In Hot Economy, Niche Retailers Left in a Suddenly Cold Place

Starkly underlining the tough conditions for small specialty retailers, linen supplier Strouds Inc. filed for bankruptcy court protection Thursday and Restoration Hardware Inc., a peddler of decorative and quirky home furnishings that’s also losing money, said it’s seeking more credit and exploring other strategic moves.

Strouds, based in Industry, runs 70 stores, most in California, but the chain said it plans to close nine stores as part of its reorganization under Chapter 11 of U.S. bankruptcy laws.

Under Chapter 11, a company keeps its doors open but its debts are frozen while the company works out a court-supervised plan to restructure the debts and its operations. In the meantime, Strouds said it has received a commitment for up to $50 million in financing from two lenders to fund its business during its overhaul.

Citing “challenging conditions in an exceedingly competitive retail climate,” Strouds Chairman Charles Chinni said the Chapter 11 filing was necessary so that the chain could keep buying enough linens, pillows and other bedding and bathroom products to remain viable this fall.

“A successful holiday season is crucial to the company’s ability to compete successfully,” and by “taking this action prior to the start of the holiday buying season, we will assure the continued flow of merchandise to our stores,” Chinni said in a statement.

Strouds, like many other specialty retailers, is struggling against the likes of mass merchandisers such as Wal-Mart Stores Inc., Target Corp. and May Department Stores Co. that sell similar goods.

Strouds, in particular, also is being hurt by chains of “big-box” specialty retailers such as Bed Bath & Beyond Inc. and Linens ‘n Things Inc. that typically carry a much broader range of merchandise in larger stores, including small appliances and other “hard-good” housewares.

“Strouds only offers soft goods, which probably puts it at a further disadvantage,” said Shelly Hale, a retail analyst at Banc of America Securities in San Francisco. Not only do the hard goods typically provide higher profit margins, but “it’s more convenient for a consumer to shop at one store for much more variety than one can find at Strouds,” she said.

And with Strouds losing money from operations, its debt load became unbearable, forcing the bankruptcy court petition. In its fiscal first quarter ended May 27, Strouds lost $2.2 million on sales of $54.2 million, and that followed a meager $1.3-million profit on sales of $224 million for its fiscal year ended last Feb. 26.

Strouds also had long-term debt of $49 million as of May 27, a sum much higher than the company’s net worth--that is, the amount of its total assets minus its total debts--of $27.5 million on that date.

In the process, Strouds’ stock has become worth only pennies. Trading at $3 a share back in February, Strouds’ stock was quoted at 50 cents a share Thursday, down six cents on the day, when its trading was halted on the Nasdaq Market in the aftermath of its Chapter 11 announcement.

The company said the nine poorly performing stores it plans to close include three in California: Rowland Heights, Santa Barbara and Fresno. The others are in Nevada, Illinois and Minnesota.

Restoration Hardware, meantime, is a Corte Madera, Calif.-based concern that operates 98 stores in 29 states and Canada. The chain sells a variety of merchandise for the home, ranging from furniture and lamps to offbeat utensils and nostalgic housewares. A shopper can find everything from picture frames to the ingredients for an egg cream.

But the mix isn’t generating profits. In the six months ended July 29, the company lost $7.7 million on sales of $140 million, and that followed a $3-million loss for its fiscal year ended Jan. 29 on annual sales of $295 million.

“The business has had a difficult 18 months,” said Walter Parks, Restoration Hardware’s executive vice president and chief administrative officer. Noting that the company has hired several new executives, including a new merchandising chief, Parks said “We’ve shown some improvement, and I remain cautiously optimistic for the fall season.”

“Effectively, we’ve re-engineered the company and we’re hoping that we put the right goods in the right stores at the right time so we have a profitable fall,” he said.

For now, though, Restoration Hardware is having to find more credit. That’s because it has borrowed about $50 million of an existing $55 million of available credit, and under those lending agreements, once its unused credit fell below $7.5 million, the company was required to seek more financing.

The company first disclosed its need for additional credit in its quarterly financial report to the Securities and Exchange Commission, in mid-June. But in connection with that effort, Restoration Hardware said Thursday that it also hired an unidentified investment bank to explore strategic alternatives for the company.

Parks declined comment on what steps the company might ultimately take, including whether the alternatives would include a possible sale of the company.

Regardless, Restoration Hardware’s stock plunged 20% Thursday, losing $1.19 a share to $4.81 on Nasdaq after the company’s announcement. The stock has now lost half its value during the last 12 months.

The company was started in 1980 by Stephen Gordon, its chairman and chief executive.

Strouds was founded in 1979 by Wilfred and Joyce Stroud, with a store in Pasadena. Wilfred Stroud had remained the company’s chairman until early last year, when he was succeeded by Chinni, but Stroud remains on its board as chairman emeritus.

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