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Retailer Throws In Towel, Files For Chapter 11

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The Associated Press

Published: May 3, 2008

NEW YORK - A Chapter 11 bankruptcy court filing by Linens 'n Things is the latest sign that the retail sector is becoming leaner and meaner amid a difficult consumer environment.

The bedding- and home-furnishing retailer filed a petition Friday in bankruptcy court in Delaware and said it would close 120 underperforming stores, almost a quarter of them in California.

Consumers are likely to lose out as well. Brian Riley, senior analyst at research firm The TowerGroup, estimates the filing will freeze about $42 million in consumer gift cards, affecting about 400,000 customers. Gift cards become valueless when a company files for bankruptcy protection.

Ken Perkins, president of research company RetailMetrics LLC, said the bankruptcy stems from a combination of operating issues and the lagging economy.

"There's clearly a shakeout going on in the retail industry which will continue through the rest of the year," he said. "I think the weaker players are going to be in difficult shape here."

The Clifton, N.J.-based company said economic factors such as the decline in the housing market, tightening credit markets and a downturn in consumer discretionary spending, particularly in the housewares and home furnishings sector, led to a "precipitous decline" in profitability and liquidity.

The filing is expected to be a boon to rival home-furnishings retailer Union, N.J.-based Bed, Bath & Beyond Inc.

"The number of stores Linens 'n Things is closing is equivalent to almost 15 percent of Bed Bath & Beyond's core store base, so there is significant opportunity to gain market share," said William Blair & Co. analyst John C. Murphy.

The news is not as good for Linens 'n Things' parent, New York private investment firm Apollo Management. Apollo took the company private in 2006 for $1.3 billion.

Still, bankruptcy will make the company a better competitor, said Burt P. Flickinger III, managing director of the consumer industry consulting firm Strategic Resource Group. Filing for Chapter 11 under the bankruptcy code frees a company from the threat of creditor lawsuits while it reorganizes its finances.

"Apollo knows how to restructure a bankrupt business," Flickinger said. "The business will be smaller but it will be more stable."

Linens 'n Things, which operates about 589 retail stores in 47 states, joins specialty retailers Sharper Image Corp. and Lillian Vernon Corp. in seeking bankruptcy protection.

Flickinger also said this may just be the beginning.

"There is going to be a record number of store closings through bankruptcy in the next 150 to 1,500 days, as the retail recession becomes the worst the U.S. has seen in 30 years," he said.

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