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Much like the troubled convenience store climate of the late 1980s, when big-name chains such as 7-Eleven, Cumberland Farms, Circle K and Dairy Mart were driven into bankruptcy by overextended debt resulting from multiple acquisitions, traditional c-store operators again are succumbing to market pressures.
Clark Retail Enterprises Inc. last month became the sixth chain with 170 stores or more to file for Chapter 11 bankruptcy in the past 23 months. Clark, like the companies before it, was in full acquisition mode just a few years ago. But what the Oak Brook, Ill.-based company found is that paying off large debt in a recession-oriented economic climate is difficult, if not impossible.
As part of its reorganization plan, Clark has received $56.2 million in debtor-in-possession (DIP) financing from its largest shareholder, Apollo Management LP, to support operations and the payment of vendors and employees. Clark's upscale White Hen Pantry Inc. subsidiary, which has more than 250 franchisees in the Chicago area, was excluded from the filing.
Despite the stigma associated with bankruptcy, the courts could be a useful tool for restructuring in the right situation. Clark, at least ostensibly, is doing it right, according to Paul Sands, a financial analyst and partner for The Spectrum Capital Group LLC in Albuquerque, N.M.
"Clark's filing took a lot of people by surprise, but from what we can see, they have done a good job staying in constant contact with employees, suppliers and vendors to keep the stores open and the line of communication open," Sands said. "Clark's ability to use [bankruptcy] as a strategic option to write down debt, acquire additional equity from investors and renegotiate with vendors to stabilize its financial situation was wise. They appear to have handled the process with class."
But while lauding the company for the way it approached restructuring, Sands warned that Clark, and other highly leveraged chains for that matter, are far from being in a state of stability. "Convenience store valuations are declining, as are margins on key categories. That makes it difficult not only to see a return on investments in new stores and acquisitions, but also to manage debt," he said. "With a decreasing amount of capital available from specialty lenders to the [convenience store and petroleum marketing industry], if this continues for a prolonged period, it will have a devastating effect on chains that borrowed heavily to finance growth.
"I suspect it's going to get worse before it starts getting any better."
John Matthews, Clark's vice president of corporate communications, said the filing had an immediate impact as the company begins its restructuring process. The cash infusion "allows the company to alleviate its short-term liquidity issues and assure the continued flow of products to its stores while it develops a plan to stabilize its financial situation."
Clark Retail, with some 1,200 stores, was the great consolidator of the Midwest, acquiring White Hen Pantry, Wareco Services LLC and Minit Mart Foods LLC. In two years, the upstart retailer picked up 500 stores in eight deals, placing it among the elite c-store chains in the country, with more than 1,300 units and $2.5 billion in annual sales.
But times have changed. Clark has been quiet the past 12 months as rivals Marathon Ashland Petroleum LLC and Alimentation Couche-Tard Inc. stepped up their presence in the central United States. Moreover, many of Clark's suburban outlets are under increasing pressure as quick marts and gas pumps sprout in front of big-box competitors Costco, Dominicks and Meijer.
Matthews said he is not sure whether the company would be forced to close any On the Go or Oh! Zone convenience stores or lay off any employees. "We are constantly reviewing the efficiency and performance of our business, based on business conditions and overall operational efficiency," he said. "Any closings of retail outlets will result from operational needs.
"Going forward, the company may have to make adjustments in its work force, depending on business conditions and the need to improve overall operational efficiency. Any work force reductions will be the result of operational needs, and not necessarily directly attributable to the Chapter 11 filing."