One of the oddities of the so-called "retail apocalypse" is that no major department-store chain has filed for bankruptcy protection since the Great Recession. Profitability has been squeezed across the whole sector, but department stores have survived through a combination of deep cost cuts and asset sales.
However, for the worst-performing department-store operators, even the most heroic turnaround efforts are doomed to fail eventually. Bon-Ton Stores (NASDAQ: BONT), for one, could soon run out of options for avoiding bankruptcy. If it goes out of business, that could provide a vital sales boost for competitors includingÂ Macy's (NYSE: M) and J.C. Penney (NYSE: JCP).
Bon-Ton's financial position is awful
During the first half of 2017, Bon-Ton posted dreadful sales results, even by department-store standards. Comparable-store sales plunged 8.8% in the first quarter and 6.1% in the second quarter. For comparison, comp sales declined 3.6% at Macy's and 2.4% at J.C. Penney during the first half of the year.
Meanwhile, Bon-Ton is losing gobs of money. The main measure of profitability the company uses is adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), because it's consistently unprofitable under standard accounting rules.
Bon-Ton has been consistently unprofitable in recent years. Image source: Bon-Ton Stores.
Even the adjusted EBITDA statistics are ugly, at negative-$15.6 million in Q1 and $9.1 million in Q2. Bon-Ton only avoided a second straight quarter of negative adjusted EBITDA in Q2 because of $7.8 million in real estate gains and $4.6 million of income from gift card breakage, the latter referring to a change in Bon-Ton's estimates of how many gift cards will go unused.
Lastly, Bon-Ton's balance sheet is in utter disrepair. The company ended the second quarter with nearly $1 billion of debt and capital lease obligations, but just $6 million of cash on hand. The crippling debt load means Bon-Ton has to pay over $75 million annually in interest. It has only managed to make those payments by cutting capital spending to the bone.
Vendors are getting skittish
Because of Bon-Ton's plunging sales and terrible balance sheet, vendors are starting to get nervous about whether they'll get paid. As a result, some have cut back on shipments to Bon-Ton or demanded cash on delivery. It's no fluke that accounts payable -- the amount owed to suppliers -- declined 17% year over year as of late July.
This is a huge problem, as inventory shortages could quickly put Bon-Ton in a death spiral. The company has been doing its best to raise cash. In September, it sold a store in Minnesota for $18.9 million and leased it back from the buyer. Last month, it amended its credit line to provide additional access to cash on a short-term basis.
However, Bon-Ton is just buying a little bit of time with these actions. As of the beginning of January, the company owned only 25 of its stores and had ground leases for another seven. In other words, there isn't much real estate to sell. Furthermore, changes to the credit line won't save Bon-Ton if more vendors bail on the company or demand cash on delivery.
This company isn't likely to survive
Bon-Ton's formal guidance calls for full-year adjusted EBITDA of $115 million to $125 million. However, this estimate seems wildly unrealistic, unless it includes a significant amount of one-time asset sale gains. Given its ongoing sales declines and lack of underlying profitability, Bon-Ton probably won't be able to create a credible turnaround plan if it is forced into bankruptcy.
A recent report that private-equity firm Sycamore Partners is interested in acquiring some of Bon-Ton's assets gives the company at least some chance of survival. Sycamore owns regional department-store chain Belk, and it may see an opportunity to convert some of Bon-Ton's better stores to the Belk brand.
However, this doesn't seem like a very realistic alternative to bankruptcy. By selling off its best stores, Bon-Ton would just be undermining its chances of returning to profitability.
On the other hand, if Bon-Ton declares bankruptcy, it's entirely possible that Sycamore would swoop in to buy some of its stores at that point. Perhaps competitors such as Macy's or J.C. Penney would do the same in a few limited cases, but both of those companies are also focused on paying down debt right now.
Thus, most of Bon-Ton's stores are likely to be a0bandoned and repossessed by the landlords. It's bad news for Bon-Ton shareholders, but it will be healthy for the industry as a whole, helping to get supply a little bit closer to matching demand for the full-line department-store experience.
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