The Subprime Spread
As the subprime crisis deepens and grows and the potential for recession increases, the effects are seeping into other industries as consumers are tightening their belts in order to afford food and gas. Michael Barbaro of the New York Times discussed the effects on retailers in a recent article:
Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.
But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.
Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.
The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.
Our own insolvency practice here in Bakersfield has felt the impact of this upsurge in bankruptcy filings generally, and retailers in particular. Recently the firm has filed two new Chapter 11 cases with another ready in the next week or so (an incredible rate for a relatively small market). It appears that the window for bankruptcy attorneys to take a vacation has passed and the ramp up for coping with increased case loads must shift into high gear as more and more regional retailers enter the "zone of insolvency" and seek the help of a bankruptcy professional.
