Stage Stores Files for Bankruptcy and Launches Sale Process

Stage Stores, the parent of off-price banner Gordmans, filed for Chapter 11 bankruptcy in Texas late Sunday night. It is the latest retailer to file during the pandemic, following J.Crew and Neiman Marcus last week. A buyer is being sought for Stage Stores, with investment bank PJ Solomon conducting the auction process, in the hope that they'll take on the Gordmans brand and at least a portion of the stores. Both Stage Stores and PJ Solomon declined to comment. The retailer filed because it was close to running out of cash and could not obtain additional financing, according to the company. It is seeking court approval to essentially use the cash on its balance sheet to continue to fund operations. “This is a very difficult announcement, and it was a decision that we reached only after exhausting every possible alternative," said Michael Glazer, CEO of Stage Stores, in a statement. Though not rated by credit rating agencies, Stage Stores had hired restructuring advisers last year and was among retailers named as vulnerable during the current pandemic. It inked a forbearance agreement with its lenders recently, giving it some extra time, but it was not enough to avoid a filing under difficult economic circumstances. Due to the mass store closures across the country necessitated by the Covid-19 pandemic, conducting a liquidation sale in the coming weeks and months could likely mean a poor recovery for creditors. Sources familiar with the situation, who asked for anonymity due to the confidentiality of negotiations, said Stage Stores is the first bankruptcy of its kind during this pandemic, due in part to the fact that the retailer did not obtain traditional debtor-in-possession financing. In addition to the two trends of retailers filing for Chapter 11—to either swap debt for equity, or to ask for a suspension of their cases—Stage Stores could pose a third trend where retailers simply run out of money and have no alternative but to liquidate if a buyer can't be found, likely converting from a Chapter 11 reorganization to a Chapter 7 liquidation. Indeed, the primary objective of the chain in this early stage is to reopen stores and entice customers to return—not an easy task during a pandemic—in order to begin winding down operations. If a buyer emerges, the wind-down process will be halted, the company said. "We appreciate the willingness of our landlords and vendors to work constructively with us to try and avoid this outcome," Glazer said. "We hope that their efforts and the actions we have taken to reposition the business over the last several months will help attract the right partner who is interested in our off-price concept." While Gordon Brothers was named the liquidating agent, Stage Stores will be in charge of reopening the stores in phases and conducting the liquidation sales. The company said it plans to reopen 557 stores on May 15, and another 67 locations by May 28. The remainder of the stores are expected to resume operations on June 4; updates will be provided on the company's website. [article_summary section="1"]Stage Stores, which is also the parent of Bealls, Goody's, Palais Royal and Peebles, was in the midst of a massive rebranding, with plans to convert all of its locations to off-price stores under the Gordmans banner. As of March 18, the company had made signifiant progress toward that goal, with 232 of its 738 locations rebranded with the Gordmans name. While the company experienced early success due to the strategy, with initial comparable sales growth at the converted stores, the process proved to be expensive and difficult, according to a source. And then the pandemic hit. The initial decision to rebrand occurred after Glazer came on board about five years ago, according to sources. Stage Stores was testing several concepts, with the intent of choosing one of these banners under which to unite all of its stores. The company ended up buying Gordmans out of bankruptcy, and decided to switch to the name as well as employ an off-price strategy similar to TJX’s TJ Maxx. The introduction of yet another off-price retailer in an already competitive segment was to test American shoppers' appetite for the category. Entering the fall holiday shopping season, the strategy appeared to not only be working, but perhaps herald a renaissance for the troubled retailer. Third-quarter results included impressive comparable sales growth of 17.4% and a reversal in cash flow to the positive, with Ebitda (earnings before, interest, taxes, depreciation and amortization, a measure of cash flow) of about $15 million from an Ebitda loss of $13 million for the same period a year prior. Though not out of the woods, Stage Stores certainly appeared to be on its way to a turnaround and possibly—maybe even incredibly—pulling off what a number of other department stores had not: sales growth. But by early January, things weren’t looking quite as promising. The company's preliminary holiday results included comparable sales growth of just 1.4%. Though below expectations, that number wasn’t so terrible on its face. However, more bad news followed: Earnings guidance was lowered for the past fiscal year by $25 million to $30 million below the low end of the previously guided range. That meant margins took a sizable hit due to promotional activity and would translate not only into lower earnings, but also eat into cash flow. In the following months leading up to pandemic, Stage Stores sought much-needed financing to continue to convert its locations to Gordmans. The question was, could Stage Stores switch over its fleet and generate positive cash flow on a consistent basis before it ran out of money? Without securing a buyer, Covid-19 appears to have answered that question. Editor’s note: This article was updated to reflect that Stage Stores has a total of 738 locations.