R.H. Macy Files for Bankruptcy : Retailing: Firm says it will conduct business as usual after taking Chapter 11 action in New York. No immediate store closures or layoffs are seen.


Squeezed by mounting debts and slumping sales, R. H. Macy & Co., the venerable retailer that has defined “department store” for generations of shoppers, filed Monday for Bankruptcy Court protection from its creditors.

Macy’s, whose flagship store on Herald Square in New York City was the site of the film classic “Miracle on 34th Street,” becomes the third national retailer in as many years to seek protection under bankruptcy law.

The 134-year-old retailer, which also owns the Bullock’s and I. Magnin stores, was forced into Bankruptcy Court on Monday afternoon in New York. A last-minute effort to rescue the company fell apart late Friday, leaving it with no money to pay suppliers and operate its business.


Under the Chapter 11 filing, which caps Macy’s two-year struggle to make ends meet, the retailer can remain in business and reorganize its finances without retribution from unpaid suppliers. The company said it intends to conduct “business as usual.”

Shoppers should find merchandise unchanged and credit cards honored. Macy’s said there will be no immediate store closures or layoffs.

However, the filing has certainly tarnished the retailer’s image and set the stage for the eventual closing or sale of some of its 251 outlets throughout the country. Analysts have said that the 22 Bullock’s stores and the 24 I. Magnin outlets, many of which are in Southern California, are prime targets for disposal if Macy’s can find a buyer to pay its price.

Although Macy’s bankruptcy is evidence of the dismal state of retailing and the decline in consumer spending in recent months, it is also another dramatic example of the continuing and devastating fallout from the go-go, debt-is-good era of the 1980s.

Expecting the nation’s strong economy to remain intact, companies took on debt to expand operations throughout the 1980s, only to discover that when the economy soured and sales declined, they did not have enough money to both repay debts and operate their businesses.

“We have known for some time that Macy’s had more debt than is desirable in such a weak economy,” Chairman Edward S. Finkelstein said in a statement. “We worked night and day to find a suitable solution and ultimately came to the conclusion that filing for Chapter 11 was best for Macy’s future.”


Macy’s became loaded with debt in 1986 when its top managers, led by Finkelstein, staged a $3.5-billion buyout of the company, turning it into a private concern. The debt was increased three years later when Macy’s purchased the Bullock’s and I. Magnin chains for $1.1 billion. In its bankruptcy filing, Macy’s listed debts of $5.3 billion and assets of $4.9 billion. Macy’s also said in the documents that it expects to lose $86.5 million in the next 30 days.

With the bankruptcy filing, Macy’s was granted a $600-million line of credit from its banker that will allow the company to begin paying apparel manufacturers and other suppliers for future shipments. With payment now assured, manufacturers said Monday they will resume shipping in time for Macy’s to receive merchandise for the critical spring season.

However, about 20,000 Macy’s suppliers, who were owed an estimated $150 million to $250 million, will not be paid until the bankruptcy reorganization is completed. Even then, suppliers are expected to receive only a fraction of what they are owed.

In a letter to Macy’s 69,500 employees, Finkelstein assured workers that their pensions, tax-deferred savings accounts, salaries and health benefits are intact and unaffected by the bankruptcy filing. But a representative of Macy’s unionized employees in San Francisco said workers still fear that layoffs and store closings are inevitable.

Macy’s is not the first major retailer to be hit by heavy debt and a dismal Christmas selling season.

Allied and Federated department stores filed for bankruptcy protection in January, 1990, burdened by debt from their takeover by Campeau Corp. in 1989 and stung by a holiday sales slump. Federated and Allied’s bankruptcy reorganization was approved by the court this month, setting the stage for its emergence from bankruptcy. In February, 1991, Carter Hawley Hale Stores, operator of the Broadway department stores, also filed for bankruptcy protection, although an investor group is helping to reorganize the company.


Macy’s expected holiday shoppers, who traditionally account for as much as half of a retailer’s annual sales, to bail the company out of its increasingly tight economic circumstances.

The company spent an estimated $150 million on advertising for Christmas and projected that sales would increase 4% over the prior year’s revenues. That proved to be an overly optimistic expectation given the poor economy in California and the Northeast, where the company’s stores are concentrated. The 1991 holiday sales period was the third straight disappointing year for most retailers.

“Macy’s has no one to blame but itself for this situation,” said one New York analyst who asked not to be identified. “This bankruptcy is not the fault of the economy; it’s not the fault of the consumer failing to spend. It’s the management that made bad decisions by buying Bullock’s and I. Magnin’s, by spending too much for Christmas advertising and by failing to be realistic about the state of their business. This is a situation that did not have to happen.”

