Linens 'n Things Demise Takes Away 589 Stores

Brent Felgner, October 20, 2008

As it ramps up for the going-out-of-business sales across all 371 of its remaining stores, Linens 'n Things' projected financial standing looks deceptively better than it has in recent memory.

For the moment at least, the company is flush with cash following a $200 million pre-payment by the six-company consortium that will liquidate the business. Late last week, LNT filed a 32-week wind-down budget with the federal bankruptcy court that projected total cash receipts of $828 million during the period, current trade payments of $48 million, and $581 million in net operating cash flow.

Most, if not all, of LNT's new-found cash will go to pay down its debtor-in-possession obligations and other priority lenders, as well as secured creditors, like General Electric Capital Corp., and its noteholders.

Unsecured creditors conceivably might see some small payout — but it's difficult to see how.

Most of the action — probably all of it — will take place in the stores before the Christmas selling season is over. The company owns an estimated $500 million in inventory — normally worth up to $1 billion at retail value.

"This will last anywhere from eight to 10 weeks," offered James Schaye, ceo of Hudson Capital Partners, one of the liquidators. "It's going through extraordinarily quickly, and then the stores will be shut."

"You know, they say that the greatest two days of a company are its grand opening and its grand closing," Schaye remarked.

In all, Linens will have liquidated 589 stores through its bankruptcy — at a time when the retailing and home textiles industries are feeling most vulnerable and every store seems precious. By one estimate, so far this year across all trade classes, more than 3,000 retail units have or will shortly be closed.

That massive door-shutting has yielded the glut of retail real estate that earlier resulted in LNT being able to sell off only five of the original 120 lease holdings it put on the auction block, a situation interim ceo Michael Gries found an embarrassment.

But if there's anything grand for LNT's business partners about its liquidation, it can only be the opportunity to be paid for the last bits of merchandise moving through a rapidly closing pipeline.

That's probably countered by the knowledge that since the beginning of the current year, LNT's 17,500 store employees, including 6,600 full-time workers, will have lost their jobs. A court-approved severance plan covers some of them.

"You can only imagine that after having been there for 17 years, there's not a short sentence or a paragraph that can convey the feelings that I have for the people who are there, and for the vendor community that supported Linens — those are the two groups I care about," offered Norman Axelrod, former ceo of LNT from its prior incarnation as a public company. Axelrod led the retailer through its highly leveraged buyout for $1.3 billion by a private-equity joint venture led by Apollo Management in 2006, before departing from the company.

Along with the economy in general, the declining housing and credit markets, that LBO debt — still at $650 million, equal to the original amount — is largely blamed for dragging LNT down. Blame is also pointed variously at Axelrod and at Apollo-appointed LNT ceo Robert DiNicola, who was bumped from the ceo spot in May, following the bankruptcy and who resigned from the company in August.

While declining to publicly discuss the subject, privately Axelrod rejects the notion that he was a principal contributor to the chain's demise. DiNicola has slipped further from public view since the bankruptcy.

But as late as March 20, when Linens held its year-end and fourth-quarter conference call, DiNicola confidently assured investors and lenders that LNT's turnaround was on-plan and indicated there would be enough working capital for the company to make it through the end of the current year. All of that was said despite a near tripled net loss, eroding margins and declines in comparable store sales.

For its part, LNT has repeatedly blamed "a variety of external factors [that] have led to a precipitous decline in the debtors' profitability and liquidity and an inability to continue with their turnaround plan." While acknowledging a role for the economy, many LNT watchers in the trade roundly reject that theory. There are plenty of viable and successful retailers in the current environment, they counter.

But by mid-April, Linens had missed a $16 million interest payment and reported it was seeking strategic alternatives and a "consensual restructuring" of its capital structure. It filed for bankruptcy on May 2.

"A lot of things did not go in their favor," said Mary Ann Domuracki, managing director at Financo, the private investment bank hired to find a buyer for the chain.

Under the current liquidation scenario, LNT will receive 95.1% of the merchandise cost value, with amounts over the guarantee split with the liquidators after expenses. In additional to Hudson Capital, the other liquidators are: Gordon Brothers Retail Partners, Hilco Merchant Services, Great American Group, SB Capital Group and Tiger Capital Group.

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