Why Payless ShoeSource Is Bankrupt: A Leveraged Buyout Disaster

Payless ShoeSource and two related Hong Kong-based logistics businesses recently filed for Chapter 11 bankruptcy in U.S. Bankruptcy Court for the Eastern District of Missouri.

Payless says it is using Chapter 11 bankruptcy court to reorganize the business, to strengthen its balance sheet and position the company for long-term success. Payless plans to close 400-500 stores. The company has about $838 million in debt, plus $250 million outstanding accounts payable, The Topeka Capital-Journal reported.

We all know traditional brick and mortar retailers are struggling, but also contributing to the company's financial demise is  Payless owners Golden Gate Capital and Blum Capital Partners. They have bled the company of its cash and loaded up the balance sheet with debt. Since the company’s leveraged buyout in 2012, Payless' owners have taken out nearly $350 million in debt-funded dividends, according to Moody’s reports. Shortly before declaring bankruptcy, Moody’s downgraded Payless’ debt to Caa2 junk status, with a negative outlook.

“Also constraining the rating is the company's history of highly-aggressive financial policies that includes nearly $350 million of debt-funded dividends since the company's 2012 leveraged buy-out,” Moody’s wrote on Feb. 2, 2017.

In 2012, an investor group, including Golden Gate Capital, Blum Capital Partners and Wolverine Worldwide, acquired Collective Brands in a $1.32 billion buyout, with Golden Gate Capital and Blum Capital Partners taking control of Payless, and the remaining footwear brands going to Wolverine.

Golden Gate Capital and Blum Capital took out $350 million in cash from Payless and loaded the company with debt at a time when retail was struggling from huge online competition.

Leveraged buyouts can be disastrous for companies because they can’t afford to pay all the bills plus additional interest expense on debt, when sales are declining.

A huge problem facing retailers today is customers who go into the stores, try on shoes, then walk out and buy the shoes online from a competitor. This happened to Best Buy until it offered price matching.

Brick & mortar retailers must find creative ways to compete, price matching is probably one solution. It may come to a point where retailers will have to charge a fee if someone is trying on clothes or shoes without buying any merchandise from the store.