A Retailer Unravels in Fast Motion

The mind-bogglingly swift demise of privately held retailer Steve & Barry's brings to mind lessons investors have learned over the years about other retail wrong turns. The biggest takeaway is probably: "Buyer beware" -- in more ways than one.

Steve & Barry's claim to fame was peddling inexpensive apparel. It marketed itself as having a cheap-chic sensibility like Target (NYSE: TGT  ) , and even had some licensing agreements with major celebrities, such as Sarah Jessica Parker and Venus Williams. (And if you wonder how expensive licensing deals and cheap merchandise fit together, you're on the right track as to part of why this retail story went wrong.)

The Wall Street Journal has done an in-depth article on its downfall, which I recommend for the blow-by-blow account of the painful stumble. For example, a lot of the money that poured into its overheated expansion wasn't actually from sales. Rather, Steve & Barry's apparently raked in the dough because some desperate mall operators provided large upfront payments ("inducements" such as tenant-improvement allowances) to lure it into empty anchor spaces, which are viewed as key in generating mall foot traffic.

Long story short, things have not gone well as a perfect set of economic variables have clustered, some related to the economy at large, others simply inevitable given the company's strange and unsustainable means of expansion. It has also defaulted on its credit facility with major lender General Electric (NYSE: GE  ) and some of its accounting practices have been questioned. (Ugh.)

The WSJ named two retailers that are said to be interested in buying Steve & Barry's (or at least some of its brands), so this is where I gasp, "Oh no, please, stop, say it isn't so." One is Gap (NYSE: GPS  ) , ironic since its own overexpansion years ago is well known in the annals of retail history (and helps prove bigger isn't always better). I find the second amusing, even if it's logical: Sears Holdings (Nasdaq: SHLD  ) , which I couldn't help but tease recently about its tendency to collect beleaguered retailers. Could Steve & Barry's be part of its "dream team"?

We'll see, but the current climate is so difficult, I don't see how a retailer that apparently never really proved its actual business model sounds like a swift acquisition idea (and that's just the tip of the iceberg with this company's difficulties). Perhaps Steve & Barry's is simply ready for retirement.

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Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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  • Report this Comment On July 15, 2008, at 8:00 PM, austinchu wrote:

    I work for a company that manages and tracks gift cards, and I've been following retailers filing for bankruptcy on savvywallet.com. My advice? Go spend your gift cards, you may not know how long they will be accepting them. Don't forget The Sharper Image incident: $75m in unused gift cards.

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