In late November, as Stage Stores CEO Michael Glazer took the phone on a conference call with investors, he said that he had been looking forward to the call "because I want to share with you the incredible excitement that is going on here at Stage Stores."

The retailer indeed had plenty to brag about. During the third quarter the company set records across its financial metrics and posted a comparable sales gain of 17%. The results seemed to validate what Stage Stores was doing, namely rapidly transforming itself on a shoestring budget from a hodgepodge of fading department store banners to an off-price retailer, through its Gordmans brand. The third quarter was so "fantastic," in Glazer's words, that management raised their guidance for Q4.

"There are many, who doubted our ability to truly transition from our department store culture," the chief executive said in November, according to a Seeking Alpha transcript. "Nevertheless, we are well on our way and we will not be denied."

It would be the last public call with investors the company would hold. Less than six months later, Stage Stores is in bankruptcy and set to liquidate all its stores and wind down unless a white knight buyer emerges to acquire and follow through on its unfinished plans. 

What happened? The company's rapid collapse followed a steep miss on its holiday numbers, a liquidity crunch and a race to find new capital. As the retailer quietly shed jobs and stores, downsizing its transformation plans, it ran into the COVID-19 crisis.

Elaine Crowley, who sits on Stage's board and now serves as its chief restructuring officer, called the pandemic a "nail in the coffin" for the retailer, coming just as it was "working to resolve liquidity concerns and greatly exacerbating [the company's] challenges."

As the retailer now looks to wind down, while also seeking out a possible buyer to salvage the company, its entire existence is on the line. And like many retailers before it in bankruptcy, Stage Stores faces some grim questions: Is the retailer worth saving? And who would want it?

Unfinished plans

Stage Stores' history stretches back to the 1920s, when its Palais Royal and Bealls banners were founded. The Bealls chain was built by Robbie Beall and his two brothers. Bealls and Palais Royal merged in the late 1980s to form a new company, Specialty Retailers, based out of Houston, which went public under the Stage Stores name in 1996. 

The company acquired several regional department store chains, mostly throughout the Southern U.S., in the following years: Fashion Bar out of Denver, which included the juniors banner Stage; Beall-Ladymon; Uhlman's; C.R. Anthony Company; Peebles; BC Moore; and Goody's. Of those, it ultimately kept the Bealls, Goody's, Palais Royal, Peebles and Stage banners.

The company entered the booming off-price sector in 2017 when it bought the Omaha-based Gordmans chain out of bankruptcy. Gordmans, which had over 100 stores at the time it filed, faced many of the same challenges ailing retailers everywhere did: demographic shifts, e-commerce growth and burdensome leases.

Nonetheless Glazer at the time trumpeted Gordmans young-ish customers, and home and gifts business. In 2019, the company would bet its entire future on Gordmans, unveiling plans to speed up the conversion of its remaining department stores to Gordmans by late 2020. Under that plan, the company would have converted 550 stores this year — which would have made for a final footprint of 700 Gordmans stores and zero department stores —​ on a capital spending budget of $30 million. 

The different businesses, department stores and off-price, require different management. Stage Stores department stores "offer a deeper, more curated selection of assortments with sales driven by high-low pricing promotions, value coupons, and in-person advice from knowledgeable employees," Crowley said. 

They were also heavy in apparel and relied on national brands like Adidas, Levi's and Calvin Klein, while Gordmans stores were much deeper into home goods. (Home and gifts account for 28% of merchandise at the off-price stores.) Gordmans stores also priced low every day, with a broad assortment laid out in the treasure-hunt style that has helped fuel the off-price boom. 

The off-price sector the retailer was looking to join has been on the inverse trajectory of department stores, which illustrates why the company moved in that direction. Yet it also has established players — including TJX Cos (owner of the T.J. Maxx, Marshalls and Home Goods banners), Ross Stores and Burlington — who are very good at what they do.

GlobalData Retail Managing Director Neil Saunders describes Gordmans stores as typical off-price. "Racks and racks of products, not very much visual merchandising, not very many point of sale materials — but, serves the purpose," he said in an interview. "I would say probably it is much more like a Burlington, or a bit like a Ross, than a T.J. Maxx, which is a little bit more aspirational." 

The newer Gordmans, he noted, were more modern in their layout and had more "inspiration" to the shopping experience. The company's department stores, on the other hand, were "very poor in terms of the stores."

By the end of 2018, the Gordmans stores showed comp increases of about 10%, while Stage's department stores fell by 5.5%, according to Crowley. Foot traffic to Gordmans stores grew 4.2% from 2018 to 2019, according to data from traffic analytics firm Placer.ai provided to Retail Dive. Traffic continued growing through 2019 until December hit, when it dropped 8.4%.

