Max S. Grumbucher, when he served as CEO of Bon-Ton in the 1980s and 1990s, had a rule about operating the department store chain his ancestors founded nearly a century earlier: Carry no debt.
"Bon-Ton was very much a family business," said Richard Mader, who was brought into Bon-Ton during the 1980s to modernize its inventory systems and had worked with both Max and his son Tim, who would take over the company from his father. Under Max (who died in 2006) the chain grew slowly, with money raised through its operations, Mader said.
Today, Bon-Ton carries hundreds of millions of dollars in debt, a burden that only keeps growing and is now threatening to send the company into bankruptcy.
After Max Grumbach turned over the leadership to Tim, the company took on debt to finance expansion, as it bought out several of its fellow regional department stores. Today though, Bon-Ton has to borrow just to finance operations while it struggles to generate cash from its retail business, according to analysts.
The retailer's balance sheet problems have recently come to a head. In December, Bon-Ton missed a $14 million interest payment on a group of bonds, sending it into a grace period that since expired. For now, the company's lenders have given it more time as they negotiate a possible bankruptcy or debt restructuring with the company.
Without the same scale as a Macy's or a Kohl's, the retailer's struggles have been more pronounced than some of its peers as department stores undergo a major structural upheaval. "They are a kind of microcosm of department stores' challenges," Phil Emma, a retail analyst with Debtwire, told Retail Dive.
"The risk [for] a store like Bon-Ton is the brands they stock are the same brands everybody else stocks and the brands you can buy direct," Emma said. "What's differentiated with them compared to any other retailer selling soft goods?"
A 'family business'
For decades, Bon-Ton was a family company, both in form and culture. As CEO, Tim Grumbacher, for example, used to review every salaried position at the retailer, Mader said.
The first Bon-Ton store opened in 1898 when Max S. Grumbacher's grandfather and great grandfather, Max Grumbacher and Samuel Grumbacher, opened a store in York, PA, according to the York Daily Herald. After Tim took over, Bon-Ton acquired a host of other nameplates with the oldest, Carson's, tracing its lineage to 1854. (Today the company operates some 260 stores under the banners Bon-Ton, Bergner's, Boston Store, Carson's, Elder-Beerman, Herberger's and Younkers.)
Bon-Ton is still in large part a family-run business. While the company went public in 1991, the Grumbacher family collectively still owns more than 50% of Bon-Ton's stock. After Tim retired as board chairman last May, his wife, Debra Simon, took over as chair.
Today the retailer remains relatively small among department stores, with some $2.6 billion in sales. It's also among the very few regional department stores left after years of consolidation and closures.
"In towns where there was a Sears, a [J.C.] Penney, maybe a Kmart — we were going to be a notch above that."
President of Mader International Consulting
"They thought of themselves as the upscale department store in small towns. In towns where there was a Sears, a [J.C.] Penney, maybe a Kmart — we were going to be a notch above that," Mader — who served as chief information officer for Bon-Ton and later for Boscov's, and who today works as a consultant — told Retail Dive. "They ran a really clean business. One of the biggest sins of a store manager was if there were any boxes or stocking going on in the aisles during business hours."
Acquisitions and various changes in operations management might have taken their toll on the company's family business culture and spread the organization thin — and added debt. The company has also been fighting a long, losing battle in a department store sector that has struggled to retain relevance for generations now.
As early as the 1990s, just months after the company went public, The New York Times wrote about Bon-Ton suffering from "aggressive cost-cutting to clear excessive inventory" (a near-constant lamentation in department store conference calls in recent years as well). The newspaper also pointed out that "as a department store, [Bon-Ton] still has higher overhead costs than competing mass merchants and specialty shops."
"As we continue down the decades long process of department store 'deconstruction,' the full-line department store business model continues to break down, and more and more damage is being inflicted on the already vastly reduced industry."
President, SiteWorks International
If anything has changed, it's that department stores are being outflanked by even more competitors who can beat them on price, convenience, style and nearly every other area important to consumers.
"Bon-Ton is one of the remaining regional department store chains, but one of the weakest among them," retail analyst Nick Egelanian, president of retail development consultants SiteWorks International, told Retail Dive in an email. "As we continue down the decades long process of department store 'deconstruction,' the full-line department store business model continues to break down, and more and more damage is being inflicted on the already vastly reduced industry."
And you can see Bon-Ton's competitive struggles in its numbers. Its same-store sales have been negative for 13 out of the past 16 quarters, according to data compiled by Retail Metrics. Declines in same-store sales have been larger than negative 4% since third quarter 2016. Bon-Ton profits have also been negative in all but three quarters since 2014.
"They have been bleeding red ink for the past four years," through Q3, Ken Perkins, president of Retail Metrics, told Retail Dive in an email.
Bon-Ton entered 2017 under financial pressure, but many analysts thought the company had the liquidity to muddle through the year and into its next debt maturities.
But as the bad news about the company flowed, the bankruptcy chatter grew louder.
In one ominous sign, Bon-Ton suppliers reportedly began pressing for tighter terms on shipments to the retailer last fall. Such supplier troubles echo the lead-up to Toys R Us' Chapter 11 filing, as well as that of many retail bankruptcies, including Gymboree, Charming Charlie and others.
