Friday, January 16, 2009

Collapsing (Big) Box
Circuit City is liquidating and closing all its remaining stores. This comes on the news of Goody's Family Clothing's decision to eliminate all its 287 stores. And before these recent announcements Linens & Things filed Chapter 11 and closed all its stores in 2008, Mervyns closed all its remaining stores by the end of 2008, and Office Depot plans to close more than 120 stores in 2009. And these are just a few from a quick Google search. This wave of liquidations is going to leave some big holes in many shopping centers.

There is a large amount of irony in this situation. Banks were eager to lend money to private equity firms that leveraged up the retailers (and in turn took out large amounts of compensation while stripping value). Banks also eagerly lent money to real estate buyers that liked the big box retailers. So, the retailers had too much debt that could not be supported in a slowing economy and had to close, and the real estate owners can't make debt payments because tenants are closing. Banks are losers on both ends. It makes it easier to understand why Citigroup and Bank of America are getting federal bailouts and their stocks are trading at levels that question whether they can continue in business.

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