Orchard Supply Hardware Stores Corp., the operator of 91 hardware stores with a $205 million offer from Lowe’s Cos. for at least 60 of them, won approval to seek bids from liquidators to run going-out-of-business sales at eight underperforming stores and potentially another 22.
U.S. Bankruptcy Judge Christopher Sontchi granted the company permission to hold a June 27 auction where it will determine which liquidator offers the best return for running its store closing sales, at a hearing today in Wilmington, Delaware.
The eight closing stores “that are continuing to drain the precious cash” of this company have historically underperformed, have above-market leases and will not return to profitability, Richard Chesley, an Orchard Supply lawyer, told Sontchi. The closing sales will alleviate the cost of operating the stores, which have been cash negative for three years, and provide the company with liquidity.
San Jose, California-based Orchard Supply sought bankruptcy protection yesterday after sales declined as the California economy, where 89 of its stores are located, deteriorated and the U.S. slipped into the recession in late 2007. It was unable to weather the storm like its larger rivals Home Depot Inc. and Lowe’s, and sales dropped 21 percent from 2007 to 2010.
A heavy debt load from being spun off in 2011 from Sears Holdings Corp., which had owned about 80 percent at the time, exacerbated the situation.
Orchard Supply, founded in 1931 as a purchasing cooperative, listed $441 million in assets and $480.1 million in debt as of May 4, in Chapter 11 papers filed yesterday in U.S. Bankruptcy Court in Delaware.
A joint venture of liquidators Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC has offered a 74 percent recovery on assets to be sold, which would set the floor for bidding at the auction, court papers show.
Other liquidators need to submit competing bids by June 25, according to court documents. A hearing to approve the winning liquidator is scheduled for June 28.
The hardware retailer needs to choose a liquidator quickly to prepare the sales “in advance of the upcoming holiday,” celebrating the U.S. Independence Day on July 4, to maximize the value of the assets, Chesley said. The holiday is an important sales weekend for the home improvement and gardening industries.
Orchard Supply will have the option, until July 31, to conduct going-out-of-business sales at another 22 stores, with the same terms ultimately approved by the court at the June 28 hearing, according to court documents.
Lowe’s, the second-largest U.S. home-improvement retailer, has offered $205 million for at least 60 Orchard Supply stores, the company said in a statement yesterday. Lowe’s will also take on amounts owed to almost all of Orchard’s suppliers.
The Lowe’s offer will be tested at auction and will be used to set a floor for other potential buyers to try and beat. Orchard will seek court approval of guidelines to govern that sale process at a hearing set for July 8.
Mooresville, North Carolina-based Lowe’s is seeking to gain access to new customers in a smaller-store layout and add locations in California as the housing market recovers, having half as many California stores as its larger rival Home Depot.
The case is In re Orchard Supply Hardware Stores Corp., 13-11565, U.S. Bankruptcy Court, District of Delaware (Wilmington).