FAILURES: Grant Goes Under

By catering to budget-minded customers, W.T. Grant Co. built itself into one of the nation’s biggest general merchandise retailers. But last week, Grant, which operates 1,069 stores, became the second biggest U.S. company ever to enter bankruptcy proceedings (the biggest was Penn Central Transportation Co. in 1970). The beginning of the end came when Chairman James G. Kendrick, who has been fighting for more than a year to keep the firm afloat, disclosed that the company now had a “negative net worth.” In other words, its debts exceed its $1 billion assets. Then the company filed a petition under Chapter 11 of the Bankruptcy Act. The move will enable Grant to continue in business for a time longer, under a court-appointed trustee, while it seeks to make new arrangements for paying its creditors. Though the banks that hold most of Grant’s debt set no specific deadline, they agreed to go along with the company at least for the moment. Eventually, after assessing the chain’s efforts to close unprofitable stores, slash expenses and improve sales, the banks could either permit Grant to continue in operation or press for the company’s liquidation.

If Grant is to have any chance for survival, it needs a strong surge in Christmas sales. But that may prove difficult to achieve. As recently as last month, Grant’s banks renewed $541 million in loans to the company. To ensure that the stores remain well stocked, the banks agreed to subordinate their own claim and let the chain’s merchandise suppliers have first call on $300 million of the company’s merchandise assets. Even so, some vendors still dragged their feet in supplying the chain, presumably because they were not sure they would be paid.

Grant’s woes are a consequence of two key management decisions. The first was hyperexpansion: between 1969 and 1973 the chain opened no fewer than 376 outlets, many in poor locations. One reason was simply ineffective planning, but there were other causes. The company sued at least three of its executives for allegedly accepting bribes to lease inferior sites at inflated rents. The second decision: Grant, which started as a 25 cent variety operation in 1906, began broadening its lines of clothing and home furnishings to include higher-priced merchandise, especially big appliances. To boost sales, the company expanded its credit operation. But while Grant sank deeper and deeper into debt to buy inventory, it had to wait for its customers to pay their bills. Then the recession hit, sales dropped, and uncollectable accounts and unsold goods piled up.

Big Backlog. The company in the past year has dumped the old top management, closed 137 of the chain’s 1,206 stores and cut its work force of 85,000 by 23,000. Under Kendrick, Grant is once again emphasizing its traditional less expensive lines of apparel, beauty products and home furnishings. But the chain is still carrying a mountainous backlog of air conditioners, refrigerators and other big appliances. Even if Grant can squeak past the threat of a bankruptcy liquidation next year, its future survival could well depend on how profitably it manages to sell off its inventory of high-priced appliances.