California Apparel News

The ink is barely dry on Mervyns’ Chapter 11 bankruptcy filing, and the industry is ready with advice to reinvigorate the mid-tier department-store chain

The Haywood, Calif.–based retailer filed for Chapter 11 bankruptcy protection on July 29 in the wake of other high-profile bankruptcies such as East Coast retail chain Steve & Barry’s.

Retail consultant George Whalin, president of Retail Management Consultants in Carlsbad, Calif., said the time is right for a lower-priced chain such as Mervyns to make a comeback.

“Mervyns should benefit from this economy,” Whalin said. “The store should not be suffering. Why people are not shopping there is baffling to me.”

But Howard Davidowitz, chairman of Davidowitz & Associates, a New York–based consulting and investment banking firm, was not so optimistic about the likelihood of a Mervyns turnaround.

“It’s possible, but it’s a long shot,” said Davidowitz, who worked as a consultant for Mervyns in the late 1960s.

Mervyns and its affiliate companies filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware to restructure the company’s debt and realign its business operations, said John Goodman, the chief executive for Mervyns.

Goodman blamed the weak economy and the tough retail environment for the bankruptcy of the department store, which has been retailing mid-tier apparel since 1949. Mervyns currently operates 176 stores. Since 2004, it has been owned by a private investment group that includes Sun Capital Partners and Cerberus Capital Management.

The company will be able to continue business through ongoing cash flow from its stores and a commitment for a $465 million debtor-in-position facility from a lender group led by Wachovia Capital Finance Corp.

There will be no change in the goods or the services offered at Mervyns during the bankruptcy, according to James Golden, a Mervyns spokesperson. He had no word about possible store closures or possible employee layoffs.

Store closures will be essential to any reorganization, said retail consultant Davidowitz. The next steps for Mervyns will be whittling down the chain to a core group of profitable stores, cutting down debt and remerchandising the stores with fresh merchandise, Davidowitz said.

Whalin also said remerchandising is crucial for Mervyns’ future success. The retailer offers brands such as Levi’s, Disney, Vans and Skechers, which are also readily available at its chief rivals, Kohl’s and JC Penney. Mervyns needs to differentiate itself through merchandise to attract more customers, Whalin said.

Mervyns also may have stumbled in its marketing efforts. Since 2004, the low-price retailer had been focused on courting Latino customers. “Our best-performing stores are in neighborhoods with a high Hispanic demographic,” said former Mervyns President Rick Leto in 2006. (Leto resigned in December 2007.)

The retailer hoped to attract more Latinos into its stores with marketing campaigns and store brands such as its Oscar De La Hoya Collection, which launched in 2004.

However, retail analyst Mercedes Gonzalez said the efforts fell flat.

“It was too little too late,” said Gonzalez, who has led focus groups on marketing to Latinos at Global Purchasing Companies, a buying office she directs in New York. “There was nothing significant in any of the [marketing and advertising] campaigns. Their merchandising was generic.”

It might be hard to lure customers back to Mervyns. Other discount retailers have been taking market share and experiencing good sales during this market, where consumers are seeking out deals. Ross Stores Inc., the San Francisco Bay Area discount retailer, reported an 8 percent increase in comparable-store sales in June. It also raised its guidance for its second-quarter earnings per share from a range of 51 to 53 cents, compared with its former range of 43 to 47 cents per share.

If Mervyns does sell some of the leases for its California stores, Whalin forecasted, they would be quickly snapped up. “They’ve been a staple of California real estate. I think they’d have no trouble re-leasing them. They got some prime locations.” —Andrew Asch