Turns out you can't profitably sell sneakers for $14.95 after all.
Steve & Barry's filed for Chapter 11 bankruptcy protection last week and now faces the daunting task of finding a buyer by July 31 or facing a full liquidation. The former retail industry discount darling blamed its troubles on the retail downturn and declining credit markets. But many retail experts attributed its collapse to a precarious business model built on sweetheart deals from landlords and razor-thin margins.
“I never really understood their business model,” said Matt Powell, senior retail analyst for The SportsOneSource Group. “I always felt they were selling products for less than they needed to so they were making less margin.”
The bankruptcy filing, according to Powell, shows that Steve & Barry's was overly dependent on up-front payments from mall operators for what were typically less-than-desirable real estate locations.
“The idea of finding distressed real estate at cheap prices and putting up store upon store is a good idea,” noted Powell. “But you have to be a good retailer to make it work, and you certainly have to follow the basic principles of retailing. You have to make a margin on what you're selling.”
Steven Buxbaum, EVP of Buxbaum Group, said part of the problem was a poor real estate strategy, often leaving Steve & Barry's with heavy lease costs in secondary markets. But Buxbaum agreed with Powell that the core problem was trying to run a retail business on such a miniscule margin.
“I never understood why their prices were so low,” said Buxbaum. “When you think about it, what's the difference between an $8.95 t-shirt and an $11.95 one. Their customer liked their product, and I think they would have paid a few more dollars and Steve & Barry's wouldn't have lost any traffic. It still would have been the cheapest T-shirt in the mall. Raising prices would have made a huge difference to the bottom line and toward stabilizing their balance sheet.”
Steve & Barrys had claimed to be reinventing the retailing wheel by selling most of its items below $10 as it quickly built its store base to 276 stores in operation in 40 states by last week's filing.
In 2005, Steve & Barrys was named “Hot Retailer of the Year” by the International Council of Shopping Centers. Dubbing their effort the “Google of retailing,” its founders said the U.S. market could support 5,000 stores.
Besides its low prices such as $8.95 t-shirts, Steve & Barry's also garnered a lot of buzz by entering into a string of deals with sports stars and celebrities, including a line of athletic sneakers endorsed by the New York Knicks Stephon Marbury selling for a shockingly-low $14.95. Other lines followed from NBA center Ben Wallace and tennis star Venus Williams, as well as celebrities, Sarah Jessica Parker and Amanda Bynes. The stores regularly featured a large assortment of college-logo T-shits to go with its more entertainment-and-humor based t-shirts. It also had carried a golf collection from Bubba Watson and a surf line from Laird Hamilton.
But many retail observers believed a breakneck store opening pace was the root of Steve & Barry's problems. It opened nine stores in the past few weeks alone, and often many of its locations were in huge and distressed spaces sometimes exceeding 100,000 square feet. Steve & Barry's also received initial rent discounts and up-front payments from mall developers designed to entice the retailer to take over vacated sites. When landlords, affected by the tightening credit market delayed or stopped those payments, the company had to postpone store openings, losing much-anticipated and needed sales all of which hurt the company's cash flow.
Retail sources said that without these one-time, up-front payments from mall owners, often for $2 million to $3 million, the stores were barely profitable, if at all. New stores usually opened strongly, but could not keep pace after a few quarters.
Steve & Barry's found itself in a financial pinch after it defaulted on a loan made by General Electric's commercial-lending unit in March, and suppliers joined the landlords in pulling support from the company. A rushed search failed to find a buyer or locate additional financing amid the current credit crunch. In a lengthy joint statement, Steve & Barry's founders and co-CEOs Steve Shore and Barry Prevor said high costs of materials and fuel prices have increased the companys cost of goods sold and operating costs. They also pointed to the economic pinch felt by their customers. The company added that the generally poor environment for apparel retailers has reduced funding for its suppliers, landlords and for the company.
Nonetheless, Steve & Barry's claimed that sell-through remained strong. Sales through May were up 70%, with a 15% increase in same-store sales. But court filings indicate that revenues for the year ended May 31 were $656.6 million, well short of estimates of $1.1 billion made by some industry sources.
Moreover, the companys balance sheet is in tatters. Court documents claim that Steve & Barry's has no cash of its own that's not subject to seizure by its senior lenders, leaving the company with no other option than to sell its assets “by no later than July 31.” The filing goes on to say that, “Without any cash, [Steve & Barry's] cannot replenish their inventory and therefore, the value of their business is declining on a daily basis.”
According to the filing in Manhattan's bankruptcy court, the retailer reported assets of $693.5 million and liabilities of $638 million. Its debt includes $107 million in trade costs and occupancy costs, $135 million owed to lender GE Capital and $30 million to another lender, PrenSB Llc.
Although Sears Holdings has been mentioned as a possible suitor, most retail analysts expect Steve & Barry's will be hard pressed to avoid liquidation.
After all the chest-pounding about how brands and other retailers were ripping off consumers with marquee sneakers, the chickens come home to roost. Wonder where Marbury will go for his next deal?
