Happy Shopping

By Danielle Fugazy, M&A Magazine

December 1, 2008

For the first Monday in a long time I went to work feeling semi-optimistic. According to various estimates, the holiday shopping season opened with retail sales increasing by at least 3% over last year. By some accounts, sales rose by as much as 8%. This is all fantastic news considering analysts were predicting an 11% drop in spending over Black Friday weekend.

I wasn’t surprised spending was up. I went shopping on Black Friday, and once inside Lord & Taylor the sales were impossible to refuse. The deep discounting made it so easy to buy an extra item or two. So to make sure I did my part to help the economy, I shopped at some other stores, too, even though I had given myself strict rules about just running into Lord & Taylor for one item. It was great to be a shopper; the sales were truly terrific. With all my shopping going so well I continued my spending spree on Cyber Monday. I was happy to find good deals and free shipping available at many sites.

I mention my shopping escapades for a few reasons. First, I am obviously not alone; people want to start spending again, and we obviously just need a reason. However, while the deals were great for me and my fellow shoppers, what do they mean for private equity firms that own retail shops? Stores (and in turn their owners) are no doubt taking a beating for the huge discounts they had to offer to get shoppers interested. And all of this is on top of many private equity-backed retailers who are already in trouble. Steve & Barry's (the store that used to sell jeans for $10) is ready to close its remaining 173 stores, liquidating $250 million worth of stock in the process. The decision comes just three months after investment firms Bay Harbour Management and York Capital Management bought Steve & Barry's for $168 million, a month after it filed for Chapter 11 bankruptcy protection. Circuit City, a great place for holiday shopping, is in bankruptcy now. Linens 'n Things, Mervyn's and Whitehall Jewelers, among others, are closed. How many more bankruptcies and closures will there be and how much is the deep discounting between now and Christmas (when some retailers make 50% of their money) going to contribute to those future closings?

Although no one would put an exact number on it, most industry professionals I spoke to expect to see more retail stores close in 2009. This will undoubtedly affect private equity firms that own retail businesses. For those who don’t, there’s always distressed investing.

Danielle Fugazy
Danielle.fugazy@sourcemedia.com