Payless is the first of its peers to exit bankruptcy. Now what?
The discount shoe seller filed for Chapter 11 prepared and is now a smaller, healthier retailer. But it still has to win customers in a chaotic retail world.
Payless went into bankruptcy with a plan and emerged in just four months a more tightly focused retailer. But questions remain as to whether it can compete in an increasingly Amazon-centric market.
Preparations and negotiations ahead of a Chapter 11 filing can determine a bankrupt retailer’s ultimate fate. In some ways, though, that’s the easy part. Creditors and suppliers can be negotiated with; shoppers, not so much.
Now Payless has a plan to win sales and market share in a highly competitive, always-changing retail world. It’s a world far less structured and certain these days than bankruptcy, and the shoe seller’s ultimate success could tell us much about the effectiveness of recent bankruptcy reorganizations and even the fate of the industry more broadly.
Payless executives told Retail Dive that the discount shoe retailer, post-bankruptcy, is refining its marketing approach to reach customers more directly through digital channels, and in ways more relevant to them. The recapitalized company, which has new owners and is searching for a new CEO, is also working to bring its omnichannel capabilities in line with others in the sector.
Payless’ managers and owners are hoping bankruptcy was just one chapter in the company’s story. Now we’ll see what comes next.
First to emerge
Payless is among the first retailers to emerge from bankruptcy in a crop of Chapter 11 filings that went to court this year with thought out and (more or less) agreed upon plans with creditors to restructure and reemerge as effectively the same company.
That group includes rue 21, Gymboree, True Religion and Papaya Clothing, among others. But the question of whether these retailers can stay out of bankruptcy remains. Additionally this year, we have seen a handful of retailers — among them RadioShack and Wet Seal — make a second trip to bankruptcy court, and others have liquidated altogether. History doesn’t favor successful retail bankruptcies. Fitch Ratings found that about half of the cases it studied ended in liquidation.
Merely avoiding second bankruptcies or liquidation is a low bar to meet. Observers are also watching to see if retailers can use the bankruptcy process to become nimbler and even more competitive. Payless and its lenders-turned-owners are betting that the company can.
Payless in recent years has been building out its website, which has seen double-digit growth in consecutive years for several years, according to Payless Chief Operating Officer Mike Vitelli. After building a new fulfillment center in Louisville, Kentucky, which can reach a large part of its customer base within three days, the retailer is now working on bringing click-to-brick and ship-to-home capabilities to its stores, Vitelli said in an interview with Retail Dive.
"We have 180 million to 200 million visitors come to Payless stores every year. So even a small change in conversion by being able to complete the sale with someone in our stores has a very significant impact on our sales."
Payless Chief Operating Officer
"Our value proposition is: great products at great prices, and they’re in stock," he said. "That’s what we want to see in our stores, and we also want to do that online." He added, "We have 180 million to 200 million visitors come to Payless stores every year. So even a small change in conversion by being able to complete the sale with someone in our stores has a very significant impact on our sales."
Payless Chief Financial Officer Michael Schwindle told Retail Dive that the retailer has also been changing its approach to reaching customers, moving away from marketing campaigns centered around broadcast media to ones that begin digitally, often on social media.
"We’re starting with the digital space and starting with what makes sense from how the customer is interacting with brands across a number of channels and venues," Schwindle said. "We have a great deal of information about our customers and want to make sure we’re speaking to that customer as directly as possible."
Whether Payless survives and even thrives depends on a lot of things, among them a clear and well-executed retail strategy and the tastes of consumers.
The discount shoe seller’s restructuring plan — one that a large group of creditors agreed to ahead of bankruptcy — shows the company and its brand had the confidence of its lenders, who now largely own the company. Notably, Payless is operating post-bankruptcy with the large majority of its store portfolio intact.
Analysts who spoke with Retail Dive said the retailer is poised to survive long-term — albeit in a diminished form — as demand remains for the company’s particular brick-and-mortar approach to discount shoes. "It’s almost weirdly reassuring that they reduced their store footprint by as little as they did," Joshua Friedman, a legal analyst with Debtwire, told Retail Dive.
Friedman noted that the decision in bankruptcy to close some 900 stores out of the 4,400 locations they started with has been a benefit. "That’s a streamlining in this space. That could reflect the fact that there is still value here, even though online shopping continues to erode the general retail space," he said. "In the discount space, having locations matters."