R. H. Macy & Co. began as a dry goods and stationery store occupying a space 20 feet wide and 60 feet long at 14th Street and 6th Avenue in Manhattan. Its founder and sole employee, Rowland Hussey Macy, was in his fifth attempt to make it as a retailer.

He was disappointed after generating sales of just $11.06 the first day, Oct. 28, 1858, but by the end of his first year he had sold about $90,000 worth of merchandise and was on his way to becoming an American institution.

Macy died in 1877, and nine years later, brothers Nathan and Isidor Straus, whose family business had supplied the store with crockery and glassware, bought control. Under three generations of Straus leadership, the store moved to its site in Herald Square. Isidor Straus and his wife were among the rich and famous who went down with the Titanic in 1912.


With Monday’s bankruptcy, analysts said the company will probably get new owners. However, Finkelstein and his top managers, who control about 12.7% of the company’s privately held shares, will continue to direct the company for the near future.

Other major owners include Laurence Tisch, chairman of CBS Inc. and Loews Corp., whose $80-million investment gives him a 15.6% stake in the company, and General Electric Capital, which invested $90.4 million in the company and holds a 17% share.

“The (stock) owners now will be out. That investment won’t be worth anything,” said Tom Razukas, an analyst with Fitch Investors Service Inc. Other analysts said Macy’s creditors could end up owning the company, in much the same way that Federated and Allied creditors will have control of those companies when they emerge from bankruptcy soon.

However, some analysts say it is possible that Tisch or other owners could move to salvage their positions by paying off Macy’s creditors and taking over their stakes in the company.

The Zell/Chilmark fund, an investment fund in Chicago, mounted a similar move on Carter Hawley Hale’s creditors by agreeing to buy out creditors for 47 cents on the dollar. Zell/Chilmark is now expected to wind up owning as much as 75% to 90% of the company.

“It is possible that Tisch or someone else could do the same thing,” said Jeff Chanin, a bankruptcy specialist in West Los Angeles. “That’s certainly an option for him or any of the other wealthy Macy investors.”


Although Macy’s problems have been evident for years, many financial analysts as recently as December dismissed the possibility of a bankruptcy, citing Finkelstein’s merchandising savvy and customer loyalty.

However, Macy’s stunned the financial community and its suppliers earlier this month when it announced that it was forced to delay payments to vendors by two weeks, until last Saturday, to comply with terms of its bank loan agreements.

As the banks toughened their stance, the company tried to put together a rescue plan under which Tisch would have invested another $1 billion in the company. Under the proposal, Macy’s creditors would have had to agree to accept a fraction of what they were owed.

However, Prudential Insurance Co. of America, a major creditor, rejected the proposal, and Tisch withdrew his offer Friday. With no other options, Macy was forced to turn to Bankruptcy Court.

The filing could weaken Macy’s relationship with some suppliers, who will not receive money for past shipments until the bankruptcy case is settled.

However, many suppliers say they have no choice but to ship to Macy’s.

“Sure, it’s hurting us,” said Paul Lewis, chairman of Paul Stanley, a Los Angeles women’s apparel manufacturer, which is owed $300,000. “It’s the small guys like me that are going to suffer. It’s so, so unfair.”


However, Lewis said he expects to resume deliveries immediately to Macy’s--because there is no other choice. “It’s hard to ignore one of the few retailing giants left. Macy’s, Bullock’s and I. Magnin do a tremendous amount of business, especially with the type of goods I make. I have to do business with them.”

R.H. Macy & Co. at a Glance

* Founded: 1858.

* Founder: Roland Hussey Macy, in his fifth retailing venture after four failures. Macy rang up $11.06 on his first day of business.

* Annual sales: Estimated at $7 billion.

* Flagship: Macy’s store at 34th Street and 7th Avenue on Manhattan’s Herald Square.

* Stores: 98 Macy’s stores, 24 I. Magnin stores, 22 Bullock’s stores in Arizona, California and Nevada; 107 specialty stores.

* Board of Directors includes: Henry A. Kissinger, former secretary of state; Laurence A. Tisch, chairman of CBS Inc. and Loews Corp.; Alfred A. Taubman, chairman of Sotheby’s Holding and the Taubman Co., a shopping mall developer.

* Troubles: Over-leveraging and the recession combined to topple Macy’s. The company’s 1986 leveraged buyout led by Chairman Edward S. Finkelstein left it with enormous debt. In 1989, the company bought the Bullock’s and I. Magnin chains for $1.5 billion, adding to its debt load, now at $3.5 billion. Three years of weak Christmas seasons, coupled with the recession, meant that the company could not both pay its debt and continue to operate.