re: Chapter 11 and other...
Hi Art:
Thanks for your post. I respect your opinion -- that's after all what we're all here for I think, to discuss and get more information to make decisions. Here's some info not specifically for you but on Chapter 11 overall and the history of Ames.
Here's the nitty gritty on Chapter 11:
www4.law.cornell.edu
Here's an example of how PG&E (California energy crisis) which is further along in the process is going through Chapter 11:
pge.com
I'm not sure if I agree that Etorre would not be allowed to continue -- it is a determination that will ultimately be made by lenders not the courts (it is not in their interests to allow someone who is incompetent to manage their money -- they are also not in the business of stealing value from shareholders because they tend to be highly risk adverse and do not enjoy running companies).
In (very simplified) theory what is supposed to happen in a reorg, is that the value of company is assessed based on what it is worth (the sum of all their operating assets plus surplus cash, securities, fixtures, real estate, excess inventory, etc.), and it is stacked up against a similar weighted chart of liabilities with secured creditors coming first and then you move down the chain with shareholders who bear most risk but also when times are good, the most potential for reward. If the value of everything on the left side of the balance sheet is substantially below what is owed on the right, then the secured shareholders tend to get everything working its way down the chain to the cutoff where one group will get short changed and everyone below that will get nothing. Typically, it is not as common that pre-reorg shareholders survive in the post-reorg organization. To make things work, after the cutoff, there will be some debt that will be converted into shares of the new organization -- and that's where the negotiations come in -- ie who gets what, who wants what... Bear in mind as well, that it is often difficult to assess a true value of the company as a continuing entity because they are losing money.
There are two reasons companies go out of business -- financial and operational. If it is financial it just means that the debt levels were too high because the interest payments are what drove them to bankruptcy. Financial caused bankruptcies were common in the early 90s from the leveraged buyouts in the 80s. If it is operational, who knows what the business is worth since it can range from anything like lawsuits to a dying industry (think buggywhips) -- this is why there are a lot of people who are questioning whether or not the bankruptcies this time around are like the last time. There are real fundamental issues with the economy overall this time around (not so much for Ames though -- things like telecom, etc. do not have short term solutions).
Here's the history of Ames -- it would be interesting to hear a discussion on what went wrong since that would be critical to see whether or not Ames will continue going on in the future -- is it a problem with strategy or execution? Clearly they were successful for a period. So is it simply overexpansion into a slowing economy? But at the same time when sales slowed for them, Walmart, Kmart and the rest of them increased market share. Anyway, here's the article:
BUSINESS
SEEKING PROTECTION AMES TURNS BACK A PAGE TO CHAPTER 11
MATTHEW KAUFFMAN; Courant Staff Writer
08/21/2001
The Hartford Courant
STATEWIDE
E1
(Copyright @ The Hartford Courant 2001)
Ames Department Stores, hobbled by a crushing debt load and dwindling vendor confidence, filed for bankruptcy protection Monday in a bid to keep its stores open and its shelves stocked.
The voluntary filing -- the Rocky Hill-based company's second march into bankruptcy court in a dozen years -- caps a dramatic two- year decline in which Ames dropped from a do-no-wrong darling of Wall Street to a struggling penny stock with slipping sales and vanishing earnings.
In the past year, Ames trimmed its inventory, targeted nearly 80 stores for closing and cut thousands of employees from the payroll. But the company has still had trouble making a buck, and with some suppliers withholding merchandise for the critical back-to-school and Christmas selling seasons, Ames called in the bankruptcy lawyers.
CEO Joseph R. Ettore, who is credited with turning Ames around after its last bankruptcy ended in 1992, said the filing would reassure vendors and give Ames time to regain its footing.
"We thought this would be our best chance, not so much for survival, but for success," Ettore said.
Unlike recent bankruptcies at Caldor and Bradlees, Ames is not liquidating its stores and going out of business. The chain's 400 stores will remain open while the company and the courts fashion a reorganization plan to shed some of Ames' debt.
For now, customers may see little impact from the filing. Not so for the potential big losers in the process: Ames' creditors, including bondholders and leaseholders for stores Ames has closed; and stockholders, who typically lose everything when a company goes bankrupt.
It is likely little solace that long-term shareholders didn't have much more to lose. Ames stock traded as high as $48.50 in June 1999, when it began a steep descent. By the end, shares were selling at a mere 69 cents -- a 98.6 percent drop -- before trading was halted Friday in advance of the bankruptcy news. The stock did not resume trading.
Ames executives blamed bad weather and a weak economy for the reversal. They said season after season has been too cold or too wet or too snowy to bring in customers. And they said their core shoppers -- with a household income around $30,000 -- have been hit especially hard by the spike in fuel costs and the economic downturn.
Still, even as Ames' sales have suffered, other discounters, including No. 1 retailer Wal-Mart, have grown. Ames executives have always maintained that stores such as Wal-Mart, Kmart and Target cater to customers with higher incomes than Ames, but many analysts believe those stores have contributed to Ames' troubles.
