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Mervyns' bankruptcy another ominous sign

As pressure mounts, consumers abandon mid-level retailers.

July 30, 2008|Leslie Earnest | Times Staff Writer

The Mervyns department store chain Tuesday joined the parade of retailers entering bankruptcy, staggered by a tottering economy made more tenuous by escalating job losses and higher gasoline prices.

The company, which operates 129 stores in California, plans to remain open during the bankruptcy process. But its future remains clouded by a retail environment in which consumers are abandoning mid-tier retailers for bigger bargains at discount stores.

"They're one of the groups in the retail sector that's going to be most affected by the downtrending economy," said Marshal Cohen, chief industry analyst for NPD Group, a market research firm. "It's just too much for them to absorb all of these forces coming on them all at once."

Other retailers that have sought bankruptcy protection in recent months include Shoe Pavilion Inc., Sharper Image Inc., Steve & Barry's and Linens 'n Things Inc. Though the circumstances vary, retail experts say a common thread is that consumers have been pinched by the housing downturn, job losses and higher costs for food and fuel.

That's an ominous sign for the economy, leading to more job losses and more vacancies in shopping centers, said Esmael Adibi of the Anderson Center for Economic Research at Chapman University.

"The retail industry, whether it's the actual stores or vendors, will go through cutbacks in jobs, and that will exacerbate overall job losses for the region," Adibi said. "There's no ray of sunshine here. You try to find one thing positive. I can't."

California could be hit particularly hard, Adibi and others said. During the housing boom that began in the late 1990s, retailers rushed to open stores in outlying suburbs such as the Inland Empire and Antelope Valley.

But with many of those new homes now lost to foreclosure, retailers have been forced to retrench in the state, where many of them have their largest number of stores.

"If the economic pressures become more pronounced, Californian consumers will suffer more than the rest of us," said Burt P. Flickinger III, managing director for Strategic Resource Group, a business strategy firm. "And the more Californian consumers suffer the more we suffer nationally and, ultimately, internationally."

Mervyns, like Shoe Pavilion and Sharper Image, is based in California, and most of its 177 stores are here. Given the severity of the housing downturn here, "California could lead the retail bankruptcy rate in the country," said Sung Won Sohn, professor of economics with the Smith School of Business at Cal State Channel Islands in Camarillo.

In filing for Chapter 11 bankruptcy protection, Hayward, Calif.-based Mervyns blamed the "state of the economy and difficult operating environment for our industry."

"After careful consideration of available alternatives, the company's management board determined that a Chapter 11 filing was a necessary and prudent step that allows us to operate our business without interruption as we seek to restructure our debt and other obligations in a controlled, court-supervised environment," John Goodman, Mervyns chief executive, said in the statement.

The company said in its filing that it had identified a "limited number" of unprofitable stores that should be closed, but it didn't divulge the locations.

The filing came on the anniversary of the company's founding by Mervin Morris.

"Fifty-nine years ago this very day we opened the first store and it was a huge success," Morris, 88, said Tuesday. "A huge success means we took in $1,500, and I thought I died and went to heaven. And today is a very sad day for me."

The department store chain is now owned by Sun Capital Partners Inc., a Florida investment firm that was part of the group that acquired Mervyns from Target Corp. in 2004 for $1.2 billion.

In its bankruptcy filing, the company said it had implemented a turnaround plan early this year to set itself apart from competitors and improve its sales.

But that plan bumped up against external economic factors, including the decline in the housing market and the tightening in the credit markets, which affected consumer spending and ultimately "led to a precipitous decline in the debtors' profitability and liquidity," the filing said.

It also said that Mervyns assets and debts both fall between $500 million and $1 billion; a company spokesman declined to elaborate.

Fans of the store said they like its prices and regularly scan its weekly ads in search of bargains.

"I'm in here trying to save them," Carol Surface, 53, of Beverly Hills said Tuesday at the Westchester store. "I told my husband last night, 'I just might cry if Mervyns goes out of business.' "

But Robin Leishman, an architectural designer from Woodland Hills, said that Mervyns was not her first choice for shopping, even though she could "always find what I need here."

"I prefer going to Target, only because it's a better atmosphere," said Leishman, 53.

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