One of the oddities of the so-called "retail apocalypse" is that no major department-store chain has filed for bankruptcy protection since the Great Recession. Profitability has been squeezed across the whole sector, but department stores have survived through a combination of deep cost cuts and asset sales.
However, for the worst-performing department-store operators, even the most heroic turnaround efforts are doomed to fail eventually. Bon-Ton Stores (NASDAQ: BONT), for one, could soon run out of options for avoiding bankruptcy. If it goes out of business, that could provide a vital sales boost for competitors including Macy's (NYSE: M) and J.C. Penney (NYSE: JCP).
Bon-Ton's financial position is awful
During the first half of 2017, Bon-Ton posted dreadful sales results, even by department-store standards. Comparable-store sales plunged 8.8% in the first quarter and 6.1% in the second quarter. For comparison, comp sales declined 3.6% at Macy's and 2.4% at J.C. Penney during the first half of the year.
Meanwhile, Bon-Ton is losing gobs of money. The main measure of profitability the company uses is adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), because it's consistently unprofitable under standard accounting rules.
Bon-Ton has been consistently unprofitable in recent years. Image source: Bon-Ton Stores.
Even the adjusted EBITDA statistics are ugly, at negative-$15.6 million in Q1 and $9.1 million in Q2. Bon-Ton only avoided a second straight quarter of negative adjusted EBITDA in Q2 because of $7.8 million in real estate gains and $4.6 million of income from gift card breakage, the latter referring to a change in Bon-Ton's estimates of how many gift cards will go unused.
Lastly, Bon-Ton's balance sheet is in utter disrepair. The company ended the second quarter with nearly $1 billion of debt and capital lease obligations, but just $6 million of cash on hand. The crippling debt load means Bon-Ton has to pay over $75 million annually in interest. It has only managed to make those payments by cutting capital spending to the bone.
Vendors are getting skittish
Because of Bon-Ton's plunging sales and terrible balance sheet, vendors are starting to get nervous about whether they'll get paid. As a result, some have cut back on shipments to Bon-Ton or demanded cash on delivery. It's no fluke that accounts payable -- the amount owed to suppliers -- declined 17% year over year as of late July.
This is a huge problem, as inventory shortages could quickly put Bon-Ton in a death spiral. The company has been doing its best to raise cash. In September, it sold a store in Minnesota for $18.9 million and leased it back from the buyer. Last month, it amended its credit line to provide additional access to cash on a short-term basis.