December 29, 2008, 12:00 AM

As the tough economy catches up with them, some retailers take drastic actions to rebuild

Several well-known retailers filed for protection under Chapter 11 of the U.S. bankruptcy code as they sought ways to restructure operations in the face of heavy debt and poor sales.

Although the 2008 holiday shopping season was one of the most challenging for retailers in recent memory, it was a more brutal time for some than for others. Several well-known retailers filed for protection under Chapter 11 of the U.S. bankruptcy code as they sought ways to restructure operations in the face of heavy debt and poor sales. Chapter 11 is designed to let companies work out payments with creditors over time in an effort to restructure an ongoing business.

“The decision to restructure the business through a Chapter 11 filing should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively,” Circuit City Stores Inc. CEO James Marcum said after the multi-channel consumer electronics retailer filed for bankruptcy. The retailer also cut 700 jobs and closed 155 stores.

Circuit City reported year-over-year e-commerce growth of only 1% along with a 13% drop in same-store sales for its 2009 fiscal year second quarter, which ended Aug. 31, the latest period for which financial data was available at press time. It posted a net loss for the quarter of $239.2 million on total sales of $2.39 billion, compared to a year-earlier net loss of $62.8 million on sales of $2.64 billion.

Also filing for Chapter 11 in the fourth quarter were KB Toys Inc., iFloor Inc. and Lenox Inc. In addition, Goody’s Family Clothing announced it was shutting down its retail e-commerce site to focus on a pared-down chain of retail stores as it attempted to re-emerge from bankruptcy. And e-commerce software vendor LaGarde Inc. filed for Chapter 11 in an effort to work out a heavy debt load accumulated during the 2007 development of its Phoenix e-commerce technology platform for mid-sized retailers, according to Bob LaGarde, who founded the company but is no longer involved in its management.

KB Toys, which is owned by investment bankers Prentice Capital Management, plans to close its chain of 460 stores but keep alive KBToys.com under a long-term licensing agreement with The Parent Co, which operates KBToys.com along with several other retail sites, including eToys.com and BabyUniverse.com.

Web-only retailer iFloor, facing the downturn in the housing market, says it plans to clear out inventory as it undergoes an “orderly administration” of its assets and credit claims.

Lenox, a manufacturer and retailer of tableware and giftware, says it expects to maintain steady operations as it restructures its balance sheet. “This process will give the company flexibility to operate on a normalized basis,” says CEO Marc Pfefferle.

paul@verticalwebmedia.com

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