Debt-burdened McCrory hints at bankruptcy Variety store chain says it can't pay debt due today

February 15, 1992|By Michael Dresser | Michael Dresser,Staff Writer Dow Jones News Service contributed to this article.

McCrory Corp., one of the last major retailers clinging to the declining variety store business, told creditors it was unable to pay $3.4 million in debt due today.

Analysts said the announcement could foreshadow a Chapter 11 bankruptcy filing.

The York, Pa.-based company said it was "examining all of its restructuring options."Paul Weiner, the company's chief financial officer, declined to comment.

McCrory's announcement comes two months after the chain said it would close 229 stores, leaving it with about 820 across the country. The company operates about a dozen McCrory's and a half-dozen G. C. Murphy stores in the Baltimore area.

The company also plans to create a reserve of between $80 million and $120 million to cover costs associated with the closing of the 229 stores, according to a recent filing with the Securities and Exchange Commission.

McCrory also disclosed in the SEC filing that it does not expect to have sufficient funds for payment of about $75 million of its variable-rate debt, which bondholders said they would cash in July 15, two years before they mature.

McCrory's joins a growing list of retail companies, led by R. H. Macy Co. and Zales Corp., that have defaulted on debt payments since a sluggish holiday sales season. Both Macy and Zales have since filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

Howard Davidowitz, chairman of the Davidowitz & Associates retail consulting firm in New York, said McCrory's has been attempting to restructure without a bankruptcy filing for some time, apparently unsuccessfully.

"I think it's going to end up in Chapter 11,"Mr. Davidowitz said, adding that he doubts the restructuring would be successful because McCrory's problems run deeper than high debt levels.

"Clean up the balance sheet and I don't know if you have a viable company," he said.

Mr. Davidowitz added that McCrory is a "pure variety play" in a market where the old-fashioned five-and-dime is being chewed up by large discount chains.

The biggest of those, Wal-Mart Stores, recently began its expansion into McCrory's home territory by building a giant new store next to McCrory's corporate headquarters in York.

"You build a Wal-Mart,what sane person would go to a variety store?" asked Mr. Davidowitz, citing the discount chain's lower prices and greater selection. "You'd have to be certifiably crazy."

McCrory's problems have been compounded in recent months by the growing reluctance of suppliers to send merchandise except on the harshest credit terms.

Last month, after a poor Christmas sales season, McCrory's President Robert M. Spencer met with suppliers and lenders in New York in an apparently futile attempt to persuade them to stand behind the company.

McCrory's has been ringing up steady losses for more than a year. Over the first three quarters of 1991, it lost $42.3 million, about the same as in the same period of 1990, as sales fell 7.2 percent, to $961 million. Fourth-quarter figures have not been reported, but they are unlikely to bring any relief.

The McCrory's announcement yesterday directly affects holders of its 6.5 percent convertible subordinated debentures, which are scheduled to mature tomorrow.

McCrory's said it would not pay either the $3.4 million principal or the interest on the debentures. A debenture is a company's unsecured promise to pay a creditor.

In McCrory's case it is convertible to stock. Debenture holders are generally the least senior debt holders -- just one step above stockholders.

McCrory is owned by Riklis Family Corp., headed by Meshulam Riklis, a native of Turkey who emigrated to the United States from Tel Aviv, Israel, in 1947. Mr. Riklis has a long history of controversial business dealings, and one of his bond offerings in the early 1980s is said to have given rise to the term "junk" bonds, conferred by Michael Milken, who would later become known as Drexel Burnham Lambert's junk bond king.

Mr. Riklis' complicated financial empire has been torn by deep financial troubles in recent years. Last year, one of the family's other companies defaulted on $400 million in bonds, prompting several debt rating companies to urge suppliers to be cautious about extending credit to McCrory's.

Mr. Riklis gained ownership of McCrory Corp. in 1990 as part of the restructuring of McCrory's former parent, E-II Holdings Inc., after it ran into debt problems.

As part of that settlement, Mr. Riklis stepped aside as chairman of E-II -- which also owned the Samsonite luggage and Culligan water softener companies -- but retained McCrory.

Besides McCrory's and G. C. Murphy, the corporation also operates under the names J. J. Newberry, H. L. Green and S. H. Kress.

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