'Existential threat'

Stage Stores was in trouble before much of the retail world was even thinking about COVID-19's impact on the U.S. 

After holiday sales fell well short of projections, the company ran into money problems. It hired Kirkland & Ellis — among the most prolific retail bankruptcy lawyers in the country — sending fear through its supply chain. As suppliers tightened terms to protect their own finances, Stage's borrowing base on its asset-based loan fell, further tightening liquidity and creating what Crowley described as "a negative feedback loop."

By February, the company was in retrenchment mode. Retail Dive reported at the time that Stage Stores was quietly laying off employees and closing stores that were previously part of its projected Gordmans footprint. Plans for the retailer's ultimate store footprint appeared to change day to day, according to accounts from those who spoke with Retail Dive at the time. 

Throughout this period, Stage Stores was looking for help raising new capital. The company had been exploring a potential equity investment or asset sales since mid-2019, when it brought on new advisers. Its investment banker, PJ Solomon, reached out to 42 parties about a sale or new financing as well as another 16 "strategic parties," according to Crowley. But, she said, the pandemic crisis derailed those efforts.

The COVID-19 crisis also forced the retailer to temporarily close its stores, which led to a massive revenue hit. As it tried to shore up liquidity and avoid Chapter 11, the company asked its vendors for help in the form of longer payment terms, according to a memo to its vendor base obtained by Retail Dive.

Stage says its landlords helped tip the company into bankruptcy. After it closed all its stores in March because of regional and state orders, and racked up past-due rent of $31 million, many landlords started posting default notices and even locked the retailer out of its stores, threatening to evict it and dispose of inventory, according to Crowley. 

The threats, she said, amounted to "an existential threat" to the company's operations, and dealing with them "would have been a monumentally difficult task" without bankruptcy protection. 

As James Van Horn, a partner in Barnes & Thornburg's restructuring and insolvency practice, said in an interview, Stage likely filed for bankruptcy simply because it had to, as landlords kicked them out. 

Reopening has given the retailer some relief. After Stage Stores opened more than 540 of its stores, sales surged $20 million in the initial days, well above projections of just under $9 million, according to the company. Gordmans comparable sales were up 146% versus last year, suggesting pent up demand, the retailer said in a presentation. 

Not viable

Stage Stores filed for Chapter 11 with a forked plan: it will liquidate while also trying to sell itself. If a buyer emerges, the retailer will be saved. If not, it will disappear. 

Currently, 21 parties are actively assessing a purchase of one sort or another, with nine of those looking at a going-concern transaction that would keep Stage Stores whole, according to a presentation the company prepared for the judge in its bankruptcy case. (Another four are assessing a partial asset sale, and nine haven't confirmed what they're interested in.)

Perry Mandarino, head of restructuring and co-head of investment banking for B. Riley FBR, said in an interview that there is an appetite in the market even for bankrupt retailers in the current environment, especially among discount retailers and those with strong e-commerce operations. 

But that doesn't necessarily mean there is an appetite for Stage Stores specifically. As with Pier 1, which recently announced it would liquidate after it failed to find a buyer in bankruptcy, the company had tested interest for the business well before it filed, without luck. 

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"I don't think any retailer is going to want to take on Gordmans in this kind of environment, even if they have a burning desire to get into off-price or they thought, 'Wow, these are great store locations,' neither of which is probably true."

Neil Saunders

Managing Director, GlobalData Retail

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Van Horn noted the glut of commercial real estate properties available now as a result of the COVID-19 crisis. "I would be very surprised if there was a going concern bid for Stage Stores operations," he said. 

And while Gordmans may have carved out a geographic and demographic niche in the off-price space, Saunders said that "the spoils" of the sector "are going to go to the existing players in the market like T.J. Maxx, they're not really going to go to the Gordmans of this world."

The chances of another retailer taking on Stage is slim, in Saunders' view. "Most retailers are struggling to survive," he said, noting that most are pouring all available cash into keeping their own operations afloat. "I don't think any retailer is going to want to take on Gordmans in this kind of environment, even if they have a burning desire to get into off-price or they thought, 'Wow, these are great store locations,' neither of which is probably true."

Financial buyers like private equity firms looking to take on a distressed asset and turn it around might not offer much more hope. "It's just not something that is that viable," Saunders said. 

"The problem is you'd have to spend quite a lot on the business to keep the conversions going and really sort of reinvent and bolster Gordmans," he went on. "I think there's a lot of work that would be needed there to drive the business into growth and therefore make it more valuable to eventually sell on."

He added, "All of this has been made all the more unlikely by the fact that most people will run a mile from retail because, other than a few select players, this is not a great market."