Levitz: Can it survive?
Owners spent $200M, couldn’t make profit
Clint Engel -- Furniture Today, November 19, 2007
NEW YORK — Filing for bankruptcy protection three times in 10 years is a rare occurrence.
And the odds of surviving after such a three-peat are slim, according to industry suppliers, observers and other experts, who hold little hope that Levitz, once the largest U.S. furniture store, will make it this time.
Levitz Furniture filed its third Chapter 11 bankruptcy petition Nov. 8. Its current owners poured some $200 million into the business in less than two years, yet couldn’t turn a profit.
Levitz reported sales of $511.3 million in its fiscal year ended May 6, assets of $177.9 million and debts of $152.5 million. It lost money despite new management, new and refurbished stores, new product, a new corporate office and new advertising.
“I think liquidation is very probable. I’d give it a 75% probability,” said Peter Chapman, owner of Bankruptcy Creditors’ Service, which has published a Levitz Bankruptcy News newsletter during all three filings.
With each bankruptcy, Levitz has downsized. Chapman said that if it closed, say, a third of its existing stores, the count would go from 76 to about 50.
“Does a 50-store chain have the critical mass that’s necessary to survive, to be able to buy things at competitive prices and cut deals with major manufacturers?” he asked. “Does it have the efficiencies of scale (to advertise economically)? Do they have a footprint that’s logical?”
A more urgent question for Levitz is whether it can find new investors.
Unsecured creditors are unlikely to be persuaded to take an equity stake, said Chapman. The 16 largest industry creditors alone are owed $25 million, and some have been burned by Levitz before. Klaussner is the only large industry creditor owned money in all three bankruptcies — $2.7 million this time and a total of $13.2 million over the three filings.
“You’ve got to find new money,” Chapman said. “That would be a challenge right now. The credit market has really contracted.”
According to court documents, Levitz wants to expedite the process of finding a buyer or investor while at the same time looking for offers to liquidate the business.
Levitz “believes it has identified and implemented initiatives expected to result in cost savings of approximately $25 million,” the company said in an affidavit of Chief Financial Officer Kathleen Guinnessey.
And in the press release announcing the filing, Levitz Chairman and CEO Larry Zigerelli said the retailer hoped the filing “will enable the business to emerge stronger and better positioned for long-term success.”
Levitz’s recent track record, however, is uninspiring.
Shortly after Prentice Capital Management acquired the company in December 2005, it began taking steps to right the ship. In 2006 and early 2007, it started remodeling just over 30% of its stores, according to the court document. Eight new and replacement stores were opened.
It upgraded and diversified its merchandise assortment beginning in winter 2006 so that 50% is now new. Levitz also started a direct sourcing program that now accounts for 20% of its purchases and helped improve gross margins.
Prentice brought in new management. In January 2007, it replaced CEO Tom Baumlin and Chairman Elliott Wahle with Zigerelli, a former president of grocer and general merchandise retailer Meijer and an 18-year veteran of Procter & Gamble, who had no furniture industry experience.
Zigerelli could not be reached for this story.
In July 2006, Harbinger Capital Partners joined Prentice in the Levitz venture, becoming a minority shareholder.
Levitz said that by the time of its Nov. * filing, it had managed to slow its losses. The retailer said it “remains cautiously optimistic that, if properly capitalized, it could reap the benefits of initiatives that have already reduced costs and created a foundation from which a going concern may be preserved.”
Jerry Epperson, industry analyst with Richmond, Va.-based Mann, Armistead & Epperson, said the retailer faces challenges other than raising capital.
“The problem with something like Levitz isn’t so much the consumer perception of the name or even the merchandise mix. The problem is that over many, many years, the demographics have moved and their stores haven’t,” Epperson said. He said most of its stores “were put in place between 1964 and 1978, and the population has shifted dramatically since then.”
He added that when a retailer begins to have to buy from whichever supplier will extend it credit, rather than those with the right merchandise, “it’s almost always too late.”
“The furniture industry always looks easy to someone who isn’t in it,” Epperson said. “The Prentice people are very smart and successful in their own right. This was just a bigger challenge than I think they recognized when they got it.
“And let’s face it: The economy in the last 18 months didn’t do a thing to help them.”
Martin Ploy, executive vice president of AICO — one of Levitz’s key suppliers, but one that paid a risk fee to factor the account and has escaped with little exposure — agreed with Epperson on the lousy business climate.
“Their intent was good,” he said. “I think their timing was bad.”
What happened to Levitz is typical of any company trying to reinvent itself without an adequate budget to upgrade stores, change merchandise and present a new campaign to the consumer, Ploy said.
“To try to reinvent yourself and create a new Levitz, or new anything, in a difficult retail market is almost a surefire way to ruin your cash flow. Unfortunately, I think that’s what happened to Levitz,” he said.
Several industry sources said Levitz is working to line up new investors, but they also say it’s a last-ditch effort and that the chances of continuing as a going concern are not good.
As one source who asked not to be identified said, “It’s time to say, ‘We loved you at Levitz’.”
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Levitz: Can it survive?
Nov 18, 2007
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