How Payless Beat Back Bankruptcy (And What Retailers Can Learn)

There are rarely second acts in retail — particularly once bankruptcy is in play — but, every so often, the unexpected happens.

Last week, footwear retail company Payless ShoeSource was one of those unexpected stories, a company pulled into the bankruptcy whirlpool but getting plucked out before being sucked all the way down to the bottom. Payless managed to emerge from bankruptcy court protection a week ago, after sloughing off $435 million in debt and closing the curtains on 673 stores. The private equity-owned chain had filed for Chapter ll four-and-a-half months prior.

Getting into Chapter 11 bankruptcy has not been hard for retail players of late. In fact, some 14 retailers have sought bankruptcy protection since the start of 2016. Of that list, though, Payless is the first to actually, successfully complete a legal restructuring process.

The names on the bankruptcy list were once well-known, including retailers like The Limited, Wet Seal, Aeropostale, Rue 21, Bebe and Gymboree as just a short sampling of the ever-growing retail casualties in the last 18 months. Like Payless, all “mall brands” were once fed by the foot traffic inherent to their locations and the people drawn in by anchor stores. They now find themselves starved out by declining mall visits and consumers who are increasingly content to buy everything — from collectibles to cars — online.

Most mall brands have perished, but some, like Aeropostale, found a way to achieve life after death with a post bankruptcy buy-out and resurrection. Much of the news, though, has been fairly dreary in the sector. These retailers are victims of what we at PYMNTS like to call the physical retail death spiral.

But Payless, as of now, has found a way to fight back against the gravity pulling it down the spiral, and is now faced with the arguably more daunting challenge of climbing back up. CEO Paul Jones recently announced his retirement and replacement by an executive committee while a new CEO is sought. The committee includes chief financial officer Michael Schwindle, chief operating officer Mike Vitelli and board chairman Martin Wade III.

It seems Payless has been given a stay of execution, and a chance to clear its books and pursue a new path going forward.

Because, despite the big changes announced in leadership and store count, Topeka, Kansas-based Payless is still a mostly brick-and-mortar retailer that relies on those physical locations worldwide to distribute low-cost shoes to consumers everywhere. The chain still boasts stores in the U.S., Canada, Asia, Central America, South America and the Caribbean.

Though the firm does operate an online store, and has affirmed intentions to expand in Asia through the power of franchise agreements, it still faces a fairly fundamental challenge. During the bankruptcy process, Payless estimates it closed approximately 673 stores, those closures on top of the 273 or so it shuttered between 2016 and its initial declaration of bankruptcy in early 2017. All in, Payless has shut down more than 900 stores, with about 3,500 brick-and-mortar locations still operating. That lowers costs, of course, which combines nicely with the $435 million reduction in funded debt — an amount representing roughly half of what Payless was believed to have owed at the beginning of the process.

“We have accomplished our goals of strengthening our balance sheet and restructuring our debt load, positioning Payless to create substantial value for our stakeholders and achieve long-term success,” Jones said in a formal news statement issued Thursday.

But how, exactly, is Payless going to achieve its long-term success? That is a much murkier question.

Payless may have cut its overhead, but it has not announced the fundamental changes in direction or strategy it intends to make to confront a retail reality in which its model is not as attuned to consumer needs as it was 15 years ago. It is not alone in that struggle: Sears, Macy’s and Kohl’s have all demonstrated severe difficulties in notching turnarounds despite heroic efforts, and even players that have managed greater success in updating their brands for changing consumer needs — think Nordstrom on one end of the spectrum, JC Penney on the other — have had to close lots of locations and consider how to digitally streamline their businesses.

But the time to make those changes is imminent as pressure from retail reinvention’s most consistently successful player, Amazon, continues to ramp up at an aggressive pace. Amazon threw down the gauntlet to start the summer with its announced $13.7 billion planned acquisition of Whole Foods Market, and the hits have kept coming from there. As of Aug. 15, Amazon announced news it had added five new Instant Pickup locations, indicating a fairly clear intention to continue pressuring brick-and-mortar players by impinging on their ability to offer same-day immediacy of purchase as a benefit.

Payless deserves congratulations, especially since a retailer getting out of bankruptcy these days is much rarer than one falling into it. But, as the segment watches what happens next, it will be worth noting how Payless uses its second chance to hit reset on the model that landed it in bankruptcy court in the first place.