Weak holiday will break distressed U.S. retailers

NEW YORK (Reuters) - Weak holiday sales this year will deliver a knock-out punch to weak, small and mid-sized U.S. retailers that somehow managed to survive last year's economic pummeling.

The economy has improved slightly from last year, when a lethal recipe of tough credit markets, stingy consumers and wary suppliers felled retail giants including electronics chain Circuit City Stores Inc CCTYQ.PK and home goods retailer Linens 'N Things Inc LNNHDL.UL.

But it has been a tough slog. The recession began in December 2007 and consumer spending remains slow. Retailers with few cash reserves cannot survive another slow holiday sales period, say advisers for distressed companies.

"It's do or die for a lot of retailers," said Jan Baker, co-head of the restructuring practice at Latham & Watkins LLP. "There's been tremendous carnage in the retail sector already but now it's moving up market to brands and companies that had seemed well-positioned to ride out the storm."

The coming months will bring a slight change in corporate bankruptcies. There will be fewer traditional Chapter 11 bankruptcies.

Instead, companies and creditors will agree on debt repayments out of court. Or they will seek a prepackaged Chapter 11, in which retailers and lenders agree on a restructuring plan before entering bankruptcy court.

For example, Samsonite Company Stores LLC, the retailing unit of luggage maker Samsonite Corp CMERNS.UL, filed for bankruptcy on September 2 with a prepackaged plan under which creditors will be paid in full, Samsonite Corp will remain the owner and the unit plans to emerge from bankruptcy protection in as little as 45 days.

This is a change from the common Chapter 11, in which a bankruptcy judge oversees a company's reorganization from the beginning, in a process that takes months, or years.

"You're going to find more restructuring and pre-packs ... for companies that have a raison d'etre," said Jeff Bloomberg, a principal at advisory and financial services company Gordon Brothers Group. For those companies without a reason to exist, that get into a liquidity problem: "I don't see a future."

MOST AT RISK

Restructuring and retail professionals declined to name companies most at risk for bankruptcy or restructuring, but said sectors with the toughest competition, highest debt and most discretionary products would suffer most, such as low-priced jewelry and mid-priced apparel.

"If you were going to look at a sector where we are grossly over-retailed, apparel (is at the top of the list)," said Daniel Alpert, a managing director at Westwood Capital LLC, who advises distressed companies on restructuring measures.

Alpert said women's mid-priced lines were most troubled, without giving examples.

"The hopes for the consumer jumping back into the market in time for the holidays have been dashed," said Alpert, who also oversees Westwood's investments in distressed assets. "No one at this point expects that is going to occur."

Consumers are keeping their wallets shut. Retail industry sales sagged 4.3 percent in August, from a year ago, according to the National Retail Federation. Clothing and accessory stores sales lost 5.9 percent during the same period.

The last few months have brought bankruptcy filings from iconic U.S. outdoor apparel chain Eddie Bauer Holdings Inc EBHIQ.PK and fine jewelry company Finlay Enterprises Inc. FNLYQ.OB.

"The holidays are always crucial to retailers and we know that this season is not going to be so good," said Larry Gottlieb, chair of the bankruptcy and restructuring practice at law firm Cooley Godward Kronish LLP. "You'll see retailers file (for bankruptcy) and those are the ones that just couldn't hold on long enough."

Gottlieb also expects more out-of-court restructurings or prepackaged bankruptcies this year since the time and costly requirements of a traditional Chapter 11 bankruptcy make it unprofitable for both companies and their creditors.

TRICKLE DOWN

Baker, at Latham & Watkins, said the fear of shuttered stores could be a rare bright spot for struggling retailers as landlords may be more willing to cut deals with tenants.

"You could have hundreds, if not thousands of mall locations that, six to nine months from now, could be out of business," said Baker.

Westwood Capital's Alpert also said landlords were ready to negotiate.

"You've got shopping malls, strip centers that are sitting there with regional mom-and-pop tenants saying: 'I know you can't pay the rent, don't worry about it, please don't go out of business,'" Alpert said.

(Reporting by Chelsea Emery; Editing by Tim Dobbyn)