Boscov's sails into retail turbulence

Most shelves were full yesterday at Boscov's in Plymouth Meeting Mall, but the scene of normalcy concealed the turbulence rattling the region's only surviving family-owned department store chain.

The Reading company, in the hunt for a private-equity deal to rescue it from a potential merchandise shortage ahead of the critical fall shopping season, has waded into the kind of troubled waters that pulled California department store Mervyn's L.L.C. into Chapter 11 bankruptcy yesterday.

The extent of Boscov's financial troubles remained unknown because, unlike firms traded on Wall Street, the privately held company does not report to government regulators. Chief executive officer Ken Lakin said earlier this week that he was searching for equity partners to raise cash that banks have been reluctant to lend. The chain needs money to free up merchandise deliveries.

But in turning to private equity for an infusion to pay for stalled shipments, the department store chain could be in dangerous territory.

A private-equity deal could result in Boscov's losing the autonomy that the family-run chain has retained for 97 years, after resisting consolidations that gobbled up other family companies such as Gimbels, John Wanamaker, and Strawbridge & Clothier, retail and equity experts said.

A private-equity partner would likely want to buy a portion of the business, said Seth J. Lehr, a partner in equity firm LLR Partners Inc., of Center City.

A more profound issue is the very problem facing Boscov's - inventory-shipment problems. Such problems can be a precursor to bankruptcy, as was the case with Mervyn's, another privately held chain.

Here is why: In retail, there is a cadre of lenders known as "factors." When suppliers deliver large shipments to retailers, factors pay them a portion of what they are owed, up front. The lenders front the money as long as they believe the retailer can sell the goods and fully pay the supplier down the road, Lehr said.

But when those lenders become insecure about a retailer, they refuse to pay up front. Suppliers then pull back on deliveries, Lehr said. Retailers must scrounge for cash to unlock the stalled delivery.

Merchandise flow - particularly heading into the back-to-school months that begin in August and presage the critical holiday shopping - is essential if a retailer is to survive the current downturn, said Lehr, who has invested in retail companies.

"It's normally someone in the factor community that drives someone into bankruptcy," he said, "because the goods won't flow."

The economic troubles curbing consumer spending in light of soaring gasoline prices hurt retailers across the board. Shoppers have been spending more time in discount stores to stretch their dollars. Boscov's, which says it caters to "Middle America," has not been immune.

It is impossible to assess the gravity of the challenges facing Boscov's, said Philadelphia retail expert Brian Ford. But the company has been "resilient," surviving when others liquidated during bad economic waves - Bradlees, Clover, Two Guys, to name a few, Ford said.

"They have consistently been creative enough and insightful enough to weather and handle any crisis," Ford said.

But gun-shy credit markets are leaving all sorts of businesses in a cash crunch. And resorting to private equity means Boscov's likely will face stiff terms, including potentially sharing control of the company.

"Private equity usually seeks collateral, and if the inventory is already pledged as collateral on existing loans, they will be looking for other kinds of collateral that might include real estate, fixed assets or stock in the company," Ford said.

By the same token, cutting a deal with private equity can protect a company in the event it falls into bankruptcy, depending on how the deal is structured. If tied to an equity deal, the company's real estate and assets could be shielded from creditors.

"Giving some away is always better than having more of it taken away" in bankruptcy, Ford said.

The company, which operates stores in six states and considers Philadelphia one of its core markets, has focused on cutting expenses through layoffs and other measures in recent months. Lehr called such measures necessary for any retailer hoping to avoid bankruptcy.