in the SEC filing make clear.

On 28 April this year, Bakers had negative working capital of $18m, an unused borrowing capacity of only $1.3m and a shareholders’ deficit of $17.6m; by 30 June, negative working capital had risen to $20.3m and the shareholders’ deficit to $19.9m.

More numbers and dates: on 13 June, Bakers secured a $30m credit agreement from Crystal; by 25 August, the remaining balance was $13.1m.

With comparable store sales for the year to date (25 August) down 5.9% – Bakers had budgeted for a mid-single-digit fall in the second quarter, followed by a rebound in the second half of the year – there’s no immediate sign that the bleeding is about to stop.

The result is that Bakers has not complied with its maximum borrowing limits, or its obligation to repay excess amounts, or the covenant on late payments – in short, it is in default.

All of these factors have converged to leave Bakers drinking in the last chance saloon in corporate terms: if things get worse, there’s nothing to stop Crystal from accelerating the debt and taking collection action, leaving Bakers to seek emergency alternative financing or face bankruptcy.

Any optimism felt by Edison and Bakers must be based on the fact that Crystal has signed off on the restructuring, encouraging them to believe that they can negotiate a forbearance arrangement to buy time for the plans to work and then, in time, return to compliance.

But will those plans work? Investors have so far remained unconvinced, with the company’s share price edging down by nearly another 15% following the announcement.

Bakers will hope that Crystal Financial shows a deal more confidence in the future of the business in the months ahead.