12 February 2015

Family Christian Stores Files Bankruptcy

A portion of my readership may be familiar with Family Christian Stores, the largest (by number of stores) participant in the market for Christian books and tchotchkes. If so, you may find this story about its entry into Chapter 11 bankruptcy of interest.

The current ownership of Family Christian Stores seems to have acquired the chain through a leveraged buyout in 2012. In short, this means the current owners borrowed the purchase price. Saddled with this debt--and buffeted with competition from the world of online mass-merchandisers like Amazon--Family Christian Stores has run out of revenue sufficient to service its current and long-term debt.

Like most Chapter 11s of retailers nowadays, Family Christian Stores has no plans to reorganize. (To understand why most retailers don't reorganize, read Michelle Harner's post here.) Instead, it's planning to auction its assets to the highest bidder. The current bidder, by the way, is a another subsidiary of the current owner of Family Christian Stores. Once sold and repurchased, the debt will be reduced and, one hopes, Family Christian Stores will be restored to profitability.

But why, you might ask, would the current lender to Family Christian Stores agree to let the company's assets, in which that lender no doubt has a blanket security interest, go for less than it's owed? Because, as everyone should be aware, it's the lender who wants Family Christian Stores to put itself on the auction block. Nothing is as bad for a lender to an already struggling retail business as to try to liquidate those assets on its own. This lender may hope someone else comes along and bids up the initial price but even if that doesn't happen, this lender will be better off than had it tried to liquidate Family Christian Stores on a piecemeal basis.

One matter still puzzles me: Why is Family Christian Stores not proposing to close some of its locations? After all, there's no way each of its 250 stores is turning a profit. At least some of them are paying too much rent or in a bad location, so why not use Chapter 11 to close them?

Putting on one's cynic's hat, one might think that the assertion that no stores will be closed is a ploy to garner some good press and keep all the employees reasonably happy. After all, there's nothing that tempts retail employees to take some five-finger discounts like the knowledge that they'll soon be out of a job. If the cynic is right, then we can expect some store-closing motions in a few weeks.

Trying on the hat of virtue suggests that the current management of Family Christian Stores is really intent on keeping open all its stores. We all know where good intentions lead and one might be concerned that current management is letting hope get in the way of good judgment. We'll see.

No comments:

Post a Comment