Some analysts also say Ames overextended itself with its ambitious 1999 takeover of the failing Hills Stores chain, a $330 million deal that increased Ames store count by 50 percent and expanded the retailer to states in the South and Midwest. That purchase is frequently compared to Ames ill-fated 1988 takeover of the 392-store Zayre chain, which more than doubled Ames' size in a single gulp. But when the recession hit, Ames couldn't handle the debt load and took cover in bankruptcy court.
Ettore says Zayre was a terrible fit for Ames and should not be compared to the Hills deal. He said the Hills acquisition made sense at the time and that most of the stores are performing well, although he acknowledged they have added to the company's financial troubles since the economy softened.
But the critical blow, Ettore said, was a maddening delay in receiving approval for a $75 million loan the company had expected to have more than a month ago. The deal required approval of dozens of banks, followed by time-consuming changes to lease documents at many stores. "The bottom line is it was six or seven weeks longer than we expected," Ettore said.
With the company short on cash, some vendors put the brakes on their delivery trucks, which is often the first step in the retail death spiral. But with the filing, Ames has secured special financing with its existing creditors to guarantee vendors will be paid during the bankruptcy, which should get the merchandise moving again.
Ettore spent most of Monday on the phone to the CEOs of nearly all of Ames' top 25 vendors, and he expects stores will be fully stocked in about a week. The interruption in deliveries will likely hurt back- to-school sales, which have become a significant driver for many retailers, but should not impact fall or Christmas sales, Ettore said.
At the Ames stores in West Hartford Friday, the limited back-to- school selection was evident, and there were spot shortages of a few other items. But there were no overt signs of the chain's troubles.
Investors had expected their latest look at how deeply the company is hurting this Thursday, when earnings were to be released after a week's delay. But Ettore said the release would likely be delayed again, though he said of the numbers, "Obviously, they're not pretty."
A decade ago, Ames shed half its stores during a 2 1/2-year stint in bankruptcy court. Ames emerged from bankruptcy at the end of 1992 and hired Ettore as CEO in June 1994. During the next five years, the company's sales grew steadily, and it routinely beat its earnings estimates.
Investors and the trade press were cheering. On May 1, 2000, a smiling Ettore stood before 200 workers and vendors at the Radisson Hotel in Cromwell and accepted a crystal award from Discount Store News proclaiming Ames the "Retail Turnaround of the Decade."
Few would have guessed Ames was already in a downward slide.
Some investors predict Ames won't survive the bankruptcy and will be forced to liquidate. Ettore says he can turn the company around again, and he pays little heed to the naysayers, saying they've been wrong before.
"Seven years ago when I came here, everybody was throwing dirt on our grave," he said.
Ames In History
1958 -- Milton Gilman, a former G. Fox executive, and his brother Irving open their first store in the Ames Worsted Textile Co. mill in southbridge, Mass. Their goal: to bring discount merchandise to small towns of the Northeast.
1967 -- Ames goes public; company has 12 stores.
1972 -- Ames, with 36 stores, begins trading on the New York Stock Exchange with the ticker symbol "ADD."
1976 -- Ames moves corporate headquarters from downtown Hartford to Rocky Hill. It has 57 stores in 13 states.
1983 -- A series of small acquisitions has boosted Ames to 118 stores.
1986 -- Ames buys G.C. Murphy stores, briefly giving it 463 outlets. Later warns that an inventory problem will hurt profits.
1988 -- Ames, with 355 stores, buys the troubled Zayre Corp. and 388 more stores for $800 million.
1990 -- Unable to cover its debt from the Zayre purchase, Ames becomes the largest department-store chain to file for Chapter 11 bankruptcy protection; hires turnaround specialist Stephen Pistner as CEO.
1992 -- Ames emerges from bankruptcy.
1994 -- Ames earns first quarterly profit in five years, hires longtime merchandiser Joseph Ettore as CEO to focus on sale of "soft goods" like clothing and household items.
1996 -- Ames stock, trading at $1.50 a share in January, triples by year's end as the company begins an era of prosperity and growth
1998 -- Ames buys Hills Stores and its 155 outlets, looking for the "bulk" to compete against national chains. Acquisition makes Ames the fourth-largest U.S. discounter.
1999 -- Ames stock peaks at $48.50
2000 -- With sales and earnings down, Ames says it will close 32 stores.
2001 -- Ames says it will close 47 more stores; files again for Chapter 11 protection.
PHOTO: (color), COURANT FILE PHOTO GRAPHIC: (color); Caption: IN HAPPIER TIMES , shoppers turn out in droves for a September 1999 opening-day event at the Ames store in Manchester. WHAT GOES UP --- * Ames stock climbed rapidly in the late 1990s, but fell even faster once the economic slowdown began. Since its peak in 1996, Ames has lost 98.6 percent of its value. Aug. 23, '96: $3.125 June 16, '99: $48.50 Aug. 20, '01: $0.69 |
