The finance blog Calculated Risk picks up on a Wall Street Journal story about how a “fast-growing” new retail chain’s explosive growth was apparently bankrolled by payments from malls. The chain, Steve and Barry’s, was being paid to fill up empty space in the malls by desperate mall owners facing excessive vacancies, and apparently derived much of its revenues from these payments. Now the chain is facing bankruptcy. (Wonder if some of the mall owners are too.)
From the WSJ story:
The company currently has 270 stores and projected 2008 revenue approaching $1 billion, with earnings before interest, taxes, depreciation and amortization of roughly $20 million, said two people familiar with its finances. But some of the forces pushing Steve & Barry’s growth were not tied to end-consumer demand, but the needs of mall owners in a softening commercial-real-estate market. Much of the company’s earnings came in the form of one-time, up-front payments from mall owners. Those payments were designed to lure the retailer to take over vacated sites, say several people familiar with the company.
Without these payments, the stores are barely profitable, if at all, people familiar with the company’s finances say. In recent weeks, the retailer has been seeking at least $30 million to fund operations through 2008… Steve & Barry’s closing would be another blow for owners of malls and shopping centers, who have struggled to cope with the 6,500 store closures predicted for this year by the International Council of Shopping Centers.
I wonder how widespread this practice has been beneath the glittering surface of America’s booming economy in the ’00’s? Steve and Barry’s is a Carousel Mall tenant. Gee, I hope this isn’t part of the planned DestiNY USA business model.