"It’s almost weirdly reassuring that they reduced their store footprint by as little as they did."
Legal analyst with Debtwire
Joel Levitin, a partner with Cahill Gordon & Reindel’s bankruptcy practice, said in an interview with Retail Dive that Payless occupies a niche in retail that (for now) is relatively safe from e-commerce, and the company could end up as one of the remaining brick-and-mortar shoe sellers.
"People need to actually try things on, and the only way you’re going to do this efficiently is if you have an accessible store," he said, noting that this principle applies specifically to the price points Payless sells shoes at. To recreate the online experience of walking into Payless’ well-stocked stores and picking out a few pairs on the cheap, "you have to order several pairs and hope a couple of them fit," he said.
"If they’re expensive shoes, it makes some sense for the retailer to send them to you," Levitin added. "Amazon probably can’t afford to ship and have you return all or most of the pairs. It’s just not cost-effective at the lower price point." Levitin also points out that Payless is "a self-service model for the most part. You can see a hundred pairs in your size in two minutes. It’s a unique type of business."
The bankruptcy plan
Founded in 1956, Payless introduced a no-frills, self-service model to customers used to shoe salespeople kneeling at their feet and asking them to walk around the store to test the comfort of a product. That, plus an extensive lineup of exclusive brand relationships and licensing agreements — including with Airwalk, Champion, American Eagle, Marvel and others — has allowed the retailer to sell an often unique assortment at discount prices.
Today it sells everything from dance shoes to footwear for restaurant workers. According to bankruptcy filings, Payless depends on women’s shoe sales especially and has four key selling periods that account for almost 50% of its business: Easter, sandals weather, back-to-school and boots weather.
In 2012, the company’s former parent, Collective Brands, was taken private in a $1.3 billion transaction involving private equity firms Golden Gate Capital and Blum Capital Partners as well as Wolverine Worldwide. Wolverine today runs the Sperry Top-Sider, Stride Rite and Keds brands as a result of that deal. Payless was left with a debt pile worth $838 million going into bankruptcy. As with several retailers filing for bankruptcy this year, heavy debt combined with a sales decline created a crisis.
The retailer filed for Chapter 11 on April 4 with immediate plans to close almost 400 stores. Perhaps more importantly, it had an agreement with some creditors — who held about two-thirds of its first lien and second lien term debt — to reduce Payless’ debt load by almost 50% and lower its annual cash interest costs. Then-CEO W. Paul Jones said in a statement at the time that filing was "a difficult, but necessary, decision driven by the continued challenges of the retail environment, which will only intensify."
"[Creditors] can negotiate timelines, milestones. Generally speaking, by doing a deal in advance, they’re negotiating the terms they want while keeping it as cheap as possible."
Legal analyst, Debtwire
Along with macro shifts in the industry, the retailer had grappled with problems of its own making. Schwindle, in an April 5 court document, blamed a sales slump on industry-wide declines in sales and traffic, as well as the shift from brick-and-mortar to online channels. He also said that Payless had "meaningfully over-purchased" inventory in early 2015 due to "antiquated systems and processes."
The oversupply was then compounded by disruption to the retailer’s supply chain from a major port strike on the West Coast. The result was a pile of out-of-season inventory that Payless had to mark down below cost to clear, which Schwindle said depressed margins, depressed liquidity, hurt Easter sales and led customers to fill their closets with cheap shoes (thereby reducing demand).
When Payless tried to reset "price expectations away from unsustainably-high markdowns," traffic was "further depressed." (Schwindle said in an interview that the retailer has since tried to meet customer pricing expectations in part by introducing new brands, such as Zoe & Zac, that have low opening price points.)
The sales slump and inventory issues combined with debt obligations forced Payless to close stores and delay payments to vendors, even to the point where the retailer’s major suppliers were on the brink, according to Schwindle’s filing. All these pressures drove Payless to negotiate with its creditors for months leading up to bankruptcy.
By the time the company filed, the process was relatively orderly and the plan largely formed and agreed upon, which benefited both Payless and its lenders, as the bankruptcy timeline for retailers tends to be both expensive and constrained by a legal framework that dictates how long (a max of 210 days) companies have to choose which leases to exit.
