Merry-Go-Round seeks bankruptcy protection

January 12, 1994|By Timothy J. Mullaney and Ross Hetrick | Timothy J. Mullaney and Ross Hetrick,Staff Writers

Merry-Go-Round Enterprises Inc., the fashion retailing empire of Baltimore folk hero Leonard "Boogie" Weinglass, yesterday sought protection in bankruptcy court after failing to reach an agreement with its lenders.

The filing, in the U.S. Bankruptcy Court in Baltimore, seems likely spark a sharp restructuring of the company Mr. Weinglass built, but it also puts the 52-year-old founder back in the top day-to-day role at the company. Mr. Weinglass, who had been semi-retired since 1982 before returning to the company as a consultant last fall, will retake his post as chief executive officer, replacing Michael D. Sullivan, who will remain as president.

No stores will be closed immediately because of the bankruptcy filing, and operations will continue as normal at the chain's 1,445 stores.

What's farther ahead for Merry-Go-Round is less clear. Company officials refused to speculate yesterday about what size or shape the company will take as it struggles to emerge from Chapter 11 reorganization.

"The only stores identified to close at this point are the ones previously announced," said Robert J. Reiners, director of financial administration at the Joppa-based retailer. "It's way too soon to talk about a plan of reorganization."

But a leading retailing analyst, Peter Schaeffer of Johnson Redbook Service in New York, said Merry-Go-Round may close as many as a third of its stores, far in excess of the 80 the company has said it plans to close as leases expire.

Merry-Go-Round, as recently as 1991 the toast of Wall Street because of its keen nose for youthful fashion trends, fell into a cash-flow crisis by overestimating the appeal of "hip-hop" clothing in the fall retailing market. As America's young seized on "grunge" fashion, with its muted earth tones and flannel, Merry-Go-Round had stockpiled millions of dollars' worth of brightly colored apparel patterned after clothing popular with urban black youth.

"They could have had flannel coming out of their ears, but if you went into their stores you couldn't find flannel," Mr. Schaeffer said. "If you have one store in Soho, it's one thing. If you have 1,400 stores, many of them in Middle America, you can't be too extreme."

The mistake forced the company to take a $35.1 million charge to compensate for the lower-than-expected value of the hip-hop clothes, which the company had to discount heavily to sell.

Another problem was the company's May 1993 acquisition of the Chess King chain from Melville Corp. of Rye, N.Y., for $46.2 million. "Melville couldn't do it for years, and Merry-Go-Round bought it at the worst time to get into the young men's [apparel] business," Mr. Schaeffer said.

But Mr. Schaeffer and others said Merry-Go-Round is suffering from a temporary cash flow squeeze rather than a long-term insolvency. Indeed, the company said the bankruptcy petition lists assets of $463 million and liabilities of only $265 million.

In the meantime, the bankruptcy filing will make it easier for the company to get the credit it needs to buy inventory for the spring season. The bankruptcy laws give priority in repayment to creditors who give the company credit after Chapter 11 bankruptcy goes into effect.

That preference, plus $90 million in cash the company hoarded in part by skipping most of its scheduled Dec. 10 payments to vendors and a $125 million credit line it lined up yesterday through the CIT Group of Livingston, N.J., should ensure that Merry-Go-Round has the money to pay its short-term bills.

Merry-Go-Round's stock was at $2.625 a share yesterday, having fallen from $18.125 on Dec. 8, 1992.

Mr. Weinglass resumed control of the company's merchandising operation Dec. 1, and that will remain part of his responsibilities as chief executive, Mr. Reiners said. But his long absence has raised doubts.

"They need to hire a new chief merchant, and I don't think Lenny Weinglass is the guy," Mr. Schaeffer said. "He's been out of the business for 10 years."

Merry-Go-Round employs about 1,080 people at its Joppa complex, making it the second-largest employer in Harford County. Merry-Go-Round has been teetering on the edge of bankruptcy since at least November, when its same-store sales -- sales at stores open for at least a year -- fell 23 percent. The company missed most December payments to suppliers and to factoring companies, which buy at a discount the debts retailers like Merry-Go-Round owe clothing manufacturers.

In December, same-store sales were down 16 percent, and Merry-Go-Round reportedly sought permission to impose a nine-month moratorium on payment of its debts to vendors and factoring companies.

Since December, Merry-Go-Round has been trying to restructure debt it owes to banks led by Signet Bank/Maryland, as well as bondholders and trade creditors.

AT A GLANCE

Headquarters: Joppa

Employees: 13,911

Sales (1993): $877 million

Income (1993): $61 million

Cash on hand: $90 million

Assets*: $463 million

Liabilities*: $265 million

Stores: 1,445 in 44 states

Store names: Merry-Go-Round, Attivo, DJs, Dejaiz, Cignal and Chess King

* As of Nov. 27

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