NEW YORK -- A Chapter 11 bankruptcy filing by Linens 'n Things is the latest sign that the retail sector is becoming leaner and meaner amid a difficult consumer environment.
On Friday, the bedding- and home-furnishing retailer filed a petition in bankruptcy court in Delaware and said it would close 120 underperforming stores, almost a quarter of them in California.
Ken Perkins, president of research company RetailMetrics, said the bankruptcy stems from a combination of operating issues and the lagging economy.
"There's clearly a shakeout going on in the retail industry which will continue through the rest of the year," he said. "I think the weaker players are going to be in difficult shape here."
Consumers are likely to lose out. Brian Riley, senior analyst at research firm The TowerGroup, estimates the filing will freeze about $42 million in consumer gift cards, affecting about 400,000 customers. Gift cards become valueless when a company files for bankruptcy protection.
The company said economic factors such as the decline in the housing market, tightening credit markets and a downturn in consumer discretionary spending, particularly in the housewares and home furnishings sector, led to a "precipitous decline" in profitability and liquidity.
The factors worsened in the first quarter of 2008, the company said.
Linens 'n Things named Michael Gries of the restructuring firm Conway Del Genio Gries as chief restructuring officer and interim chief executive. Current CEO Robert DiNicola will become executive chairman. The company's Canadian stores — which Linens 'n Things said are among the best performing stores — are not included in the filing.
The filing is expected to be a boon to rival home-furnishings retailer Bed, Bath & Beyond bbby.
"The number of stores Linens 'n Things is closing is equivalent to almost 15% of Bed Bath & Beyond's core store base, so there is significant opportunity to gain market share," said William Blair & Co. analyst John C. Murphy.
In a note to investors on Friday, Deutsche Bank analyst Mike Baker said 50% of Bed, Bath & Beyond stores overlap with a Linens 'n Things store within three miles. He estimated the bankruptcy could conceivably add as much as 18 cents a share to Bed, Bath's annual earnings.
But the news is not as good for Linens 'n Things' parent, New York private investment firm Apollo Management. Apollo took the company private in 2006 for $1.3 billion.
"The rapid spread of the retail recession caught Apollo and other Wall Street firms by surprise," said Burt Flickinger III, managing director of the consumer industry consulting firm Strategic Resource Group.
With competition from Bed, Bath & Beyond, department stores and other specialty stores, "Linens 'n Things too often had older locations and smaller stores that didn't have the depth and range of products," he said.
Bankruptcy will eventually make the company a better competitor in the space, Flickinger said. Filing for Chapter 11 under the bankruptcy code frees a company from the threat of creditor lawsuits while it reorganizes its finances.
"Apollo knows how to restructure a bankrupt business," Flickinger said. "The business will be smaller but it will be more stable."
That downsizing will create more vacancies at malls — but it could also provide some mall operators the opportunity to adjust to the current economy, real estate experts said.
"Although the magnitude of this bankruptcy filing cannot be disputed, recent bankruptcy filings and store closings create new opportunities for other retailers to acquire space in the nation's shopping malls," said Dan Ansell, a partner at Greenberg Traurig LLP and chairman of its real estate operations division. "It also creates opportunities for shopping centers to redefine their tenant mix and thus adapt to current economic trends."
Linens 'n Things, which operates about 589 retail stores in 47 states, joins specialty retailers Sharper Image and Lillian Vernon in seeking bankruptcy protection.
And Flickinger said this may just be the beginning.
"There is going to be a record number of store closings through bankruptcy in the next 150 to 1500 days, as the retail recession becomes the worst the U.S. has seen in 30 years," he said.