Concept Branding Group Managing Partner Tom Kelley interviewed by San Francisco Business Times on current retail environment

October 24, 2008 SAN FRANCISCO BUSINESS TIMES

Mervyns LLC will begin liquidating merchandise at its remaining 149 stores about Nov. 1 as it prepares to shut down operations a few months short of its 60th anniversary.

The Hayward-based department store chain, which should close its door by early January, was not just another retail victim of the current economic crisis, according to industry observers. They contend poor management and a four-year-old purchase deal by an investment consortium that left it paying exorbitantly expensive leases on its stores also contributed to its failure.

In September, Mervyns LLC sued the investors who purchased the retail chain for $1.2 billion in 2004 from Target Corp. -- Sun Capital Partners Inc., Cerberus Capital Management LP and Lubert-Adler and Klaff Partners LP -- alleging that the investors and Target devised complex real estate transactions in order to gain control of the retailer’s stores, then lease them back at “substantially increased rates.”

It sought the return of $58 million in transaction fees and other damages from the investors and Target, as well as a court order permitting Mervyns to reclaim its real estate.

Roy Berces, group manager of communications for Mervyns, said the original deal struck by the investors and Target was instrumental in the company having to file for Chapter 11 bankruptcy protection in July.

But the suit and a $465 million line of credit from a lender group led by Wachovia Capital Finance Corp. extended last summer proved too little, too late to save the struggling chain, which which opened its first store in San Lorenzo in 1949.

“In order to succeed, a retailer cannot have too much debt or too much overhead,” said George Whalin, president of Retail Management Consultants in Carlsbad. “Certainly not so much that you can’t buy merchandise, as happened to Mervyns.”

Whalin said the real estate deal devised by the investment consortium is what eventually doomed the value-oriented retailer, which he said should have been faring reasonably well despite the slumping economy. Even in a turnaround situation like Mervyns, Whalin said “fairly deep-pocketed investors” find a way to make things work.

“The last five or six months have been tough on all retailers, but discounters and value-oriented companies are doing OK,” Whalin said. “Mervyns should have been in that group, if it wasn’t for the usurous rents it was being charged for its stores. Someone at these investment companies had to have known turning Mervyns into a cash cow was not going to lead to a good outcome.”

Tom Kelley, a former Mervyns executive who now runs Concept Branding Group, a retail consultancy based in Washington D.C., took an even harsher tone.

“During the past few years, there were no real indications that senior managers were making any of the right moves,” Kelley said of the revolving door of CEOs at Mervyns LLC -- four in four years. “If anyone tries to blame this on the economy, shame on them. It’s a sad story when leadership is so ineffective.”

Kelley criticized the current CEO, John Goodman, former manager of the successful Dockers apparel line for Levi Stauss & Co. of San Francisco, who took the top Mervyns jobs only last April.  “When he got involved in this and saw this complex web of buying properties and then leasing them back (to Mervyns) at exorbitant rates, he should have walked away from it,” he said. “Instead, he kept saying for the past six months (the company) was going to survive, knowing that the store (lease costs) were impossible to meet.”

Kelley said even Vanessa Castagna, brought in by the investors in early 2005 because she was highly regarded in the retail industry for having led a turnaround at J.C. Penney Corp. Inc., could not repeat her success at Mervyns because of the handicaps. Castagna abruptly stepped down in early 2007.

Even before it was saddled with high lease costs, Kelley said “neglect of the Mervyns’ brand” by former parent Target, which owned the East Bay retailer for 26 years, began the retailer’s slow decline.

“They got away from keeping the brand distinctive and keeping the company involved in the community,” he said. “Once a retailer loses touch with its community, its chances of success are very slim.”

Mervyns will use an outside professional services firm to help it liquidate its merchandise.

Goodman, who was not available for comment, said in a company press release he was confident the going-out-of-business sale would “drive significant traffic to our stores.”

“We are disappointed with this outcome but (Mervyns’) declining liquidity position and the extremely challenging retail environment, together with the fact we have exhausted all other possibilities, requires that we take this action.”

Berces would not comment on how many people will lose their jobs, or whether severance pay or job-search assistance will be made available to employees.

Copywright, San Francisco Business Times