U.S. retail sales fell 2.7% in December

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Retail carnage continued as government figures released Wednesday showed a record six months of sales declines, and December turned out even worse than analysts had predicted.

Sales fell by 2.7 percent in December from the previous month on a seasonally adjusted basis, according to the Commerce Department. Economists had predicted a 1.2 percent sales decline for December, but consumers held onto their wallets even tighter during the holiday season due to job losses and the credit crunch.

Also on Wednesday, two companies - including Gottschalks Inc. of Fresno - added to the growing number of companies filing for bankruptcy protection or going out of business.

Gottschalks, which operates 58 stores in six Western states, filed for bankruptcy with the hope of finding a buyer. Goody's Inc., a Tennessee clothing store chain that has no California stores, resorted to total liquidation in its second filing.

"The reality is this is the long, cold winter following a holiday season that didn't appear for retailers," said Greg Segall, a partner with Versa Capital Management, a private-equity firm that specializes in distressed sectors.

Reorganization experts predict the number of retailers that will file for bankruptcy will accelerate in the coming months, and many of these companies will be unable to survive and ultimately just go out of business. Companies typically file for bankruptcy protection with the hopes of emerging smaller, but solvent.

Shoppers have already seen the demise of such well-known retailers as Shoe Pavilion Inc., Mervyns LLC and Linens 'n Things. Circuit City Stores Inc., which filed for bankruptcy protection, is considering liquidation if it can't find a buyer within days. Other retailers are shuttering stores and reducing staff. Cost Plus Inc. of Oakland said last week it will close 26 stores and cut jobs at its distribution center and home office by 18 percent as part of a plan to save $21 million annually starting in fiscal 2009.

Luxury department store operator Neiman Marcus Group Inc., which posted a 27.5 percent drop in same-store sales for December, said this week that it is cutting about 375 jobs. Last week, Macy's Inc. said it will close 11 underperforming stores, which will affect about 960 employees.

Retail experts took Macy's closures in stride, saying shedding less profitable locations is a smart business move for such a large national chain. But they said some companies won't be able to stave off bankruptcy even if they close stores and employ other cost-cutting measures. And they expect smaller, regional chains like Gottschalks to have a tough time emerging from bankruptcy proceedings.

"In this economic environment, it will be very difficult for Gottschalks to be successful," said Helen Bulwik, managing director of New Market Solutions, a retail consulting firm in Oakland. "It is very difficult for a regional retailer today to survive. They just do not have the buying power of a large national retailer like Macy's or Kohl's or Target."

Thirty-eight of Gottschalks' 58 stores are in California. The bulk are concentrated in the Central Valley, a region that has been hit particularly hard by the housing crisis and the credit crunch.

The company, founded in 1904 by German immigrant Emil Gottschalk, said in a statement that it had negotiated a $125 million debtor-in-possession financing arrangement with a group of lenders and is looking for a buyer. Gottschalks said last week that its same-store sales, those at stores open at least a year, dropped 9.6 percent in December compared with the same month in 2007.

Harlan Platt, a turnaround expert and finance professor at Northeastern University College of Business Administration in Boston, said a growing number of Chapter 11 filings will turn into what he calls a Chapter 22 filing: a second bankruptcy that results in liquidation.

"The retail sector has always been one of the most problematic to reorganize because they are lacking in hard assets," he said. "Retailers have stores they lease, have merchandise sold on credit and they have a lot of debt. That's not a healthy combination."

While some retail losses are considered good for the overall economy - most experts say the United States is "over stored" - the expected closures are likely to have a ripple affect, hitting suppliers hard and leading to additional empty storefronts and shuttered malls.

Local retail expert Bulwik said she expects the central Bay Area, particularly San Francisco's Union Square, to weather the retail fallout better than many other parts of the state and country.

"However, as you get further out into more suburban locations where there has been a lot of building of malls, strip malls ... that's where we're going to see a lot of store closures," said Bulwik, referring to such areas as Antioch, Fairfield and Brentwood.

Platt, of Northeastern University, said a government bailout is not likely to be an option for U.S. retailers, who have to wait behind the financial and auto industries. "The line is so long, when they get to the front of the line, there won't be any money left," he said.