ANOTHER EXAMPLE OF HOW CHEAP MONEY CORRUPTS

Implications: This article is important for at least three reasons. The first and most important is the "Domino" affect the restructuring or demise of Steve & Barry's will have on most, if not all, Mall REITs. The vast majority of their 270 existing stores are in former anchor stores that, if returned to their former vacant status, would have profound negative impact on the entire "wing" of the regional mall they would be vacating. The second and equally negative monetary impact will be on the bottom line of "inline" specialty retailers who have been depending upon the customer traffic generated by Steve & Barry's as a replacement for the vacant department store anchor. The third impact is the further verification of the "MYTH" of DEPARTMENT STORE REAL ESTATE VALUES". If the SHLD investors needed any additional proof that Messrs. Lampert and Ackman were totally misguided in their claims of between $15 & $20 Billion in real estate value, this is it. 

Analysis: As the article effectively points out "the forces pushing Steve & Barry's growth were not tied to end-consumer demand, but the needs of mall owners in a softening retail real estate market. Much of the company's earnings came in the form of one-time, up-front payments from mall owners. Those payments were designed to lure the retailer to take over vacated department store locations..."

This is a classic case of a "novice" retailer expanding where he can instead of where he should. It is also an excellent case study of how a so called "hot retailer" can lose sight of some of the basic principals of retail expansion. 

As any experienced analyst of the retail scene well knows, there is more to a successful new store than the availability of "free money", very cheap rent  and a bunch of cheap merchandize. Such things as well trained management, well trained supervision, carefully thought out distribution patterns, proven profitability and acceptance of the concept in each new market area, etc., etc. are all of equal or greater importance to the overall profitability of the retailer.

Even the most cursory look at the expansion strategy of any successful retailer reveals that Steve & Barry's was violating every known principal of retail expansion. There is simply not a single successful retailer you could find in business today, that expanded nearly as fast (from a percentage of store growth as well as the spread into new markets) as Steve and Barry's have tried to do. 

It is hard to tell just how much of the blame is to be placed on Steve Shore and/or Barry Prevor, two young guys who started slowly opening discount college apparel stores in 1985 and sold out half their company in 2005 for $170 million to T A Associates, or how much of the blame is to be born by T A. It is also hard to say how much of the blame is due to inexperience as opposed to just plain greed. 

Whatever the reasons or wherever the blame properly rests, the impact of a restructuring or bankruptcy will have repercussions well beyond the universe of Steve & Barry's investors. As the reporters correctly pointed out, mall owners gladly gifted each new store with millions of dollars of "Tenant Allowances" or outright cash gifts to insure that one of their empty anchor stores would again be able to generate customer traffic so that the nearby specialty retailers would continue to pay their rent. 

All of this "Irrational Exuberance" on the part of both landlord and tenant is now coming home to roost.