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Wednesday, Feb 8, 2023

Fallas Plans to Get Back Up

Gardena-based discount retailer National Stores Inc. filed for Chapter 11 bankruptcy earlier this month in the face of a perfect storm.

But it wasn’t the same storm of digital disruption and e-commerce that’s knocked out many retail chains and forced others to adjust.

The problems facing National Stores, which owns 344 brick-and-mortar sites spread over several chains, amount to a tale of a troubled acquisition, bad weather and crimped cash flow that might seem nostalgic if it weren’t so difficult.

National Stores is most visible locally with its Fallas, Factory 2-U and Anna’s Linens chains. The stores primarily serve low-income communities and sell men’s, women’s and children’s apparel, shoes and household items.

The average price for products at its stores is $5 – and customers shop in person.

“Other retailers are incorporating entertainment, experience, innovative brand awareness in their stores,” said Frank Kaufman, national retail analyst at Seattle-based Moss Adams. “That doesn’t apply to National Stores. They’re trying to get low cost products in the hands of hard working people.”

Cuts to come

That’s no small task for a company with close to 10,000 employees across the continental U.S. and Puerto Rico.

National Stores’ bankruptcy filing on Aug. 6 indicated the company is expected to cut approximately 150 jobs in L.A. County, Orange County and the Inland Empire. Six of the 59 stores located in the region are set to close, according to company spokeswoman Jennifer Mercer.

The company plans immediate going-out-of-business sales at Fallas stores in Hollywood, Norwalk, Northridge, Burbank and Santa Ana.

The cuts are expected to total 74 stores companywide, driven by three factors: the acquisition of discount clothing chain Conway in 2014; a data breach that proved to be costly for the company and spooked its lenders; and weather conditions on the East Coast that temporarily shut down multiple stores.

Michael Fallas, chief executive of National Stores, said in a statement that the privately-held company had historically been profitable and sees a path back to the black through restructuring.

“Our goal is to emerge a reorganized company poised to compete in an evolving industry so that we can continue to serve the communities where we are rooted,” he said.

The company listed both its assets and liabilities in the bankruptcy filing as between $100 million and $500 million, according to court documents, but declined to give more specific figures about its balance sheet.

“That’s a range, we don’t know the specifics but I think it matters if assets are closer to $100 million and liabilities to $500 million. Or vice versa,” Kaufman said.

Growing pains

National Stores was founded in 1962 in downtown Los Angeles by Michael Fallas’ father, Joseph. The single-store operation grew with several acquisitions. It acquired 31 of the Weiner’s clothing store locations in 2001, and got 100 Factory 2-U stores in a 2004 deal. The 78 Conway locations came in 2014, and 40 Anna’s Linens locations – along with some proprietary brands – were picked up after that chain’s bankruptcy in 2015, court documents show.

The expansion strategy wasn’t all smooth sailing, however.

“The Conway acquisition did not go as expected,” said Mercer, company’s spokeswoman. “Conway stores were mostly on the East Coast and that increased operations, labor and distribution costs,” she said.

The company opened an East Coast distribution center in 2014 in a bid to cut costs in the region. The move backfired, and “rather than increase efficiency, (the distribution center) significantly impaired it,” according to the bankruptcy filing.

National Stores also took on New York-based Conway’s debt, hurting its profit margin. It is unclear how much debt came with the deal, but “the Conway acquisition majorly impacted liquidity,” according to Mercer.

National Stores said the strain on liquidity was worsened by the aftermath of a data breach that affected customers from July to December of last year, when information relating to more than 550,000 credit cards was allegedly compromised. Court documents show the data breach could cost the company up to $4.5 million.

“The company’s banks became concerned once claims started coming in so they tightened access to operating funds,” Mercer said.

Another hit came in the form of literal storms.

Hurricanes Harvey and Maria raked Puerto Rico and parts of the East Coast, forcing prolonged shutdowns at a number of damaged stores, which impacted revenue.

National Stores also owes around $220 million to its suppliers and has $42.8 million in unsecured loans from Fallas himself.

An important part of the restructuring, according to the filing, is to look at the company’s lease obligations. National Stores currently holds 360 store and distribution center leases and pays approximately $85 million annually for rent.

The company has secured $108 million bankruptcy loan from an undisclosed lender, the filing stated.

“That is in some case a vote of confidence,” Moss Adam’s Kaufman said. “There are some lenders with astute financial knowledge that are willing to put significant dollars to back National Stores.”

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