How Private Equity Buried Payless

Done right, a Chapter 11 bankruptcy is an opportunity for a company’s rebirth. It can shed the debts, lease obligations or onerous supplier contracts that might have gotten it in trouble.

The executives who led the company through its 2017 bankruptcy were confident they had done exactly that. The company shed about half of the debt on its balance sheet, closed about 700 underperforming stores, got its rent on remaining stores cut by as much as 50 percent, negotiated more favorable credit terms with suppliers, and formed a plan to invest in new technology and expand its profitable Latin American business.

“We were going the right direction, we had stability, we had a strategy, we had a team, and we had results,” Mr. Jones said. He said the new owners should have had at least four years of breathing room to get the business on track. Golden Gate Capital, in its statement, said, “When we exited Payless, we left it with a right-sized store footprint and meaningful earnings opportunities for future owners.”

“It’s the antithesis of what we’ve seen in other retail bankruptcies,” a restructuring expert, Christopher Jarvinen, told Reuters at the time.

Yet 18 months later, Payless was in bankruptcy court again. Its United States stores were closed.

What happened? Why did Alden Global Capital, the firm that took over Payless after the restructuring, fail so badly?

One answer is that it is hard to fix decades’ worth of problems quickly, even with the help of a bankruptcy court that can wipe out debts. For example, the Alden managers enthusiastically demonstrated a new system with which store employees could call up information on a tablet to see if desired shoes were available in another store.

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That sort of thing was pretty standard in the retail industry in 2018. Yet many Payless stores had inadequate Wi-Fi for the tablets to be used. And the bankruptcy had fractured the company’s relationships with suppliers, many of them small Chinese manufacturers that had lost money when Payless experienced its cash crunch.



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