What Caused Shopko to File for Bankruptcy? Two Parts to the Puzzle.

Last Wednesday Shopko, a general merchandise retailer with 333 stores, filed for chapter 11 bankruptcy.  On January 17^th, SGB Media published an article on Shopko and the filing by Thomas J. Ryan with the title, “Shopko Becomes Latest Casualty Of Online Disruption.”

I took umbrage at the suggestion that online disruption was the primary cause of the filing.  It’s not that there wasn’t any online disruption.  Every retailer is dealing with some online disruption and how they manage it will determine if they survive.

However, Shopko’s online disruption was no doubt facilitated by the condition of their balance sheet following being acquired and taken private by Sun Capital in 2005.  According to this article on a web site I watch, the 2005 purchase price was $877 million.  “In an SEC filing of November 2005, Shopko explained that the buyout deal would be funded mostly by debt that Shopko itself had to borrow.”  Here’s the link to the SEC filings for those who might be interested.  The total amount of debt loaded onto Shopko’s balance sheet at the time of the transaction, the article says, was $1.2 billion.  That, I suppose, is why they call them ‘leveraged buyouts.’

And then, “Five months later, in May 2006, Sun Capital sold Shopko’s most valuable asset, its real estate, for $815 million to Spirit Finance Corp. Shopko then leased back those locations for its stores. So Shopko had to pay rent, and Sun Capital had the $815 million.”  Another addition of leverage to the balance sheet and hit to cash flow.

“The Wall Street Journal noted at the time:”

“The move might make waves in corporate real estate, showing retailers and others the possibilities in unloading their real-estate assets. It also shows that private investors are still finding ways to wring money out of retailers’ real estate.”

Here’s the link to the Wall Street Journal article, but you can’t see if unless you are a subscriber.

Regular readers are no doubt moaning, “Oh god, here he goes again about balance sheets.”  Yup, pretty much.  A strong balance sheet gives you the flexibility and staying power to manage through surprises and disruptions, stay the strategic course, and try new things.  I wonder if Sears would be in bankruptcy (yet?) if they hadn’t spent $6 billion on share buybacks.

Shopko’s bankruptcy petition (form 201) indicates assets of $500 million to $1 billion, and liabilities between $1 and $10 billion.

In the SGB article, you’ll see that Shopko CEO Russell Steinhorst blames the problems on almost everything but the condition of the balance sheet and cash flow.

The SGB article notes that “Shopko is owned by Sun Capital Partners. Much of the debt arrived when Sun Capital took Shopko private in 2005,” so they don’t completely ignore the issue.  I don’t know what Shopko’s future would be like if they hadn’t had their balance sheet ravaged by a leveraged buyout.  But I have to believe they’d have had more of a chance if they weren’t paying interest on debt from the buyout and rent on stores they used to own.  That requires some emphasis in any discussion of the company’s filing.

Online disruption?  You bet.  But financial fragility as well.