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May 11, 2020

Stage Stores begins Chapter 11 process

US department store retailer Stage Stores has filed for Chapter 11 bankruptcy protection and will simultaneously solicit bids for a going concern sale of the business or any of its assets and initiate an orderly wind-down of operations. 

By Beth Wright

US department store retailer Stage Stores has filed for Chapter 11 bankruptcy protection and will simultaneously solicit bids for a going concern sale of the business or any of its assets and initiate an orderly wind-down of operations. 

In a statement yesterday (10 May), the company said it will terminate the wind-down of operations at certain locations if it receives a viable going-concern bid.

“This is a very difficult announcement and it was a decision that we reached only after exhausting every possible alternative,” said CEO Michael Glazer. “Over the last several months, we had been taking significant steps to attempt to strengthen our financial position and find an independent path forward. However, the increasingly challenging market environment was exacerbated by the Covid-19 pandemic, which required us to temporarily close all of our stores and furlough the vast majority of our associates. Given these conditions, we have been unable to obtain necessary financing and have no choice but to take these actions.”

The company temporarily closed all of its 738 stores on 27 March amid a nationwide lockdown to stem the spread of the coronavirus. It also furloughed virtually all of its associates in stores, field support roles and at distribution centres, along with 87% of employees at its Houston Support Center, effective 29 March. Members of the executive leadership team also saw a 25% reduction in pay.

In yesterday’s statement, Stage Stores said it will take a phased approach to reopening its stores in the coming weeks to commence the liquidation of its inventory. The company currently anticipates about 557 stores will open on 15 May, with a second phase of approximately 67 stores expected to open on 28 May, and the balance of the chain forecast to resume trading on 4 June.

It intends to seek approval for a consensual use of cash collateral to ensure it has the liquidity necessary to support its operations in Chapter 11.

The company’s filing in the US Bankruptcy Court for the Southern District of Texas follows a narrowing of its net loss in the third quarter ended 2 November to US$15.9m from $31.4m in the prior-year period. Adjusted net loss was $4.2m, compared to $30.5m last time. Net sales, meanwhile, slipped to $399m from $347m, while comparable sales increased 17.4%. 

It also comes amid the news CFO Jason Curtis will leave the company on 22 May to pursue a career with another retailer. Following his departure, Glazer will oversee the finance function with support from Rick Stasyszen, who previously served as the company’s senior vice president, finance and controller until 2019.

US luxury department store retailer Neiman Marcus has also filed for Chapter 11 bankruptcy protection, following US apparel retailer J.Crew Group last week.

“A prudent option”

Commenting on Stage Store’s filing, Neil Saunders, managing director of GlobalData Retail, notes: “In its latest set of quarterly results, Stage Stores showed all the signs of a retailer on the right path. For the third quarter, comparable sales rose by 17.4%, margins expanded by over 100 basis points, and EBITDA nudged into positive territory for the first time in almost five years.

“This performance was driven primarily by the firm’s pivot to the off-price business, with many of its full-line department stores being converted to the Gordmans brand – a process that began in 2017 but which had recently been accelerated.”

As much as this move has put Stage Stores onto more solid ground, and “arguably gives it a stake in a segment of retail that is set to do well once the current crisis is over”, Saunders says the coronavirus situation has hit the company hard and has exposed many “underlying weaknesses” of the business.

“Foremost among these is the poor cash position. The company has very few cash reserves and remains loss-making at operating level. The coronavirus crisis has only exacerbated this and has pushed Stage further into the red. Even if it were able to get through the crisis, Stage would struggle to maintain its pace of converting traditional department stores to off-price, which is a key part of its strategy.

“Not all existing shops are suitable for conversion to off-price and it had been Stage’s intention to rationalise its fleet and close unprofitable locations. In many instances, exiting shops is not an easy, or cheap, process and the squeeze on cash makes executing this part of the plan far more challenging.

“While Stage may not be as indebted as many retailers which have already failed, it does carry $360m of long-term debt and $275m of long-term lease liabilities on its books. In the pre-crisis world, this was already uncomfortable, and the balance sheet will only have been weakened further by the downturn.”

He adds these “poor” finances and dynamics made it impossible for Stage to secure additional liquidity to see it through the sharp downturn of the crisis. As such, entering Chapter 11 is a “prudent option” that will allow Stage to restructure its business, especially in terms of store locations, in a more efficient and effective way.

“Looking ahead, we believe there is a future for Stage as an off-price business. However, many of the more traditional stores like Bealls, Goody’s and Stage outlets are ill-suited to the modern realities of retailing and we do not see them playing any part in the business as it recovers,” Saunders says.

“Even with the drive to off-price we have two concerns about performance in the near-term. The first of these is the company’s exposure to oil producing states, like Texas, where the downturn in the oil market is suppressing consumer wages and demand. The second is the need to stand out in an off-price market that is increasingly crowded and competitive.

“The former factor will likely dissipate with the time Stage has bought itself with Chapter 11. The latter will require much focus and discipline as the company emerges from the bankruptcy process: here the more localised store locations will help, but other points of differentiation are required to ensure long term survival.”

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