Why Bon-Ton Stores Is on the Rocks

The retail apocalypse has claimed its first major victim of 2018. Bon-Ton Stores (NASDAQ: BONT) finally filed for bankruptcy, following years of falling sales and big losses.

In this segment from Industry Focus: Consumer Goods, the team talks about why Bon-Ton Stores has run into trouble in recent years. Management hopes to turn the company around while under bankruptcy protection, but Bon-Ton faces serious fundamental challenges that could lead to its ultimate demise.

A full transcript follows the video.

This video was recorded on Feb. 13, 2018.

Vincent Shen: First up, we're going to spend a couple of minutes talking about the major retail bankruptcy, the first one of 2018, and that's for Bon-Ton Stores. They have over 250 store locations spread across 26 states. Bon-Ton is one of the larger regional department store chains in the U.S. The company filed for Chapter 11 protection on Feb. 4th.

Adam, when we actually covered department stores and their holiday results last month, you spoke briefly about Bon-Ton and how this outcome seemed pretty much inevitable at that point. How did Bon-Ton end up in this position?

Adam Levine-Weinberg: From a high-level perspective, Bon-Ton's historical strength was being in these rural markets, primarily smaller towns where there wasn't a lot of competition, and there weren't a lot of options for consumers to get high-quality, branded department store goods. This was great until the internet came about. All of the sudden, after you had Amazon in particular moving into the fashion market, now people can get the same kinds of goods that they had to go to Bon-Ton for previously. Now, they can get the same thing at a lower price, at least a more competitive price, from Amazon and from the retail websites of companies like Macy's. That's the big picture of what has happened.

Bon-Ton is a lot smaller than most of its competitors, it has about $2.5 billion annual revenue. That makes it about a tenth of the size of Macy's, for example. And it just hasn't been profitable in many, many years at this point. A lot of people have talked about, "Oh, it had to file for bankruptcy, because it had too much debt." And it's true that it does have too much debt. It has roughly $1 billion of debt as of November. And for a company with $2.5 billion of sales, that's a pretty tough burden. That said, the reason why the debt piled up was because it couldn't pay the bills in the first place and had to borrow year after year. So the underlying cause of the bankruptcy is just that Bon-Ton is not profitable. They've been putting together annual losses of about $60 million in 2015 and 2016 -- 2017 hasn't been reported yet but it was probably even worse. Comp sales declined about 6% for the full year. Because the primary issue here is unprofitability as opposed to high debt, it's hard to see how Chapter 11 can really fix things.

Bon-Ton has already taken a hatchet to its cost structure. It's going to close some more stores, some of which aren't profitable. But given that the company has been losing so much money up until now, it's hard to see how, even with less debt, it's going to be a sustainable company. It has less than half of the online sales penetration of its larger rivals. And it's not that surprising. Bon-Ton, last year, planned to invest about $30 million in capital spending. Macy's plan was for about $900 million in capital spending. So Macy's has more money to invest in its stores, more money to invest in its e-commerce operations to try to keep up, at least somewhat, with Amazon. Bon-Ton is running on a shoestring budget, and it's really hard to see how a Chapter 11 restructuring would do anything more than string out the pain for another few years. A lot of Bon-Ton's creditors just want the company to liquidate. The company is fighting back. So we'll just have to see what happens. But the chances for long-term survival definitely don't look good.

Shen: Sure. Thanks, Adam. I'll add that, even for this most recent holiday shopping season, a pretty strong one for retailers across the board. In that episode from mid-January where you and I talked about the holiday results for a lot of department stores, in November to December, revenue for Bon-Ton was down about 4% year over year, while others were seeing pretty strong gains. And before this bankruptcy news even, you mentioned some store closures, the company had already announced plans to close over 40 stores. I'm on the same page as you in terms of the company's prospects. Even with a potential reorganization, it's looking rather grim. With that in mind, I'll ask you this: Are there any competing department stores or retailers that you think might stand to benefit the most from these store closures and what might fall out with the bankruptcy filing?

Levine-Weinberg: I think the biggest beneficiary is most likely to be Kohl's. Kohl's has the broadest retail footprint among the department stores, because it has smaller stores than a chain like Macy's, for example, and it tends to have strip mall and stand-alone stores as opposed to being in malls. Kohl's has a bigger presence in the smaller markets where Bon-Ton has a stronger presence as well, so that definitely puts it in a good position to win some of that business. I think Macy's will also get some, but there's relatively limited overlap at this point in terms of malls where there's both a Macy's store and one of Bon-Ton's retail chains. So there's definitely some upside there for Macy's, definitely a little more upside on the e-commerce side, potentially, for Macy's. But in e-commerce, you're fighting with everybody, so it's kind of a jump ball. And given the way things are going, you'd expect Amazon to come up with a big chunk of that revenue.