Down goes Steve & Barry

(via CJR's Ryan Chittum)

Retailer's Collapse Hits Mall Owners 

By Jeffrey McCracken, Peter Lattman and Kris Hudson

Steve & Barry's, the discount-clothing chain that collapsed last week, depended heavily on bargain-hunting shoppers and attention-getting celebrity endorsers. But its biggest boosters were the nation's struggling mall owners.

Desperate to fill empty department-store spaces, mall owners courted the retailer with fat payments to outfit its cavernous stores. Those checks, not clothing profits, fueled the company's runaway growth, according to people familiar with the company's finances. When the payments slowed, Steve & Barry's collapsed.

The 276-store chain, regarded just weeks ago as one of America's fastest-growing retailers, now qualifies as one of the industry's most unusual blowups. Its Chapter 11 bankruptcy filing on Wednesday is likely to lead to its liquidation, people involved in the case say.

Two observations:

1) Time to go to the store and feast on the carcass.

2) Malls pay anchor stores to move in. This is probably news only to me - and makes sense to a certain degree - but here's the fun bit: this was the business model that kept Steve & Barry afloat.

Mall owners have always viewed anchor stores as loss leaders -- owners offer favorable deals to big stores in exchange for bringing traffic to the malls. Financial inducements often come in the form of tenant-improvement allowances, which are upfront payments that retailers use to outfit the interiors of their stores. Landlords seldom monitor how the money is spent.

The mall owners welcomed Steve & Barry's with open wallets. One former Steve & Barry's executive recalls company co-founder Barry Prevor jumping up on his credenza with joy at company headquarters after negotiating the first multimillion-dollar payment in 2003.

[snip]

Because Steve & Barry's was often the only retailer willing to occupy large, vacant stores, it didn't often budge on its demands. "They go into a market and say, 'This is what we're going to pay,' " says Mr. Natanek. "There's not a lot of negotiation."

One mall owner says he talked to Steve & Barry's about leasing space, but the terms they demanded were absurd. "Leasing to them would have been like bringing prostitutes to a party to look popular," he says. "They might look good, but you're paying for it."

So - they're gambling that the mall payments and celeb deals will keep them in the chips until they turn a profit.

Plenty of business take awhile to establish profitiability (e.g. US airlines have lost a collective 13 billion dollars since deregulation) but you have to wonder about a business climate where corporations are free to gamble so big.

Not only that, but they used creative accounting to hide their losses as long as possible - something they are going to have to explain in bankruptcy court.

Huge risks, creditors kept in the dark until the music stops.

Now, where have I heard this story before? Oh yeah, on Wall Street.