Monday, July 21, 2008

Add Mervyn's to Our Growing Litany of Retailers Headed to the Great Sunset

We've predicted the great demise of US retail for a long time in the blog; we simply have overbuild our consumer culture based on a national savings rate of zilch. I can't short individual REITs so I am stuck with Ultrashort Real Estate (SRS), but I would prefer to focus those REITs who focus on malls and strip centers.

After Linens 'n Things [Apr 11: This Day in Bankruptcies - Another Airline and our First Major Retailer] came Steve & Barry's [Jul 10: Another Retailer (Canary in Coal Mine Down]. Now Mervyn's looks like it's on the fast track - coming from the auto industry I can tell you when "key vendors halt shipments" you are essentially done. Now Mervyn's has been weak for a long time, but like any herd - the sick and diseased will go first. And another group of future Walmart workers, federal government workers, and healthcare workers is born.

But don't worry folks, as oil pulls back and gas heads "down" to $3.40 the American consumer will be back! CNBC promised.
  • Mervyn's LLC, the long-struggling California department-store chain, is fighting for survival as some of its vendors have halted shipments to the company and key lenders have pulled financing, according to people familiar with the situation.
  • In recent days, Mervyn's executives have been trying to persuade vendors to ship merchandise to the retailer for the crucial back-to-school season. If that effort fails, the company could be forced to file for bankruptcy protection as soon as this month and shut down, according to these people. Mervyn's operates 177 stores in seven states, mostly in California.
  • A Mervyn's liquidation would deliver another blow to the nation's mall owners, which are suffering through a torrent of store closings. Linens 'n Things, Goody's Discount Clothing and Sharper Image are just some of the chains that are closing stores or shutting down for good this year.
  • It would also be an embarrassment to Mervyn's owners. Private-equity firms Cerberus Capital Management and Sun Capital Partners, along with three other partners -- including real-estate investor Lubert-Adler -- acquired the chain from Target Corp. in 2004 for $1.2 billion. The group put up about $400 million in equity and financed the rest. [embarrassment yes - but still lucrative - see below]
  • But while thousands of employees would lose their jobs and their vendors would get hurt in a Mervyn's liquidation, the private-equity buyers wouldn't stand to take much of a financial hit. That is because when they bought the company they structured the $1.2 billion deal as two separate transactions -- one for the retailer and a second one for the retailer's real estate. [aha, the barbarians at the gate ARE smart after all - generally most of these private equity firms buy these companies and load them up with debt and make sure their firm is paid through the nose - yet another example of heads we win, tails we still win - as long as they can find a new set of suckers... err, shrewd investors to offload debt on]
  • The real-estate arm has been a lucrative investment, according to people familiar with the deal. It leased many of the stores to Mervyn's and has sold and leased certain properties to other retailers. And through sale-leaseback transactions and the appreciation of real-estate values over the past several years, the buyers have more than doubled their money on the real-estate investment. Those profits have far exceeded losses on the retailer, according to these people. In a bankruptcy of the store operations, the real-estate arm would become a creditor. [I just have to laugh at that last point - so one part of the private equity business becomes first in line to receive money from the bankruptcy of the other part - what a system folks!]
  • Two retail experts familiar with the bankruptcy planning at Mervyn's said the retailer's sales began to tumble quickly as the real-estate slide began in California and Arizona. Mervyn's tried to cater to Hispanic consumers, many of whom have been hurt by the downturn and job losses in the mortgage and home-building industries. [everyone assured me in spring 2007 not to worry about housing - it is only 4.5% of GDP; a pittance]
  • In the spring Mervyn's lender CIT Group Inc., which has severely cut back on its business loans overall, stopped providing financing to the chain, according to people familiar with the matter. This caused Mervyn's vendors to get nervous, and many began withholding shipments to the company.
  • Among Mervyn's largest landlords is Macerich Co., a Santa Clara, Calif.-based real-estate investment trust that owns 72 U.S. malls.

If you are ever interested on how gamed the system is you should read this story [BusinessWeek - April 10: Where's the Beef?] on what private equity has done with Burger King - they are "brilliant" in the fact they have created a system where they win no matter what. As long as new suckers are born every day, these guys will win. This was an eye opener for me when I first read it a few years ago.

Long Ultrashort Real Estate in fund; no personal position

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