During an interview with Bloomberg News that aired yesterday, billionaire real-estate investor Sam Zell warned that Americans probably won't realize the depths of the economic scarring caused by the coronavirus shutdown until restrictions are lifted, and thousands of businesses simply never return.
Well, readers might have just gotten a taste of what this shock might be like, because after a flurry of reports about looming Chapter 11 filings involving major mall stalwarts like Neiman Marcus, JC Penney, J Crew and Saks Fifth Ave (among others), Reuters added on Wednesday that Lord & Taylor would likely proceed with a liquidation instead of trying to tough it out through bankruptcy.
To be clear, for those - like CNBC's Scott Wapner - who aren't well-versed in the workings of corporate finance: When a company files for Chapter 11 protection, typically, the underlying business will continue to function as normal (or something approximating that), while the court sorts the mess out, creditors find some new common ground, and (again, typically) equity shareholders are totally wiped out.
But when a company decides to proceed with liquidation, things get a lot dicier, the businesses often cease operating (leading to the termination of all workers) while all of the company's assets are typically sold off to pay back creditors.
Having sold its former HQ building to WeWork a couple of years ago, L&T is now planning to liquidate the inventory in all 38 of its stores. Typically, this is done via "going out of business sales", as owners scramble to sell all of their inventory before they turn off the lights and walk away.
Venerable U.S. retailer Lord & Taylor plans to liquidate inventory in its 38 department stores once restrictions to curb the spread of coronavirus are lifted as it braces for a bankruptcy process from which it does not expect to emerge, people familiar with the matter said on Tuesday.
Lord & Taylor’s preparations to liquidate its inventory as soon as its stores reopen offer a window into the grim future of a high-profile retailer - a storied department store chain founded in 1826 and billed as the oldest in the United States - that does not expect to survive the pandemic’s economic fallout.
On Monday, retailer J.Crew Group Inc filed for bankruptcy protection with a plan to avoid liquidation and reorganize its debts thanks to an agreement with its creditors.
Retailers that pursue a liquidation hold “going out of business” sales in order to generate cash, and their stores often become magnets for consumers looking for bargains. Lord & Taylor is holding off on a bankruptcy filing and subsequent liquidation until it can reopen its stores to attract those shoppers, according to the sources, who spoke on condition of anonymity.
Lord & Taylor has lined up liquidators to help it run the “going out of business” sales and is girding to permanently close all its stores once the merchandise is sold, some of the sources said. The retailer had been exploring filing for bankruptcy among other options, including trying to negotiate relief from creditors and finding additional financing.
The sources said that it remained possible that external funding or some other intervention could rescue Lord & Taylor, and asked not to be identified because the liquidation preparations are confidential.
Lord & Taylor did not respond to a request for comment.
Its stores are primarily in the northeastern United States, which has been hit hard by the pandemic, making the exact timing of the bankruptcy filing hard to plan, the sources said. Lord & Taylor also has stores in the Chicago area and Florida.
Though Hudson's Bay retained ownership of Lord & Taylor's choice assets, and might cash out more during the bankruptcy, the investor, which also owns a chunk of Saks Fifth Avenue, sold Lord & Taylor to fashion rental startup Le Tote last year when it spun it off from Saks.
Fashion rental service start-up Le Tote acquired Lord & Taylor last year from Saks Fifth Avenue owner Hudson’s Bay Company for C$100 million ($71 million).
Hudson’s Bay kept ownership of some of Lord & Taylor’s real estate and assumed responsibility for its rent payments, amounting to tens of millions of dollars a year.
Hudson’s Bay may use the bankruptcy filing to take some of its leases back from the department store operator, one of the sources said.
Le Tote declined to comment. Hudson’s Bay did not immediately respond to a request for comment.
Other department store operators - already hit hard by competition from online rivals - are also struggling to survive. Neiman Marcus Group plans to file for bankruptcy within days, while J.C. Penney Company Inc is also considering a similar move, Reuters previously reported.
Neiman Marcus and JC Penney at least appear to have struck deals with creditors to extend enough financing to tide the retailers through the bankruptcy, where the unsustainable ghosts of LBOs past will finally be excised. Macy's is trying to do the same - though whether or not it will succeed remains unclear. For the former companies, these arrangements have probably taken liquidation off the table - for now at least.
Over the longer term, survival will depend on whether the American economy is as "deeply scarred" from the lockdowns as people like Zell fear it might. As one of the oldest department stores in the world, Lord & Taylor was founded in 1826 by two English immigrants to the Lower East Side. During the Civil War, the company sold mourning outfits to widows. But it floundered over the decades as lower-cost competitors like TJ Maxx and Macy's ate into its market share. Investment firm NRDC Equity Partners acquired Lord & Taylor for $1.2 billion in 2006, when department stores were still doing well, and later it became a part of Hudson’s Bay.
On the bright side: At least when the lockdowns end, New Yorkers will have an excellent opportunity to do some bargain shopping.