Chapter 11 Bankruptcy: Pardon or Stay of Execution?
Expanded Edition: https://www.isourcerer.com/2020/08/chapter-11-bankruptcy-pardon-or-stay-of.html
What is Bankruptcy?
Bankruptcy is a legal proceeding involving a person or business that is unable to repay their outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor's assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.
So, in my simple terms, a company that owes more to its suppliers, landlords, employees, etc. than its sales will repay can file Chapter 11 to protect it from these debts- temporarily. Temporarily should mean that the company can stay open and earn revenue while it figures out how to pay these debts.
IF you owe more than you take in, there are only two ways to change that situation: 1. Generate more sales; and 2. Borrow more to pay the debts.
Can you actually “emerge” from Bankruptcy and not go back?
IN case 1, you must find the missing pieces, the relevance and the customers to accomplish what you couldn’t before you filed; In case 2, if you don’t accomplish case 1, all you are doing is like the song, Sixteen Tons: “Another day older and deeper in debt.”
There is case after case of companies filing bankruptcy and being so overwhelmed with the debt service that they have to do the only thing possible: File Chapter 7 which may allow discharge of debt and liquidation of assets.
There are fewer cases of companies that have emerged from bankruptcy (and stayed viable, not returning to bankruptcy) to become profitable enterprises. Those that did have had to rejuvenate their offering, or venture into blue oceans. Examples of this are Apple (near bankruptcy in 1997 and saved by Microsoft, yes it’s true), Marvel Entertainment, bankrupt in 1996, now owned by Disney and wildly popular. (Investopedia)
In the apparel industry, fewer still have emerged and stayed out. One example was Wet Seal, which ventured into plus sizing to save itself. Many others, such as Toys R Us and Sears were too choked by debt and too lost as to what to do.
So again, as I have said in other articles, for companies like JCrew, JC Penney, Ascena and more, COVID-19 is not the cause of death. It is the executioner. Chapter 11 is merely a stay of execution. Why? Tell me, as in the case of Wet Seal, what plans for improving its relevance via product mix and customer base, have you heard from the latest list of casualties?
IF we view Bankruptcy as a disease, the main cause is the loss of relevance. Either someone took the company’s relevance while it was asleep, or it just forgot to evolve, or both. Great companies survive all manner of financial downturns, some may become even more relevant during it (there are many cases of this during the Pandemic, starting with Amazon, Walmart, Best Buy, etc.)
One retailer who, in my view, has a very good chance to emerge from bankruptcy is Neiman Marcus. Clearly they are making efforts to get closer to their customer and personalize their offering; IF they match these efforts with great and sustainable investment dressing, they will have completed their task and should be able to generate the income necessary to pay down and back the debt. I have said this a few times, most recently in my last article, “What is the Future of Retail?”
As a former department store retailer, I believe I am right. Let’s see.
The bottom line is that Chapter 11, for most, is just a stay of execution. Companies who found themselves in the position to have to resort to Chapter 11 Bankruptcy filing, were usually lost as to their relevance in the marketplace. What is the answer for those companies: Use the Brand Name or Store Name good will and retool, revitalize; strip anything that didn’t work and reinvent themselves. In most cases, as with Sears and JCrew, the Brand has value; it just needs to be applied to the current market.