Closeout retailer Liquidation World Inc., plagued by mounting losses and a breach of its borrowing terms, seems to have had little choice but to sell itself for a near-liquidation price of 6 cents per common share.
In doing so, it's providing a Canadian entreé to Big Lots Inc., the U.S. retailer Liquidation World had hoped to emulate in its now-failed turnaround plan.
Big Lots will pay about $1.8-million in cash for the Liquidation World stock, obtaining the chain's 92 stores in the process. It will also make good on the company's debts and "normaliz(e) the working capital needs" of Liquidation World - two tasks that it estimates will bring its total investment to $36-million.
Big Lots, with 1,405 stores in 48 U.S. states, said in a statement it had "diligently studied and analyzed a number of opportunities or paths to enter Canada over the last couple of years" before seizing on Liquidation World.
Big Lots obtains closeout, liquidated and overstock inventory from wholesalers and manufacturers and sells it to customers in a modern retail setting, with a week-to-week consistency about the kinds of products it stocks.
Liquidation World, started 25 years ago in Calgary, has tried recently to adopt the Big Lots model. Under chief executive officer Seth Marks, a former Big Lots executive, the company has been remodelling or relocating stores, then rebranding them as "LW - Everybody's Outlet Store." The new locations were posting positive same-store sales earlier this year, while the older outlets were posting significant sales declines.
Ultimately, the company ran out of money to finish the job. A liquidity crunch in the second quarter "impacted its ability to refresh its inventory," the company said, which hurt sales. Revenue declined 21 per cent in the quarter ended April 3 from the prior year, and the net loss widened to $14-million from $2.9-million in the 2010 quarter. Liquidation World said it had defaulted on its primary operating loan.
One vendor, St. Thomas, Ont.-based Canadian Home Liquidators Inc., or CHLI, had been pressing Liquidation World over the last several weeks to make good on invoices from March, according to an e-mail exchange CHLI shared with The Globe and Mail. In a May 11 e-mail, a Liquidation World employee told CHLI, "Unfortunately we are not releasing payments on [outstanding]payables this week. We do not have the cash available to apply."
Liquidation World said a special committee of its board of directors recommended the sale to Big Lots after considering a number of factors, "including the operational results and the financial position of the company." Company directors, senior officers and some shareholders representing about 40 per cent of the company's shares have agreed to vote 'yes' on the deal.
Liquidation World expects the deal to close by July 31.