FOOL PLATE SPECIAL
Montgomery Wards Closes for Good

Yesterday marked the end of a retailing era as Montgomery Wards announced it will be closing all 250 of its stores for good on January 15. A reported 37,000 Wards employees will be losing their jobs as the evidence of an economic slowdown continues to mount.

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By Paul Larson (TMF Parlay)
December 29, 2000

It's not just the dot-coms that are folding for good these days. Yesterday, it was announced that Chicago-based retailer Montgomery Wards was filing for Chapter 11 bankruptcy. This is not the first time Montgomery Wards went into bankruptcy protection, but this time the prognosis is fatal.

Wards filed for Chapter 11 in June 1997 and emerged from bankruptcy in 1999 with General Electric's (NYSE: GE) GE Capital owning the majority of the recapitalized firm. The company then tried to revamp its brand and retailing model by shortening its name from "Montgomery Wards" to "Wards" and drastically remodeling some of its stores. While the early attempts at reworking the company's operating model were somewhat successful, it was too little, too late.

What apparently was the final straw to break the retailer was slow holiday sales this season. An increasingly anemic economy and retailing environment stunted the turnaround efforts, while stronger competition in the form of efficient and huge retailers such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) certainly didn't help.

With the bankruptcy filing, some 450 employees in the company's corporate offices were laid off immediately. Meanwhile, the company's 250 retail stores remain open at the moment, but are scheduled to close Jan. 15 in an expedited but hopefully orderly shutdown of the company. When all is said and done, a reported 37,000 employees will have lost their jobs.

Wards was not the first retailer to go belly-up this week. Discounter Bradlee's (NYSE: BRADQ) announced it was also ceasing operations and closing all of its stores over the next several weeks. Just like Montgomery Wards, Bradlee's went through Chapter 11 once before in the '90s and emerged a restructured and recapitalized firm. This time, however, the company is liquidating itself and will lay off all of its almost 10,000 employees.

While Montgomery Wards is essentially a private company, it is majority-owned by GE Capital. Luckily for GE investors, the nation's largest conglomerate got its stake at firesale prices after the last bankruptcy and said this liquidation will have "no material effect" on the company's earnings. The real pain will be felt by Wards' employees and by the malls that will have one less anchor tenant.

There are several lessons investors can glean from this event with Montgomery Wards. Beyond the obvious one about companies needing to change with the times and maximize efficiency, there is the lesson about bankruptcy. Companies that go through Chapter 11 often times bear the equivalent of a scarlet letter. It becomes much more difficult to attract top talent at any level of management, and vendors demand much stricter terms. This is a disadvantage that many recapitalized firms never overcome.

For those also watching the overall economy, the news coming from both Bradlee's and Wards shows that consumers are perhaps tightening their budgets more than a little. Wards is not the first company in mediocre health to be felled by the braking economy, and it will not be the last.