Update: Service Merchandise Faces Chapter 11

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Service Merchandise, Nashville, TN, said last week that it expects to file for Chapter 11 bankruptcy protection before the end of the month.

The troubled retailer's board of directors voted in favor of filing a voluntary petition for bankruptcy protection after a notice it received indicating that five of its vendors were planning to request an involuntary reorganization of the company. The five vendors are owed a combined $8.2 million, according to court documents, and include Samsonite Corp., Denver, and Remington Products Co., Bridgeport, CT.

Spokeswoman Ann Julsen confirmed that Service Merchandise had negotiated a debtor-in-possession financing agreement with its key creditor, Citibank U.S.A., which was officially approved March 17 and will allow it to continue to borrow against its existing $750 million revolving credit facility without regard to the reorganization petition.

The 39-year-old chain has experienced financial problems in recent years. In 1998, it began redesigning many of its 347 stores as it moved toward becoming a more traditional retailer after years of operation as a showroom cataloger.

In December, it tapped Paradigm Interactive, the Internet marketing division of Paradigm Direct Marketing Inc., as its online agency of record to redesign its Web site and begin integrating a more "customer-focused" image in the online world as well. In February, the company started closing 141 underperforming stores. And three weeks ago, it announced 300 layoffs, reducing its work force to 24,700.

No more dismissals are planned, Julsen said, and all other retail outlets are expected to remain open unless the court orders it to act otherwise.

Commenting on the state of the catalog and retail merchandising industry in general, David C. Hochberg, vice president of public affairs at Lillian Vernon Corp., Rye, NY -- a company that has experienced its own share of organizational challenges -- said, "Most retail analysts will tell you these days that America is over-retailed and overcataloged. To survive and thrive in this environment, you have to have some unique service or product that helps you capture consumer dollars."

For the nine months ended Sept. 27, Service Merchandise reported a loss of $68.5 million on sales of $1.88 billion.

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