Did expansion lead to Boscov's woes?

At the time, it was a hopeful milestone in the life of one of the region's most resilient family businesses: On Jan. 31, 2006, Al Boscov and brother-in-law Ed Lakin - patriarchs who had shepherded the Boscov's department store chain for decades - cashed out and retired.

Though not evident at the time, that momentous day may have marked the beginning of the crisis now gripping the Reading company as it tries to avoid bankruptcy in an economic downturn that has pushed other retailers to the brink and beyond.

Within a week of handing the reins to a third-generation family leader, Boscov's announced ambitious expansion plans, fueled by the demise of other famous department stores that had left behind empty anchor sites across the region.

Though times were good and the economy relatively strong then, the money spent on buying and occupying the 10 new stores may have helped drain the chain of the financial cushion (and cash) it now needs to convince suppliers it can pay its bills.

Chief executive officer Ken Lakin, 54, who assumed control, has been searching for a private-equity deal to generate the cash needed to avoid bankruptcy. He said no one imagined things unfolding the way they have as the economy has gone south over the last 12 months.

"I don't think anybody could have envisioned the downturn in the lending community, the contraction of the trade, and the pressure that's been applied to the consumer by higher prices and less lending, less credit availability," Lakin said. "It's a perfect storm."

Lakin has declined to discuss the rampant rumors over the last week that Boscov's may be flirting with bankruptcy.

Looking back to when he took over as chairman in early 2006, Lakin said the company had taken steps to replenish the cash it lost in buying out his father, then 82, and uncle, then 76.

"The two principals in the company had been looking for a way to capitalize their 50 years of blood, sweat and tears that they put into building the business from nothing to a 40-store chain," Lakin said.

With help from an investment bank in Reading, the company entered into a private recapitalization agreement around the time of the Lakin-Boscov retirements and replaced, dollar for dollar, the money given to both men as part of their buyout package, Lakin said.

The opportunity to buy 10 properties from Federated Department Stores Inc. in Pennsylvania, Maryland and New Jersey - including five old Strawbridge's locations - was "a surprise."

Nobody would have imagined that in our lifetime," Lakin said, referring to the fact that Federated, which owns Macy's, would have gobbled up all those stores and then put so many on the block.

A few months later, in April 2006, Boscov's sold its credit card portfolio to HSBC Finance Corp. for a reported figure of $199 million. Retailers sell such assets to generate cash.

Boscov's swiftly renovated the 10 stores it bought. By year's end, it intended to have all open, raising Boscov's store count to 50 in Pennsylvania, New Jersey, New York, Maryland, Delaware and Virginia.

The company was unveiling its new mall-based department stores even as big-box retailers such as Target Corp., Wal-Mart Stores Inc. and Kohl's Corp. were cropping up in freestanding sites and shopping centers.

Boscov's was determined to keep its affordable but old-school model in play - the kind of store where shoppers could buy wicker furniture, homemade fudge, furniture, clothes, toys and appliances all under one roof.

Boscov's adhered to this even though other family-owned department stores had abandoned the model before disappearing.

"There was Wanamaker's, there were a bunch of Strawbridges, there was a Snellenberg, there were the Lit Brothers, there were the Gimbel Brothers . . . There always was a family," said Philadelphia retail expert Brian Ford.

"Boscov's has found a way to move it from generation to generation," Ford said. Lakin said the company kept true to its traditional sales model because it continued to fare well.

"My uncle loved to say, you can keep throwing these departments out and send the customer down the mall to somebody else or across the street to somebody else," Lakin said, "or you can try to overcome the obstacles of providing those goods and services and find a way to do it."

Boscov's has seen its customers return - even if they have defected for a time to the big-box competition, he said.

"We've absorbed Wal-Marts and Targets and Kohl's and power centers and things like that," he said.

But taking on the debt to buy the additional stores has been a strain on the company - particularly over the last 12 months, as the national economy has deteriorated and taken consumer spending down with it.

Boscov's began to show cash-flow problems in February, said Bob Carbonell, chief credit officer at Bernard Sands L.L.C., which helps apparel manufacturers determine the creditworthiness of retailers.

Months later now, some of his clients are withholding shipments to Boscov's because they fear the retailer may not be able to pay for the merchandise in full down the road, he said.

"Bernard Sands has been advising its clients to hold shipments for several weeks now," Carbonell said.

The shipment logjam has spurred Boscov's to hunt for cash. The company needs to continue receiving merchandise to make it through the back-to-school season. Lakin said he began searching for private-equity investors after traditional lenders demurred.

Boscov's tried to assuage suppliers in March by announcing it had refinanced some debt, freeing up additional cash.

"I would say creditors saw that as a positive step at the time and perhaps expected more to come of it than what actually materialized," Carbonell said.

Key points in the recent history of the 97-year-old retailer:

January 2006: Al Boscov and Ed Lakin retire and cash out. Company recapitalizes to replenish buyout cash.

February: Buys 10 Strawbridge's, other old stores.

April: Sells credit card business for $199 million.

Fall 2007: Subprime crisis strikes U.S. economy.

Winter: Dismal shopping season hurts retailers.

February 2008: Suppliers begin to detect payment trouble.

March: Boscov's reassures vendors it has cash.

July: Some vendors stop delivering inventory.

Lenders rebuff requests for emergency financing.

Boscov's says it is looking for a private-equity deal.

Rumors swirl of potential bankruptcy.

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