Why Payless Failed to Make Its Promised Comeback

Payless ShoeSource has marked the end of an era.

After much speculation — and a seemingly successful emergence from Chapter 11 in 2017 — the “everyday low price” family footwear retailer confirmed on Friday that it will hang up its hat in North America. (Payless filed for Chapter 11 protection on Monday in the U.S. Bankruptcy Court for the Eastern District of Missouri and plans to file the Canadian equivalent in the coming days.)

Getting to this point has been a challenging road for the 60-year-old chain, which has switched hands a number of times over the decades and seen its share of ups and downs. At its height in the late-2000s, the retailer counted more than 4,500 stores globally and had roughly $2 billion in annual sales. Its CEO at the time, Matt Rubel, was lauded for his mission to “democratize fashion” through the (at the time) revolutionary concept of high-low collaborations with designers such as Lela Rose, Patricia Field, Alice + Olivia and Christian Siriano.

But the firm ran into major challenges during the 2009 economic downturn as consumer spending plummeted, and it never again found its footing — for multiple reasons, according to experts.

“With Payless, it seems there are two primary components: First, the company does most of its business in brick-and-mortar stores, and as we’ve seen in the last five to seven years, there has been a huge shift in sales and foot traffic in malls and standalone stores as compared to those made online,” explained fashion attorney Elizabeth Kurpis. “[Secondly], the companies that ultimately succumb to bankruptcy are generally straddled by too much debt.”

Payless first staggered into bankruptcy court in April 2017 laden with nearly $840 million in liabilities — much of which stemmed from a 2012 leveraged buyout by private equity firms Blum Capital and Golden Gate Capital.

At the time, Payless’ contentious court proceedings included allegations from vendors and landlords that dividend payouts to its private equity owners made the company especially susceptible to collapse at a time when other factors were also hurting the industry at large.

In 2017 court documents, a group of Payless’ unsecured creditors stated, “The depletion of their coffers 
put the company on a dangerous path that ultimately led to this instant bankruptcy filing.”

Nevertheless, four months later, Payless was able to emerge from Chapter 11 after it shed about $435 million in funded debt and ditched hundreds of stores. (Payless had 4,400 stores at the start of its 2017 Chapter 11 process; it exited bankruptcy with close to 3,500.)

At the time, Payless’ emergence set the company in a rare class among its peers — many struggling retailers that had taken the Chapter 11 route met a far different fate. Cases in point: The Sports Authority, Eastern Outfitters, City Sports, Toys R Us, Wet Seal and others launched futile attempts to restructure via Chapter 11.

And only a short list of firms, including Pacific Sunwear of California Inc. — doing business as PacSun — and teen mall staple Aéropostale Inc. were among those to successfully restructure via voluntary bankruptcy.

But despite the company’s upbeat posturing in 2017, Payless hardly reaped the benefits of Chapter 11 — nor did it find its footing.

Payless’ chief restructuring officer, Stephen Marotta, said in a statement Monday, “We have worked diligently with our suppliers and other partners to best position Payless for the future amidst significant structural, operational, and market challenges. Despite these efforts, we now must wind down our North American retail operations under Chapter 11 and the CCAA [the Canadian equivalent of bankruptcy].”

Marotta, who was appointed to the post in January, added that “the challenges facing retailers today are well-documented” and that Payless emerged from its prior reorganization “ill-equipped to survive in today’s retail environment.”

In other words, the same forces that led Payless to bankruptcy in 2017 have sealed its fate just two years later.

“Private equity as a general rule does not work — the numbers show it,” Josh Kosman, author of “The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis,” told FN last year of the role PE firms have played in a slew of retail bankruptcies. “I [estimate that] 52 percent of the 25 companies that borrowed a billion dollars or more in the 1980s went bankrupt.” (Kosman was referencing the highly leveraged buyout of Federated Department Stores in 1988 that led to its bankruptcy just two years later.)

Like several of its peers that found the weight of a private equity buyout much too heavy to bear — Toys R Us faced a similar challenge last year — Marotta said its prior proceedings still left Payless “with too much remaining debt” as well as “too large a store footprint and a yet-to-be-realized systems and corporate overhead structure consolidation.”

While the rapid rise of e-commerce, the growing importance and convenience of Amazon and an overwhelming shift in consumer preference toward experiential spending have all played a role in the deaths of scores of fashion firms, many experts contend that large debt loads — which cripple already struggling retailers’ ability to fight back — are the true nail in the coffin.

“They didn’t really have enough time to evolve the business model, given the financial constraints they had to contend with,” explained B. Riley FBR analyst Jeff Van Sinderen, noting that Payless wasn’t helped by a “so-so” 2018 retail holiday season. “Not being omni-digitally relevant hurt them.”

As for other retailers looking to avoid a fate similar as that of Payless, Van Sinderen suggests an approach that is perhaps easier said than done: “Focus on digital and omnichannel, bring in talent, reduce brick and mortar/fixed expenses more than you think you might need to and revamp [your] product and marketing strategies more aggressively.”

Unfortunately, each strategy would involve some level of investment, which those burdened by debt are often unable to make.

As Kurpis put it: Even if Payless “likely made a valiant effort to digitally streamline their business since their 2017 bankruptcy filing, it may have been a case of ‘too little, too late.'”

Payless, which had prioritized Hispanic consumers as part of its 2017 post-bankruptcy restructuring plan, said it would continue to operate its 420 stores across 20 countries in Latin America, those in the U.S. Virgin Islands, Guam and Saipan, and its 370 international franchisee locations in 16 countries across the Middle East, India, Indonesia, Indochina, the Philippines and Africa.

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