Retail: Steve & Barry's not profitable?

In a entry back in May I had speculated as to how Steve and Barry could be out doing Wal-mart to such a large degree. Apparently they're not out doing Walmart - they're hardly profitable. In fact, a sizable portion of their revenue apparently comes from the malls that they're leasing stores in. To quote:

But some of the forces pushing Steve & Barry's growth were not tied to end-consumer demand, but the needs of mall owners in a softening commercial-real-estate market. Much of the company's earnings came in the form of one-time, up-front payments from mall owners. Those payments were designed to lure the retailer to take over vacated sites, say several people familiar with the company.

Steve & Barry's Faces Cash Crunch

Fast-Growing Chain
Seeks $30 Million;
Chapter 11 May Loom

As one of the country's fastest-growing store chains, Steve & Barry's LLC was billed as the future of discount retailing. It boasted of massive expansion plans, built on the back of fire-sale prices of clothes and shoes promoted by the likes of actress Sarah Jessica Parker and professional basketball player Stephon Marbury.

Don Lansu/WireImage for Steve and Barry's

Sarah Jessica Parker fans overflow into the mall waiting for their favorite star to sign autographs on Aug. 3, 2007, in Mount Prospect, Ill.

That future now looks bleak.

The closely held retailer is racing to find rescue financing of about $30 million. If it is unable to secure backing, it could seek protection from creditors sometime in the next month, say several creditors, bankruptcy lawyers and retail experts familiar with the matter. Steve & Barry's has hired Goldman Sachs Group Inc. to seek out financing and hired a bankruptcy lawyer to advise it on a restructuring, say these people.

A spokesman for Steve & Barry's declined to comment. Its attorney, New York-based retail-bankruptcy veteran Paul Traub, also declined to comment when reached Thursday.

The cash crunch comes even as Steve & Barry's expands across the country, with stores already in 40 states hawking exclusive fashion lines endorsed by tennis player Venus Williams and actress Amanda Bynes. Since May 15, it has opened nine stores, from upstate New York to Kokomo, Ind., and San Jose, Calif.

Steve & Barry's is just the latest retail player hurt by the economic downturn, and its demise would be a big blow to struggling mall owners. An ailing economy and $4-a-gallon gasoline have wreaked havoc upon the retail landscape, pushing the likes of Sharper Image Corp. and Linens n' Things Inc. into bankruptcy protection.

Getty Images

Sarah Jessica Parker is among Steve & Barry's celebrity collaborators.

With fashionable clothes priced below $10, Steve & Barry's deep-discount model was built to thrive in such an environment. In a 2006 interview with The Wall Street Journal¹, co-founder Barry Prevor said the U.S. market could support 5,000 stores. Its founders have dubbed their effort the "Google of retailing."

The company currently has 270 stores and projected 2008 revenue approaching $1 billion, with earnings before interest, taxes, depreciation and amortization of roughly $20 million, said two people familiar with its finances.

But some of the forces pushing Steve & Barry's growth were not tied to end-consumer demand, but the needs of mall owners in a softening commercial-real-estate market. Much of the company's earnings came in the form of one-time, up-front payments from mall owners. Those payments were designed to lure the retailer to take over vacated sites, say several people familiar with the company.

Without these payments, the stores are barely profitable, if at all, people familiar with the company's finances say. In recent weeks, the retailer has been seeking at least $30 million to fund operations through 2008. It has approached a number of financing sources, say these people.

Without additional capital, the company's fate will largely be determined by the commercial-lending unit of General Electric Co. It provided the company with a roughly $200 million credit facility in March, and the company is already in default on that loan, said three people familiar with the matter.

Steve & Barry's closing would be another blow for owners of malls and shopping centers, who have struggled to cope with the 6,500 store closures predicted for this year by the International Council of Shopping Centers.

Steve & Barry's eagerly snapped up big-box sites vacated by consolidating chains like Macy's Inc. At a shopping-center conference in May, several mall owners said Steve & Barry's was one of the answers to the industry's problems filling vacant space.

"They should be able to see through this," said Anthony Cafaro Jr., a vice president at Cafaro Co., a large Youngstown, Ohio-based mall developer that leases 10 sites to the company. "They still have that sensational 'wow' factor in terms of their prices—it's a great concept."

Part of the chain's attraction has been its low prices. Everything from sweatpants to jeans to down jackets cost less than $10. The chain has a miniscule advertising budget. Mr. Prevor is also considered a master "tariff arbitrager," carrying an encyclopedic knowledge of tariff codes so the business can reduce costs by manufacturing products in such far-flung locales as Lesotho and Malawi.

Steve & Barry's has received much attention for its celebrity-branded products. In 2006, it signed National Basketball Association star Mr. Marbury to endorse a line of $14 sneakers called Starbury, which were hailed as an antidote to the prices for Nike and other basketball shoes. It also made a splash with a line of clothing designed by Ms. Parker, who named the line Bitten because she was "bitten by the Steve & Barry bug," she has said.

Last year, Ms. Parker and Mr. Marbury appeared on the Oprah Winfrey Show to promote their lines and the trend toward "cheap chic."

Mr. Prevor and Steven Shore were childhood friends from Long Island, N.Y., and opened their first store in 1985 in Philadelphia, selling discount University of Pennsylvania apparel and undercutting the campus bookstore. They slowly opened outlets in college towns across the country before transforming Steve & Barry's into a big-box-mall retailer.

In 2005, the International Council of Shopping Centers honored the chain with its "Hot Retailer Award," given each year to stores considered by mall managers as the best at generating buzz and bringing more shoppers to the shopping centers they occupy.

Later that year, the duo fueled those ambitions with investment capital obtained during the credit boom. Private-equity firm TA Associates Inc. paid $320 million for roughly half of the company. About half of that went into the company, with the balance -- about $170 million -- being paid to Messrs. Prevor and Shore.

Write to Peter Lattman at peter.lattman@wsj.com² and Jeffrey McCracken at jeff.mccracken@wsj.com³