THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, June 9, 1996 TAG: 9606110496
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY STEPHANIE STOUGHTON, STAFF WRITER
LENGTH: 149 lines
As Donald Clarke tells it, a strange thing happened before his company, Caldor Corp., filed for bankruptcy and junked plans to move into Hampton Roads.
The discount retailer had hit tough times, he said, but it was only temporary, no big deal. Then, the whispers started: Caldor is in trouble, Caldor can't fight Wal-Mart, Caldor can't pay its bills.
The financial community heard the those whispers and refused to extend credit. Suppliers slammed on the brakes as well, and Norwalk, Conn.-based Caldor crashed.
``We had no recourse but to make this most difficult decision and seek protection under Chapter 11,'' Clarke, company chairman and chief executive, said last September.
Caldor is among a growing list of retailers that say these lenders, called ``factors,'' contributed to their bankruptcies, or at least accelerated the process by yanking support. Other companies on that list include Edison Brothers Stores Inc., Merry-Go-Round Enterprises Inc. and Norfolk-based Fine's.
Retailers don't entirely blame the financial community for their bankruptcies. These are tough times, especially for apparel chains and regional discounters facing tougher competition and changes in customers' buying habits.
But retailers say skittish lenders make matters worse by refusing to extend credit or give management the time to fix problems. This can trigger a chain reaction of suppliers withholding shipments and a retailer's demise, they say.
Not so, according to lenders and others in the industry. Lenders say they're simply doing business the sensible way: by restricting credit to retailers that have deep-rooted problems.
``Recently, some observers have cited nervous creditors as the unseen force behind the rolling wave of Chapter 11s that has swept the industry,'' said Lawrence A. Marsiello, president and chief executive officer of CIT Group/Commercial Services, the retail industry's biggest lender. ``The reality is that factors have a vested interest in maintaining the flow of liquidity.''
Even if things get bad, lenders say they aren't quick to cut off a retailer. In most cases, decisions to withdraw support follow careful review of a retailer's financial reports.
``Arbitrarily cutting off credit can kill our business,'' Marsiello said. ``We work hard with the people we do business with to keep them in business.''
But is it hard enough?
Frank J. Santoro, a local bankruptcy lawyer, says there's some truth in what both sides say. There are seriously troubled retailers out there. But then, there are others that might have been made it through bad times if factors had not pulled their support.
``The factors don't want to be placed at risk,'' Santoro said. ``But sometimes, they don't take the time or make the effort to understand the individual situation. If you over generalize, the odds are that you can make a mistake.''
Factors like CIT are little-known players that operate as behind-the-scenes middlemen. Despite their low profile, they play a large role in what ends up on store shelves.
In a nutshell, factors pay suppliers for merchandise and then assume the risk of collecting from retailers. They extend credit so suppliers - mostly underfinanced and smaller ones - don't have to wait for retailers to cough up the cash.
In the end, the factor gets stiffed if the retailer doesn't pay.
At one time, factors were more patient with retailers. They believed that, given time, retailers could turn losses into profits as long as they had adequate cash and bank credit lines. But that perception changed after a wave of retail bankruptcies in the '90s.
``There are so many uncertainties,'' said Tom Linker, credit manager for Donnkenny Apparel Inc., a sportswear manufacturer in Wytheville, Va.
Today, it's not enough for a retailer to have cash on hand and good credit lines, officials said. Business executives also must communicate with factors and discuss business plans, they say.
``I've been reading this in the newspapers. It's always the factors,'' said Richard V. Romer, executive vice president of CIT Group/Commercial Services in New York. ``The problems that retailers are having . . . are because of difficulty in communicating with the people who supply them goods.''
In some cases, executives of troubled retail chains simply aren't talking to the factors or suppliers, Romer said.
``I think what they could do is talk to Mr. Romer,'' he said. ``I don't think they can talk to Mr. Romer through the press.''
Retailers know things have changed. But in some cases, they say, factors' reactions have been unwarranted.
In Caldor's case, CEO Donald Clarke said the discount chain had hit a temporary snag due to the difficult retail environment.
``Even though Caldor was in compliance with all its bank covenants, recent adverse publicity and speculation have led a portion of the vendor and factor community to withdraw the support that is so vital to the conduct of (Caldor's) operations,'' the company said in its bankruptcy filing.
In the retail industry, some refer to this phenomenon as ``herd mentality.'' That's when one factor stops financing the receivables of a retailers, and then everybody finds out.
In most cases, the factor's suppliers stop sending goods. Then comes the domino effect: factor after factor, supplier after supplier, pulling away.
The retailer is left standing alone, with little means of keeping its shelves and racks stocked.
``All the bad news gets circulated relatively quickly,'' said Peter A. Chapman of Bankruptcy Creditors' Service Inc. in New Jersey. ``Then, there's a wave of nervousness, and all the folks want cash. It's the old 1930s run on the bank.''
Factors don't like to sound harsh. They acknowledge that market rumors play a role. They know credit terms are much stricter. They also understand that retailers are having a bad time.
But so what? This is not their fault, they say.
Chapman agrees.
``To put the onus back on the factors - it's a great public relations campaign and a great way to diminish the impact of the bankruptcy filing,'' he said.
Companies like Caldor, St. Louis specialty chain Edison Brothers and Joppa, Md.-based Merry-Go-Round had fundamental problems, Chapman said. All three were headed for bankruptcy, anyway, he said.
Even Fine's chief executive acknowledges his men's apparel chain had serious problems. But he's not blaming the factors.
Even before Fine's and its parent company filed for bankruptcy in 1994, Mitchell Fine knew what was coming.
``It got tougher and tougher,'' he said. ``They said: `We want you to pay up front. We want you to pay C.O.D.' You could feel the noose tightening.''
While Fine would have liked the factors to continue their support, he realizes his apparel chain was overloaded with debt at the time. It has since reorganized and emerged from bankruptcy protection.
``From a business standpoint, I totally understand what they did,'' he said. ``I do think they got a little scared earlier than they should have. From an emotional standpoint, I think maybe we could have worked it out.'' ILLUSTRATION: Graphic
Factors - Latin for ``doer'' or ``maker'' - are little-known
players in the financial community that support retailers. Most
consumers probably don't know factors exist, though they have
significant control over what ends up on store shelves and clothing
racks.
These factors essentially pay suppliers for the merchandise and
then assume the risk of collecting from retailers. They extend
credit so suppliers - generally under-financed and smaller ones -
don't have to wait until retailers have cash on hand.
For example, let's say a retailer called Jane's Boutique wants to
buy $5,000 worth of bathing suits from a small manufacturer. Jane's
probably won't be able to pay the manufacturer for more than a month
- after the merchandise is sold.
To avoid risk, the manufacturer essentially sells its receivables
- or money that Jane's owes for the bathing suits - to a factor.
The factor takes on the receivables and then advances a
percentage - let's say 80 percent of the bathing suits' value - to
the manufacturer.
When Jane's pays up, the factor collects on the entire amount and
pays the remaining 20 percent to the manufacturer. The factor makes
money from commission charges and interest collected during the
period.
If Jane's doesn't pay, it's not the supplier that loses
everything; it's the factor. by CNB