UPDATE: Wherehouse Seeks Chapter 11 Protection21 Jan, 2003 By: Kurt Indvik
Wherehouse Entertainment has entered into voluntary Chapter 11 bankruptcy reorganization to “facilitate capital restructuring and streamline operations” of the struggling Torrance, Calif.-based retailer.
Executives say the move is part of the company's ongoing review of all its operations that recently saw the closure of 30 stores. The company said it expects to close an additional 120 unprofitable or underperforming stores within the next few months. That would leave the chain with 250 stores that will “form a solid basis for a return to profitability,” said the statement announcing the Chapter 11 filing.
“After careful evaluation of various restructuring and recapitilization alternatives, we concluded that a voluntary reorganization under Chapter 11 presents the most effective means to restructure the company's operations, strengthen its capital structure and position Wherehouse to compete effectively in the new music industry,” said Wherehouse president and CEO Jerry Comstock.
Increased illegal downloading of music and continued pressure from major discount retailers to sell products below cost has resulted in significant sales declines for Wherehouse.
The announcement supports concerns a Morgan Stanley analyst raised in the wake of Best Buy's announcement that it was closing 120 of its Musicland units -- 90 Sam Goody stores and 20 Suncoast Video outlets.
That announcement “serves to highlight our concern with music and video retailer credit, including Trans World Entertainment (TWMC), which is a very large mall tenant," Morgan Stanley analyst Matt Ostrower told Dow Jones, adding TransWorld is on the firm's "Watch-list" of retailers that face a potential credit risk. Trans World operates stores under the For Your Entertainment, Coconuts and Strawberries shingles.
Ostrower faulted not only the transition to home-burned music CDs, but Wal-Mart's muscling into the DVD sellthrough arena and cannibalizing mall-based retailers.
Other large mall-based music retailers include Record Town, Tower Records and Virgin Entertainment.
During its reorganization, Wherehouse vendors will be paid for post-petition purchases of goods and services per the company's normal payables procedures, and the company has asked the court for permission to continue customer policies regarding merchandise returns and to honor outstanding gift cards.
Management plans to use the restructuring initiatives to reinvest capital in its stores to create “a more interactive environment” for its customers, including increasing listening availability and installation of interactive kiosks. Comstock said neither customers nor employees at the remaining stores would notice any difference in operations as a result of the filing.
Wherehouse reported assets of $228 million against debts of $222.5 million in the voluntary filing.
20th Century Fox Home Entertainment headed the list of the largest unsecured creditors, owed $2.6 million. Koch International, also a video product supplier based in Port Washington, N.Y., followed in the No. 2 spot with $1.2 million in trade debt.
The retailer also reported owing $778,643 to Columbia TriStar Home Entertainment and $498,334 to MGM Home Entertainment. Sensormatic Electronics Corp., which provides theft control services, is due $226,221, according to the filing. In addition, the privately held company listed debt consisting of more than 11 million shares of common stock as of mid-September.
The retailer also petitioned the court to take steps that would keep the 400-store chain in business during the reorganization process, including authorizing the payment of employee wages and prohibiting utilities from discontinuing service.
Wherehouse operates 370 stores in 23 states under the names Wherehouse Music, Tu M·sica and XChange.
Holly J. Wagner and Joan Villa also contributed to this report.