Success and Failure

Loehmann’s is filing for bankruptcy. Are the bad times coming back?

Probably not. While the 92-year old New York discount clothing chain is an icon in the Northeast, it has been a regular visitor to the bankruptcy court. They might even want to get a frequent-filer card. The firm filed Chapter 11twice before: in 1999 and 2010. It’s hard for small chains—Loehmann’s has just 39 stores—to keep up with behemoths like Target or TJX, which has 3200 stores. In addition, lots of retailers have struggled—like Sears, JC Penney, and Gap.

Indeed, some of these chains wouldn’t still be around if it hadn’t been for the Fed’s ultra-low interest rate policy. Rates have been so low for so long that these firms have been able to secure financing even though their sales have been flagging. Sears used to have a 3% market share as recently as 2005—now it’s down to less than 2%. But the firm was able to get a $1 billion loan in October to help restructure its business.

In addition, bankruptcy is a lagging indicator. It takes years for a company to run out of cash, and since management is frequently replaced in a reorganization when the equity is wiped out, it’s usually the last resort as debt-holders sue to get their money back. And the number of business and non-business filings has fallen every year since it peaked in 2009. It’ s now 20% below its high.

Bankruptcy is how the system tells a business that what it’s doing isn’t working. It’s how our economy evolves. Just because an iconic company goes down doesn’t mean we’re going backwards.

Douglas R. Tengdin, CFA

Chief Investment Officer

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