Tuesday, March 30, 2010

Effects of the Economy

We hear it all over the place, the economy, the economy, health care, the economy....yea yea yea. I know it is affecting hundreds, no make that millions of people but honestly it is hard to conceptualize unless it directly hits you. Sure you try to cut back, make a few less Starbucks runs, maybe stop by Wal-Mart instead of Whole Foods, maybe make last year's clothes fit a little longer. Unemployment is hitting millions and I do see that first hand as I work in the highly sought after business of medical sales and watch as eager little beavers come in daily to interview for our ever expanding business. My husband who is in the same business receives resumes in his inbox on a weekly business. It is tough out there but do we really truly understand the effects.

For me, I do somewhat understand the economic impact in a business and financial sense but no one, not even me, cares to talk about that. I mean really do you think my friends would enjoy chatting about how the economy is affecting the financial markets or the lending industry....doubtful, highly doubtful. I mean I am bored just writing about it, but I must admit, my nerdy mind does think about it! ha! So anyway, a much more interesting take on the economy and a first hand view of the changes it is causing is from business bankruptcy.

So let's put it this way, your favorite store closes. Ahhhhh I hate when this happens. I shop there all the time, why is it closing. I mean I spend hundreds there a year and I always see other people shopping in there and I know all my friends love it so how can they be suffering. I think I could personally support it through my insane addiction to it. Well it is is oh so much more complicated than this. I am going to attempt to explain it in simplistic terms!

The latest victim ladies.....hold you breath........Swoozie's. Yes my dear friends, Swoozie's is closing all of their doors. Can we all make a mental note to jot this down in whatever form of planners we use so that we can alert each other as soon as the clearance and liquidation sales begin! I just might buy all of those little cookie jar things, maybe I will give them as gifts, maybe I will eat them all myself, I am just saying. I think the husband is more sad than me that they are closing because it is for sure his go-to place for gifts for me. It is so easy, just buy pretty much anything in there for me and I am happy. My friends know, I buy every single birthday, baby shower, wedding shower, gift in there. Love it, oh the sadness is setting in. Ahhhh.

Okay so why are they closing, why do stores that are seemingly doing well from an outsiders view close? Well there are many explanations. In Swoozie's case it was over expansion and then the inability to off-set those increased costs with increased sales. Liabilities were greater than assets coupled with net loss and pair that with the inability for increased borrowing and not finding a suitable buyer to buy the company all points to bankruptcy and closing. Now bankruptcy does not always signal an end for a company. There are two types of bankruptcy- Chapter 7 and Chapter 11. Today I would like to chat about Chapter 11.

Chapter 11 bankruptcy generally provides the company the ability to reorganize. The company intends to stay in business while allowing the bankruptcy court to supervise the company's debt and contractual obligations. The court has the ability to cancel all or some of the company's debt and therefore allowing the company to remain in business. Think of it as a pause button that the companies can push to catch their breath, re-group before they jump back into the race. It is equivalent to walking through a water station during a marathon. It is a long race, sometimes you need to slow down and get caught up. Sometimes it works and the companies allow some fresh faces, new management strategies, new lenders to help them out. Sometimes it doesn't work. There may not be anyway to restructure they debt, a bank or lender may not be willing wot work with the court or take on a new agreement. Okay have I lost you? Are you bored?

Here are some Chapter 11 companies that might impact your daily life......Mrs. Fields Cookies (I mean who does not love a gooey yummy cookie), they filed for Chapter 11 in August 2008, emerged October 2008 and now are opening new stores, ready to go. So what did they do...they cleaned up their balance sheet. What is a balance sheet, well it is where your assets and liabilities and equity are located. It is simple if liabilities are greater than assets....well you are in trouble. So they eliminated both short term and long term debt and established a new credit facility that enabled them to emerge a stronger, more sound company. They are now thriving as they open new stores, expanding their brand and marketing.

Circuit City was not as lucky as Mrs. Fields. They were not able to find banks and/or lenders who were willing to take a chance on them. Best Buy, Costco, various other electronic stores posed to much competition. They were a sinking ship that was not able to be saved. Harold's was in the same boat. I loved Harold's, what college age girl in the south did not shop there, especially for rush and sorority related activities. It was annual event at my house, as the mother of three girls, my mom would take us to Harold's to load up for the spring and fall semesters. It was a sad sad sad day they day Harold's closed their doors.

So what happened, Harold's filed for Chapter 11 in July 2009. At the time of the filing the companies liabilities exceeded its assets by $19 million. How could that be, I swear we single handily supported the various Texas stores we shopped at. I mean their clothes were by no means cheap. Well it all goes back to poor financial management. Sure they had great sales but their expenses began to out weigh their sales, competition set in and Harold's did not necessarily keep up with the new trends, all recipes for disaster. In my years at PwC I quickly realized how quickly management could force a company into financial distress, despite of the popularity of the merchandise, services provided, etc.... It is sad really. Sad for the consumers who did their part in supporting the store and upper management just made poor decisions.

To tie it all back together that is what happened with Swoozie's. Over eager expansion just caused them to drown. They were over eager beavers, taking over 13 Blue Tulip stores in the Northeast in early 2009. The economic downturn coupled with the failure to obtain additional capital caused the cookies to crumble. Oh how I love those little chocolate chip cookies in the cute jars. I admit, chessy metaphor but I had to do it, way to easy!

On March 2, 2010, Swoozie's filed for relief under Chapter 11. This did not come as a complete shock to me, I was assuming something was up because as the frequent shopper that I am, I started to notice "wind down" activities. For instance they have been out of bags and "Swoozie" wrapping materials for several months and will not provide a date when they should expect to receive more. They also are not taking anymore special orders. Hmmm I knew something was up! They estimate that their liabilities exceed their assets by $9 to $40 millions (all courtesy of bankruptcy filing information). Very vague if you ask me. The end is near my friends. Their inventory is extremely low and the knight in shining armour does not look like he is about to ride up on his white horse! Sale information should be coming any day now!!!

The big bad stationary and cutsie item companies after them. Their top 40 creditors include, Mud Pie, Heart Strings, Crane, William Arthur and Melissa and Doug. Most of this debt is unsecured, meaning these companies will be lucky to receive their money but their are a few landlords in the deal who are sure to stake their claim as well.

The lesson learned in all of this, as much as you love a store and are loyal to them, sometimes their management and business plan can ruin it all for you. I am on the look out for a replacement store now that my love is closing. Let me know if you find one. In the meantime, as you peruse the malls and shopping centers and see empty store fronts, in the back of your mind maybe this little lesson will pop up.

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