Why retailers are avoiding bankruptcy (or lessons from Circuit City)
Struggling retailers are staying as far away from bankruptcy courts as possible this year after being traumatized by a slew of liquidations in 2008 and having a general feeling that the bankruptcy code is unfair to them.
While the most recent holiday shopping season was better than 2008, some retailers whose holiday was only so-so, could benefit from being able to reduce their size or get out of onerous leases in bankruptcy.
But retailers are increasingly viewing filing for bankruptcy as the beginning of the end, and are increasingly wary that they could turn out to be the next Circuit City.
The Turnaround Management Association on Thursday reunited several of the major players in the Circuit City case, who said the bankruptcy code’s new bias toward speed was one of the main reasons any attempt to save a portion of Circuit City failed.
“Quick bankruptcies are a good thing, but they’re not necessarily good for a retailer,” said Richard Pachulski, an attorney at Pachulski Stang Ziehl & Jones who represented unsecured creditors in the case.
The experts on the panel said a 2005 rule that requires bankrupt companies to decide to assume or reject real estate leases within 210 days of filing for bankruptcy makes reorganizing extremely difficult for retailers who often concentrate a large portion of their annual sales around the holiday period.
Retailers now have to “make decisions about leases long before they have the information about which leases to keep,” Edward Morrison, a Columbia Law School professor, said on the panel.
“You’re shooting in the dark,” Pachulski said .
For example, a retailer who files for bankruptcy in February would have to make all its decisions about which stores to close, without ever being able to go through another holiday season, when retailers typically do about 25 percent of their annual sales.
So what’s a retailer to do? Apparently wait it out and hope. Turnaround experts at the conference were saying retailers shouldn’t file for bankruptcy or be forced into bankruptcy unless they are sure what stores they want to close.
But on the panel, Morrison warned about the perils of “hope,” citing Circuit City’s dashed hopes that it would get a $75 million tax refund prior to filing for bankruptcy.
“A wise man once said hope is not a strategy,” Morrison said.