S&P has listed the company as one of the retailers most at risk of bankruptcy. In a Nov. 17 report, analysts with Fitch Ratings, after leaving Bon-Ton off an expanded "loans of concern" list in October wrote, "While the company has enough liquidity to support 2017 holiday working capital needs, there is risk of a debt restructuring over the next 12 months."
In September, the retailer hired AlixPartners for help with its turnaround efforts and began a search for a financial adviser to help with a possible debt restructuring.
"In December, Bon-Ton failed to make a multimillion dollar interest payment, entering into a grace period that it has since passed."
The month of May saw an executive shakeup in which Bon-Ton announced that COO William Tracy would replace previous CEO Kathryn Bufano. Then Bon-Ton's chief financial officer recently left for Pier 1. (The CFO slot has been filled by Michael Culhane, who has served in executive roles at several retailers, including as CFO of Hudson's Bay Co., as well as positions at Lord & Taylor and May Department Store Group.)
After three months on the job, Tracy acknowledged in November the "retail headwinds" his company faced and told analysts, "While our third quarter results fell short of our expectations, I want to assure you that we’re approaching the challenges to the business with [a] sense of urgency and decisiveness," according to a Seeking Alpha transcript of the company's Q3 conference call. He confirmed then that the company had hired on advisers for financial and operations help.
In December, Bon-Ton failed to make a multimillion dollar interest payment, entering into a grace period that it has since passed. Debtwire reported in December that bondholders had hired advisers, implying that they were discussing possible debt restructuring or company reorganization with Bon-Ton.
Then in January, both Bloomberg and the Wall Street Journal reported that a bankruptcy filing was possible, even "imminent." Citing unnamed sources, Bloomberg reported that the retailer "hasn't made a decision and is still trying to avoid a court filing" and that "it's not clear whether [Bon-Ton] would seek to liquidate or to reorganize." One option would be to combine some parts of Bon-Ton with another business, a move that would entail a bankruptcy at some point, according to the news service.
'What has to happen now'
After its grace period on the interest payment expired in mid-January, the only thing that kept Bon-Ton out of default was an agreement with a group of creditors who opted not to exercise their legal rights, for the time being.
That agreement lasts until Jan. 26 and can be extended until Feb. 4 with the consent of bondholders. In announcing the agreement, Bon-Ton said in a release that it was "engaged in ongoing discussions with its debt holders in an effort to strengthen its capital structure to support the business."
Moody's on Jan. 18 downgraded Bon-Ton, giving it a "limited default" designation over the missed payment and expired grace period. Analysts with Moody's wrote that the retailer's capital structure was "unsustainable at current weak levels of operating performance" and that the company "may have difficulty refinancing its debt without restructuring or impairment to lenders."
Given the missed interest payment and its years-long financial duress, Bon-Ton needed a stellar holiday performance. Unfortunately the company came up short. Bon-Ton said in January its comparable store sales fell by 2.9% during the holiday period. Total sales dropped to $752.1 million, down more than 4% from the year-ago period.
"With retailers, there's always some degree of seasonality, where they rely on the fourth quarter. When you look at Bon-Ton, they only generate cash flow in the fourth quarter."
Retail Analyst with Debtwire
At the same time, other department store retailers — including Kohl's, J.C. Penney and Macy's — reported much-needed sales increases for November and December. Tracy offered no explanation for the declines but noted in a statement that they were an improvement over the 6.6% drop in comps in the third quarter.
Bon-Ton's disappointing fourth quarter illustrated many of the company's long-running issues. "With retailers, there's always some degree of seasonality, where they rely on the fourth quarter," Debtwire's Emma said. "When you look at Bon-Ton, they only generate cash flow in the fourth quarter." In the other nine months of the year, as Emma noted, the company has plenty of other cash needs: interest payments, capital expenditures, operation costs and so on.
"They use the fourth quarter just to wipe the slate clean for the past nine months. If it's not as strong as needed, they're pulling the problem into the next year," Emma added, referring to the borrowing Bon-Ton must do to keep the lights on throughout the year.
Tracy said in November that his company was trying to fix its problems, namely through "refining our four areas of focus, which include differentiating ourselves through merchandise assortment enhancements, driving growth in omnichannel, refining our marketing strategy to increase traffic and customer engagement, and reducing costs through the continued rollout of our profit improvement initiatives."
"What has to happen now, you have to evaluate whether this is the case of a bad business or just a bad balance sheet."
Retail Analyst with Debtwire
If Bon-Ton were to file for Chapter 11, it would at least have the opportunity to set itself right, re-aligning costs with a diminished sales base. It could jettison debt and close unprofitable stores. (Bon-Ton already has plans to close 40 stores this year, but as Emma noted, that pace could accelerate in bankruptcy.)
And of course, Bon-Ton might not file for bankruptcy at all, if the company is able to convince debtors to agree to a debt restructuring plan, which could include a debt-for-equity exchange, extension of maturities and/or reduction in interest payments. J. Crew, among others, has bought itself time through restructuring maneuvers, though the apparel retailer is still at risk of going bankrupt.
"What has to happen now, you have to evaluate whether this is the case of a bad business or just a bad balance sheet," Emma said. "If it's just a bad balance sheet, there are a lot of options to address it."
Yet there's another, even more existential question hanging over Bon-Ton as well, and one that its creditors might well be asking the company in talks going on now.
Noted Emma, "What is so unique about Bon-Ton compared to other regional department stores that have gone away?"