November 6, 2017
Payless ShoeSource has eliminated half of its $847 million in debt and is moving forward with plans to open new stores in Latin America, including 22 in Nicaragua , the Dominican Republic, and Peru, as well as venturing into new markets in Asia. As one of the largest stores to ever emerge from bankruptcy, they are using a risky strategy that sounds counter-intuitive in a crowded retail market amid burgeoning competition from online stores.
Despite having only 400 stores in Latin America, the region boasts 40 percent of the chain’s global profit, the most growth for the company. Payless’ strategy will focus mostly on bricks-and-mortar stores in a highly competitive US market with record store closings, bankruptcies of large franchises, and fierce competition from e-commerce companies, such as Amazon.
The company closed approximately 700 mall-based stores over the course of the bankruptcy but will open four new mega stores in the US on top of their 3,200 existing global locations. The corporation will invest $234 million during the next five years of its expansion, including improving its online sales. Because Payless relies on customer loyalty and repeat customers, they don’t worry about in-store sales suffering from competition with e-commerce.
Emerging from federal bankruptcy provides the company with better terms, vendor contracts and lease agreements. During bankruptcy, many landlords reduced rent by up to 50 percent while vendors increased trade credit by 60 to 75 days. However, the company’ s past financial woes and the competitive retail space still leaves a small margin for error and doesn’t take into consideration any potential negative surprises.
According to Thomson Reuters LPC data, while Payless slashed its debt in half during its bankruptcy, $280 million of new term loans carry yields between 7 and 9 percent, similar to other struggling retail chains, but still above the average term loan yields of 3.6 percent.
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