"The creditors reached a deal in advance because they’re getting what they want here, they are taking over the company, they’re taking over a healthier company, they’re dictating strategy by saying this is the company we want to take over," Debtwire’s Friedman said. "They get input in the process. In this case, if they’re providing DIP [debtor in possession] financing as well, they have even more control over the process. They can negotiate timelines, milestones. Generally speaking, by doing a deal in advance, they’re negotiating the terms they want while keeping it as cheap as possible."
When Payless announced on Aug. 10 that it had exited bankruptcy, it had expanded its store closure count to about 900 and said it had shed some $435 million in debt. In a release, the retailer described itself, post-restructuring, as "the number one specialty footwear retailer in the U.S. and one of the largest in the world."
In the same release, Jones, who joined Payless in 2012, announced that he was retiring, effective at the time of Payless' exit. An executive committee is currently searching for a new chief executive, without a specific timeline, and in the interim Payless Chairman Martin R. Wade III is serving as CEO. Wade, with a deep background in finance and investment banking, has served as executive and board member for many companies across a wide array of industries.
"In a year where so many major retail companies have filed for Ch. 11 restructurings, Payless is the first to successfully emerge as a stronger and healthier enterprise for the benefit of its customers, employees, suppliers, business partners and lenders," Jones, in a statement, said at the time. "Our new owners believe wholeheartedly in the future of Payless, and I am confident that they will identify a new leader who will complement our outstanding and deeply committed management team, while sparking new ideas and approaches."
Schwindle said the company spent money and effort to try to keep customers from abandoning its remaining stores and redirecting them, instead, to those nearest ones that were closed. Those efforts included in-store, direct and digital marketing. Though it’s early still, Schwindle said customer retention levels have tracked with the retailer’s expectations. (The company declined to disclose specific figures on customer retention.)
Some observers agree that Payless’ restructuring plan appears sound and could position it to succeed going forward. "The Payless plan has all the trappings of a retail structuring that can succeed," Friedman said. "They knocked out a good amount of out-of-market leases to streamline their operations. They substantially reduced their balance sheet… New owners, better balance sheet, better store footprint: When you’re able to pull off those three with the parties that were invested, the expectation is that they can pull this off."
Avoiding Ch. 22
As Friedman points out, even an optimal restructuring plan isn’t always enough to keep retailers out of Chapter 22 (i.e., a second Chapter 11 bankruptcy filing) or from liquidating. "You can make that argument for a number of the past retail restructurings, whether it’s RadioShack, American Apparel, Wet Seal — there are some others that went the Chapter 22 route," Friedman said.
"It seems to me that taking big steps sometimes isn’t enough," he added. "But when you have a decision that leaves a substantial footprint ... and they’re able to take out a large portion of their debt, it would seem like this would be the type of true balance sheet restructuring that can succeed."
The threat to Payless, if there is one, might not come from its own balance sheet, or even the business itself. It could be more existential. "In a certain sense you could make the argument conceptually against the entire business model," Friedman said. "You can get shoes at Amazon, Zappos, any of these online retailers."
"Revenues have been going down, margins have been going down for various bricks-and-mortar businesses across the board. Is there a need for this type of business, or is it likely to be totally eliminated by digital sales?"
Partner, Cahill Gordon & Reindel
"Obviously revenues have been going down, margins have been going down for various bricks-and-mortar businesses across the board," Cahill Gordon & Reindel’s Levitin said. "Is there a need for this type of business, or is it likely to be totally eliminated by digital sales?" For his part, Levitin said Payless has a chance, at least for the time being, because of the storefront model's efficiency in selling discount shoes.
But sales have been migrating online as Amazon takes a bigger bite of the market. Footwear sales rose 35% last year at Amazon and the powerhouse retailer introduced a new private label line of shoes and accessories called The Fix.
At the management level, retailers emerging from restructurings must have "a clear strategy of where growth is going to come from" and who their customers are, Deb Rieger-Paganis, managing director at consulting firm AlixPartners, told Retail Dive. More, reorganized retailers have to "fix the business problems," she said. For struggling retailers, that often entails building up too much inventory, which companies often do to maintain liquidity from asset-backed lenders.
Along with closing stores, companies have to reduce their corporate staffs to get their "overhead structure aligned with strategy, get the right people in the right places," Rieger-Pagani said. "You can’t do the same amount of work as before, so you have to do what you can to get some of the complexity out of the business."
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