Steve & Barry's Loses a Little on Every Shirt, But Makes It Up on Volume

Update: The Wall Street Journal reports today (July 1) that Steve & Barry's may close 100 of its 270 stores and seek bankruptcy protection as early as this week. The company is trying to arrange $40 million in debtor-in-possession financing, the Journal says, and has approached retail giants like Wal-Mart, Gap, and Sears Holdings about investing.
It's a measure of the current retail schizophrenia (and the state of business reporting, for that matter) that even as Steve & Barry's creditors are cutting them off, newspapers like the Arizona Republic are running stories headed "Cheap and chic fuels Steve & Barry's."

In the same week, Women's Wear Daily reports that Steve & Barry's has retained Goldman Sachs and a bankruptcy attorney and is desperately in search of a $30 million short-term credit facility to keep goods flowing from overseas. The Wall Street Journal says Steve & Barry's projects 2008 approaching $1 billion and EBITDA of $20 million. What's keeping the company afloat? One-time payments from landlords -- tenant improvement allowances of as much as $80 per square foot, which at stores of 50,000 to 100,000 square feet mean as much as $8 million in upfront cash.

Can both be true? Of course. This is 2008.

The Republic story quotes a Tucson shopper who drove more than 100 miles to Phoenix after seeing Steve & Barry's written up in Glamour. She was surprised to find everything in the store $8.98 -- "I had read everything was $18.98." The less-than-$10 deal started as a Christmas promotion but is still in effect.

Steve & Barry's exec Howard Schachter told the Arizona paper that he stays at Econo Lodge and sits in a $20 chair back at the office. Manufacturers in Africa are used instead of China, to save money on tariffs and duties. "We look at 1,000 points along the production line and cut out the fat," he said.

Back in April, in a story headed "Steve & Barry's Rules the Mall," Business Week's Robert Berner provided the biggest hint that Steve & Barry's 70 percent growth rate was a house of cards. He reports that last year, the chain took 3.5 million new square feet, the most of any mall-based chain, opening 62 stores around the country. Mall owners made deals to fill big spaces vacated by department stores like Macy's and Mervyn's. How big?

"Some of these [mall owners] are desperate," says Deutsche Bank real estate analyst Louis Taylor. So as the chain's popularity has risen and store size has increased, it has been able to negotiate lease rates that are less than half those of most mall tenants, says (co-founder Barry) Prevor.

Low rents are hardly the only way the men keep costs low. While malls usually give new tenants allowances of $20 to $30 a square foot to build interiors, the popularity of Steve & Barry's has allowed the chain to command "build-out" fees as high as $80, considerably more than actual costs, says Ivan L. Friedman of Retail Consulting Services Inc., which advises retailers on real estate issues. That's enough to cover a store's initial inventory, lowering operational costs further, he adds. Prevor denies that mall payments exceed actual interior costs. Even so, he says, there's no question the fees "fuel our growth."

"I don't know how you can sell goods at no markup, at $8 or $9, and expect to make money. The merchandise is [cheap] and they rolled it out and overextended."

One credit analyst told WWD, "It's hard to figure out how well Steve & Barry's is doing because they only have two U.S. suppliers. The factors have been declining orders because the company won't give out any numbers. Right now, most of the private label goods are from overseas."

Another credit analyst said that a vendor seeking payment was told by the retailer that it would "get paid when it is able to pay."

Not to put too fine a point on it, but market watcher Mike Shedlock calls this a Ponzi scheme. At least the kids in $10 shoes aren't the ones getting taken.

Image via Flickr, CC 2.0 -- Eric Molina