The Housing Slump Wallops Linens ‘n Things

The company’s troubles were symptomatic of woes that have spread throughout the retail sector, with companies including the Levitz furniture chain, the Sharper Image gadget stores and the gift-seller Lillian Vernon filing for bankruptcy.

Linens Holding Co. in Clifton, which does business as Linens ‘n Things, huddled with creditors last week after missing a $16.1 million payment on its senior secured floating rate notes due in 2014. The struggling retailer previously retained turnaround specialist Conway, Del Genio, Gries & Co. in New York City to help mull over its options.

Linens’ plight was hardly what Apollo Global Management in New York City had in mind when it acquired the retailer for $1.3 billion in 2005. Coping with Linens’ problems has become a headache for the private equity firm, which this month unveiled plans to raise up to $418 million in an initial public offering.

Robert J. DiNicola, CEO of Linens ‘n Things, conceded last week that efforts to improve operations over the past two years had not produced the results desired. DiNicola cited the ailing economy and a credit crunch that has forced vendors to demand tighter payment terms. “These factors have had a dramatic effect on our liquidity outlook for the remainder of the year,” DiNicola said in a statement.

Linens ‘n Things operates 589 stores. The company still files financial statements and reported a deepened net loss of $242 million on revenue of $2.79 billion for the fiscal year that ended last Dec. 29, compared with a net loss of $154.4 million on revenue of $2.81 billion for the previous fiscal year.

A bankruptcy filing by Linens could hurt rival Bed Bath & Beyond in Union, says Laura Champine, an analyst with Morgan Keegan & Co. Inc. in Memphis, Tenn. “If bankruptcy happens [at Linens], I would not view that as a positive for Bed, Bath,” she says, since Linens would likely launch an aggressive marketing campaign to pull business away from other companies.

Bed Bath & Beyond is already sharing the retail industry’s pain. The company reported depressed net income of $562.8 million on revenue of $7.05 billion for its fiscal year, which ended March 1, compared with income of $594.2 million on revenue of $6.6 billion for the previous year.

Bed Bath & Beyond operates 881 stores under its own name, plus 41 Christmas Tree Shops, 40 Harmon and Harmon Face Values stores and nine buybuy BABY outlets. Its stock traded between $29 and $30 last week, down from a 52-week high of $41.90 last April.

Bed Bath & Beyond says its earnings for fiscal 2008 could be down as much as 15 percent compared with last year, with same-store sales dipping or staying flat. Champine estimates that Bed, Bath’s earnings will trail last year’s by nearly 17 percent.

“Bed, Bath has become a more mature company. They are not the growth vehicle they used to be. I am not sure if they have seen a downturn of this extent,” Champine adds. “They will take the brunt of the cycle this time.”

Geoffrey Seiler, editor of BullMarket.com, an online investing newsletter published by Indie Research in Princeton, says help may be on the way for Linens, Bed, Bath and other companies. “Retailers are gearing up for the fiscal stimulus checks that are expected to arrive in May,” says Seiler, who notes that “the East Coast has been a little stronger than out West and places like Florida that have seen a lot of foreclosures.”

Meanwhile, retailers such as Wal-Mart have previously offered to cash tax-refund checks for free, he says, and may do so again to attract customers. “Sears is upping the ante this time around,” he adds, “by offering a 10 percent bonus to anyone who converts the checks into gift cards. I’d expect other retailers to follow suit with similar promotions.”

E–mail to jpruth@njbiz.com