Discount retailer faces Chapter 11 bankruptcy or liquidation

You would think that a struggling economy would be good for discounters. That has been true for some players including Walmart and, to a lesser extent, Dollar General, but many low-price retailers have faced massive struggles.

Tuesday Morning, and Christmas Tree Shops — two retailers built around the discount treasure hunt model — filed for bankruptcy and were not able to right the finances. Both companies ended up being liquidated after their Chapter 11 filings turned into Chapter 7 auctions. 

Related: Chapter 11 bankruptcy on table for nationwide restaurant chain

Those two companies are not the only discounters that have struggled. Dollar Tree (DLTR) will be closing 600 stores under its Family Dollar brand. It has also moved away from the $1 price limit charging between $1.50 and $7 for items in its stores.

That, as you might imagine, creates branding problems for the chain. but it has become common in the dollar store space. Dollar General (DG) , which has over 19,000 stores, has never been a pure dollar store and has items at various prices.

Dollar stores, and other discount chains, have struggled because their generally low-income customer base has been hit hard by the economy. These stores are facing a sort of double-edged sword that's making their operations more challenging.

"Most now sell food products that offer the retailers low margins. Still, everyone needs to buy food. But it’s the other items that low-income consumers are passing up as they try to make ends meet," Consumer Affairs reported. "Many consumers are passing up things like balloons, greeting cards, and craft supplies because they need money for the essentials. So inflation hurts dollar stores in two ways – it raises the cost of their inventory while discouraging their customer base."

That combination appears ready to claim another victim.

99 Cents Only Stores have a storied history

A chain with a storied history, 99 Cents Only Stores started with a simple idea.

"The stores date back to the 1960s when the company's founder, Dave Gold, inherited a tiny liquor store in downtown Los Angeles and decided to run a test by selling bottles of wine at a fixed price-point of 99 cents. The test was an instant success. Dave thought selling everything in the store for 99 cents would be hugely popular," the company shared on its website.

99 Cents Only Stores grew to over 370 stores in four states with two distribution centers in California and Texas, 99 Cents Only Stores became the leading extreme value retail chain in the Western United States. It has also greatly expanded its merchandise offerings 

"The 99 Cents Only Stores serve communities with fresh produce and a wide assortment of quality products, from everyday household items to fresh produce to an exciting assortment of seasonal and party merchandise, including decorations, costumes, and gifts," the company posted.

And, while the retailer retains the name, it now sells many items for more than $0.99 but it uses the gimmick of all prices ending with $.99

99 Cents Only Stores face bankruptcy

While it's a private company, 99 Cents Only Stores has made moves over the past six months. Bloomberg Distressed Debt Reporter Erin Hudson shared some of its financial moves on her LinkedIn page in September.

"99 Cents Only Stores by one measure of earnings lost $27 million, down from an $8 million loss the year before. The dollar-store chain also saw its gross margins fall 5% and attributed the majority of the decline to inventory shrinkage," she wrote.

The company also sold its Commerce, California distribution facility for $188 million after the quarter ended and received a $21 million promissory note for a three-month term to improve liquidity.

Now, the chain has been considering a Chapter 11 bankruptcy filing or perhaps even a liquidation, according to a new Bloomberg story.

"99 Cents Only Store LLC is considering a bankruptcy filing as the discount retailer faces a liquidity shortfall, according to people familiar with the situation," the news service posted. "The more-than-370-store company is also weighing potential liquidation since a sales process for some of its assets has stalled, said the people, who asked not to be identified discussing a private matter. Discussions are ongoing, multiple options including an out-of-court agreement are being considered and stores remain open, they added."

A Chapter 11 bankruptcy filing could come as early as April, according to the report.