The nation's largest home furnishings retailer, Heilig-Meyers Co., plagued by rapid expansion and problems with its installment payment plan, filed for Chapter 11 bankruptcy protection Wednesday and said it would close a third of its 872 stores, firing 4,400 workers.
The company seeks court protection from its creditors as it restructures. The company is closing all of its 81 stores in California and a distribution center in Hesperia, which will result in the layoffs of 1,400 workers. The store closures are pending permission from the U.S. Bankruptcy Court in Richmond, Va., where the company is based.
Heilig-Meyers' financial problems come at a time when U.S. home sales are surging and homeowners are spending record amounts for repairs and refurbishments.
"The kind of company that Heilig-Meyers represents should be thriving in this current economic climate," said retail industry consultant Kurt Barnard. "The great pity is that they did not know how to take advantage of their advantages. They bit off more than they could chew."
Heilig-Meyers increased its debt load during the last five years as it expanded through acquisitions, growing from 647 stores in 1995 to 872 this spring. It also was unable to sustain its lending program, which allowed low-income families to pay for merchandise in installments, as customer defaults mounted, a company spokesman said.
Nearly three-quarters of the company's sales were made through the installment plan, but after the bankruptcy reorganization, the company will use outside firms to handle customer credit, said the spokesman, Barry Brockwell.
"The return on the capital employed is higher in the retail furniture business than it is in the credit business," Brockwell said.
In California and other Western states, the company faced much higher shipping costs than it did in East Coast markets, where most stores are only 250 miles away from the nearest distribution center, Brockwell said. However, the majority of its California stores were hundreds of miles from its Hesperia distribution facility in southwestern San Bernardino County.
The retailer's strategy has been to open stores in small towns and rural markets at least 25 miles from large cities, drawing customers by offering easy credit.
Heilig-Meyers, which traces its roots to Virginia and North Carolina furniture companies incorporated as far back as 1940, had signaled its financial problems earlier this month when it said it would be unable to make interest payments on loans due Aug.1 and that it had hired the Lazard, Freres & Co. investment bank to explore options, including reorganization. The company's trading was halted Wednesday because of the bankruptcy announcement. It closed Tuesday at 50 cents on the New York Stock Exchange, a fraction of its 52-week high value of $6.56.
The company lost $59 million on revenue of $2.3 billion for the year ended Feb. 28, compared with a loss of $2 million on revenue of $2.7 billion the previous year. It had assets of about $1.4 billion in May and liabilities of about $840 million, according to the most recent balance sheet available.
Lenders have agreed to provide the company with $215 million in financing during the restructuring, Heilig-Meyers said.
The Southern California stores closing include locations in La Habra, Culver City, Monrovia, Santa Ana, Buena Park, Garden Grove, Northridge, North Hollywood, San Fernando, Simi Valley and Oxnard.