Another Victim Of Over-leveraging

Implications: This WSJ writer and many like him are raising big red flags about the fate of the retail industry. They are seizing upon the rash of retail bankruptcies as either further evidence of the severity of the depression or the tightening of customer purse strings, or both. However, not one business writer I have found is talking about the "elephant in the room". The elephant is simply the fact that every one of the retailers recently declaring bankruptcy have been the target of a buyout by some private Investment Fund who overpaid for a long-troubled company and then promptly loaded the company up with debt to enrich their investors.

Analysis: Linens 'n Things is being singled out as one of the first major retailers to go bust in this economic downturn resulting from the credit crisis. Other less dramatic business writers also mention other recent buyouts such as Wickes, Sharper Image, etc.
However, upon closer examination, none of these recent bankruptcies are really the fault of the current recession.  They (and the several others yet to come) are a product of only two things.
 
Thing one is that they fell victim to stronger competition.  Many have become weak or were never strong, dominant, retailers to begin with. Alternatively (as was the case with Linens 'n Things), they were once reasonably good but became complacent and allowed themselves to be overtaken by newer, better merchants that eventually "done them in".

Thing two is that they were all overburdened with lots of new debt placed upon them by their financially savvy new owners to help pay for the buyout and provide immediate riches to their investors.

The current recession is but a minor cause of their troubles. Any slowdown (or lack of a miraculous sudden sales and profit increase at the hands of the new "merchant genius owners) would have hastened their demise.

Those of you old enough to remember the Federated Department Store debacle of the late 1980s when a Canadian homebuilder managed to convince several fee-hungry investment banks that he was worthy of acquiring FDS, will immediately see the similarity to today's craziness.

FDS was (and remains so today under the Macy name) the preeminent department store group in the world.  Because they avoided debt and were conservative operators who owned most of their hard assets free and clear, they were inviting targets of the overleverage crowd.  They were bought at a huge premium and were immediately burdened by horrendous levels of debt that could only be met by (this twice- committed for "nervous breakdowns" and convicted bigamist )Canadian being able to immediately increase profits by 25%. Naturally he was unable to do this. FDS could not meet its' debt load and went bankrupt within 20 months.

The former management took over and, free from some of their less successful stores, picked up exactly where they left off before being rudely interrupted by the unholy alliance of Canadian homebuilders and New York bankers.

That is exactly what is happening today with many of these retailers. However, most do not have the staying power and successful track record that FDS had prior to the takeover so they will have little choice but to fall by the wayside as they would have done anyway if left to their own devices. 

GLG News readers should not be deceived by the drama and controversy the 24/7 business media tries to create when they think they see a pattern emerging and want to announce it to the world to show how smart they are.  It is simply business as usual in response to too much debt being placed upon weak businesses!