At 32 cents a share, how long can Bon-Ton survive?

Jon Harris/The Morning Call - If you have a quarter, nickel and two pennies in your pocket, you have enough to buy a share of Bon-Ton stock — which is why analysts are wondering how long the company can survive.

The department store chain’s stock hit a new low Wednesday, closing at about 32 cents a share on the heels of a report last week that said The Bon-Ton has a nearly 25 percent chance of defaulting over the next year.

Retail analysts say it’s just a matter of time. When they look at The Bon-Ton Stores Inc., the official name of the retailer co-headquartered in York and Milwaukee, analysts see a money-losing operation loaded with debt that hinders the company’s ability to reinvest and adapt to a difficult retail climate.

Because the chain doesn’t have many assets left to sell, “the most likely option is bankruptcy,” retail expert Howard Davidowitz said.

Bon-Ton officials did not respond to several calls and emails seeking comment.

Lehigh Valley residents remember The Bon-Ton as the chain that bought a large piece of the financially troubled Hess’s Department Stores in 1994. Bon-Ton bought 19 of Hess’s remaining 30 stores that year along with its Whitehall Township distribution center for $60 million. It’s the reason Bon-Ton has such a large presence here today, a footprint that includes stores at the South Mall in Allentown and Salisbury Township, the Westgate Mall in Bethlehem, the Palmer Park Mall in Palmer Township, on Hamilton Boulevard in Trexlertown, near Quakertown and Phillipsburg, N.J., and the distribution center in Whitehall.

The Bon-Ton employs 550 people within a 30-mile radius of the Lehigh Valley, spokeswoman Christine Hojnacki said in September.

The Bon-Ton’s fortunes have shifted since 2006, when it purchased for $1 billion a 142-store unit from Saks that brought the Carson Pirie Scott, Younkers, Herberger’s, Bergner’s and Boston Stores under the Bon-Ton umbrella. In recent years, declining sales have become the norm. In the fiscal year that ended Jan. 28, Bon-Ton’s annual sales decreased 4.3 percent to finish at $2.6 billion, the company reported. In addition, the company’s net loss for the year widened to $63.4 million, eclipsing the $57.1 million it lost in the prior fiscal year.

Still, Bon-Ton President and CEO Kathryn Bufano said in March the company was focused on reducing its costs throughout the year and expected to decrease its debt — reported as about $989 million as of Jan. 28 — by as much as $30 million by the end of this fiscal year.

But Bufano won’t be with the company much longer. On May 8 — 10 days before The Bon-Ton reported first-quarter sales of $536 million, a 9 percent decrease from a year earlier — it announced Bufano would resign Aug. 25 and be replaced by Chief Operating Officer William Tracy.

He will take control of a company that earlier this year nearly had its stock delisted by the Nasdaq stock exchange because it failed to maintain a value of at least $15 million for a period of 30 consecutive business days. The retailer’s stock closed at nearly $18.50 in early December 2013 and has been declining ever since.

While plenty of traditional brick-and-mortar retailers are struggling, The Bon-Ton is at a high risk of default, according to independent research provider CreditSights’ BondScore, a default risk model that covers 34 of the country’s 58 high-yield retailers.

Using data as of June 30, CreditSights concluded The Bon-Ton has a Credit Risk Estimate — an issuer’s one-year forward default probability — of 24.7 percent, meaning the company has a nearly 1 in 4 chance of defaulting in the next year. The next-highest is Sears, with a 20.2 percent chance of defaulting.

According to The Bon-Ton’s annual report, filed April 12, the chain operates 262 stores in 25 states. Of those, Bon-Ton only owns 25 stores. In addition, The Bon-Ton owns a distribution center in Rockford, Ill., but leases distribution centers in Fairborn, Ohio, and in Whitehall, the latter of which it sold and leased back from W. P. Carey & Co. Inc. in 1997.

Because The Bon-Ton doesn’t own the majority of its stores, the company doesn’t have much to sell and monetize, said Jeff Green, owner of Jeff Green Partners in Phoenix.

The Bon-Ton this year closed its department store at the Schuylkill Mall near Frackville and sold its store property there.

Despite that example, The Bon-Ton has largely avoided massive store closures, opting to shutter locations here or there rather than in large waves. A reason for that, Green said, is because the retailer can’t easily get out of leases.

He estimated a Bon-Ton store does $125 in sales per square foot, compared with the department store norm of $175 in sales per square foot. In addition to online competitors, Green said department stores also have been hit by off-price retailers such as Marshalls, T.J. Maxx and Ross.

Green said many of the malls that have a Bon-Ton can be described as small, tertiary, and in regional markets that tend to have limited options in replacing a large anchor. Many of those older malls that The Bon-Ton calls home have been eclipsed by large shopping centers able to attract more modern brands, he added.

That placement in mid-level malls far away from wealthy communities is a major problem for The Bon-Ton that can’t be fixed, according to Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm headquartered in New York.

“The core problem is their positions in these mid-level malls, which are a terrible place to be,” he said. “They are not the dominant store anywhere and when you have a business like that in this environment, you’re going to get killed.”

With much of its real estate already sold, it’s possible the chain could squeeze some value out of selling some divisions to stay alive a little longer, Davidowitz said. But the most likely conclusion, he believes, is bankruptcy.

“They’re in a position where they can’t do much,” Davidowitz said. “They don’t have money where they can reinvest in anything.

“It’s just a matter of time.”