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Sunday, 30 August 2015 22:00

Family Christian's Next Chapter: Niche retailer emerges from bankruptcy with plan for modest growth and profitability

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GRAND RAPIDS — Despite a prolonged, controversial and contested bankruptcy process, Grand Rapids-based Family Christian Stores has emerged from Chapter 11 with a humble growth strategy and the backing of nearly all of its former creditors.

The sale of the Christian product retailer’s assets to FCS Acquisition LLC closed on Aug. 11 in a deal worth $52.4 million to $55.7 million, according to court records. The transaction keeps the niche retailer in familiar hands: Richard Jackson, who was chairman of the entity that entered bankruptcy, also controls FCS Acquisition. And the senior management team of the new

Family Christian is much of the same team that took the company into bankruptcy.

While Jackson’s role early on in the six-month bankruptcy process caused some of the controversy, in the end more than 99 percent of company’s creditors supported the plan. Legal experts said getting that many creditors on board made for a somewhat unprecedented scenario, particularly since all the parties took losses in the deal.

The reason creditors supported the sale to Jackson: Unlike other bidders who would have liquidated the company, FCS Acquisition’s plan will keep the majority of the retailer’s 266 stores open, providing publishers and other vendors with an important industry outlet where they can continue selling their products.

“We need (multiple) outlets in our industry,” said Curtis Riskey, president of Colorado Springs, Colo.-based Christian Booksellers Association. “Family Christian is the largest chain, so it’s important that we retain those outlets. For the suppliers that were part of the proceedings, to be able to keep doing business with their largest customer is important.”

Moreover, had Family Christian been liquidated, vendors and landlords would most likely have received nothing because all the assets would have gone to secured creditors first, said Robb Wardrop, an attorney at Grand Rapids-based Wardrop & Wardrop PC.

Wardrop represented some of the creditors and landlords in the proceedings.

“They were the ones with the gun to their head,” Wardrop said, referring to the publishers’ support of the sale to Jackson’s new company. “They must have come to the conclusion that this alternative was better than to lose their source for selling the books.”

Everyone involved in the case got some, but not nearly all of what they wanted, which is the way Chapter 11 proceedings are supposed to work, Wardrop added.

With the bankruptcy process complete, turnaround experts say the company faces another daunting task: modernizing and turning around its business.

“The turnaround is just beginning, and making it through a turnaround is just as hard,” said Dan Yeomans, president of Amicus Management Inc., a Grand Rapids-based turnaround firm that was not involved with the Family Christian case. “The hardest thing about making it through a turnaround is changing behavior. That takes a lot of work. We’ll find out if they are willing to adapt to changes in the market.”

‘Not a high-growth business’

In an exclusive interview with MiBiz, Family Christian CEO Chuck Bengochea said the company’s senior management team plans to execute on a strategy it believes will return the troubled retailer to profitability.

Aside from closing approximately 15 of the company’s stores, the management team’s agenda includes better defining the Family Christian brand, enhancing the look and feel of stores and shifting to a hybrid e-commerce sales-and-distribution model.

While the retailer of Christian books and gifts has long eschewed e-commerce because it typically offers lower margins, the company now realizes that embracing that model has become “a necessary evil.”

“We’re never going to compete with Amazon — that’s a losing proposition,” Bengochea said. “But I don’t want (customers) to have to wait a week and a half just because (they’ve) ordered a Christian product. I want it to be out there in three days or less.”

The company doesn’t expect overnight success, as margins at bricks-and-mortar stores and e-commerce channels remain tight in the Christian retailing industry, he said.

Executives at Family Christian also are taking a conservative, measured view of the company’s potential, he said.

“We have a five-year plan and we don’t believe it’s double-digit growth,” Bengochea said. “We believe there is single-digit growth, which the (Christian retailing) industry has not been experiencing, but we believe we can do that. Our model is very healthy. We have new stores in the model and good EBITDA earnings growth. But it’s not a high-growth business.”

Not everyone in the industry shares Bengochea’s confidence.

Sue Smith, chairman of the board for the Christian Booksellers Association and a store manager at Ada-based Baker Book House Co., told MiBiz she remains unconvinced that the strategy Family Christian plans to implement will be enough to sustain it in the long term. She declined to comment specifically on what the company should do, but did point to Nashville, Tenn.-based Lifeway Christian Resources as a company doing well in the Christian retailing industry, based on its purchasing methods and history of smart acquisitions.

“I see some stores doing well — the ones that are all in with their heart and with their business model,” Smith said of the overall Christian retail industry. “The ones that won’t change their business model with the changing times won’t make it.”

Tectonic trends

Like many in the broader retail industry, Family Christian has struggled in recent years.  Over the past year, several high-profile niche retailers have closed stores and sought bankruptcy protection, including electronics retailer Radio Shack Corp. and fashion retailer Wet Seal Inc.

At the time it entered bankruptcy court, Family Christian’s sales had been in “steady decline since 2008,” according to court filings. Sales slid from $305 million in fiscal 2008 to $230 million in 2014. The company predicted annual sales to decline to $216 million in 2015, according to filings.

The slide in sales, coupled with a heavily leveraged balance sheet, created a tough environment for Jackson and his partners when they initially purchased Family Christian in 2012 from Blackstone Group LP, a New York City-based private equity firm. At the time, the new owners promised to donate 100 percent of profits to Christian charities.

“The previous owners had so much debt that when the stores went down, they had enough to take care of themselves, but they couldn’t pay for the debt,” Jackson said in an interview with

The Christian Post in February. “So we took it on; we were too positive thinking, and tectonic trends — people going online not going to brick-and-mortar stores — brought sales down 10 to 20 percent.”

The Christian publishing and retail industry has fallen into a downturn for a number of years. Although sales in the industry rose 2.9 percent in 2013, the industry still reported the net loss of 49 stores, according to last year’s annual report from the Association for Christian Retail.

Despite challenges in the industry, Family Christian’s play in the niche Christian retailing market could serve it well going forward as customers focus more on the buying experience, said

Jeff Lambert, founder of Grand Rapids-based public relations firm Lambert, Edwards & Associates Inc., which has worked with several companies in the Christian products industry, including Family Christian.

“Buying a bible at Meijer is different than at a specialty retailer,” Lambert said. “The Christian retailers have differentiated themselves.”

He believes customers will continue to support Family Christian Stores in the future, as long as it executes with a high level of customer service.  

“If I’m in their shoes, I’m making sure my shelves are stocked. (Customers) don’t care about the bankruptcy if there’s a great experience,” Lambert said.

Proceedings marred by controversy

While customers might not care, Family Christian’s handling of the bankruptcy process did, at times, put some strain on the relationships with unsecured creditors including publishers, landlords and gift suppliers. Secured creditors in the case included FC Special Funding LLC, a senior lender controlled by Jackson, and Swiss financial services giant Credit Suisse AG.

At first day hearings in February, creditors objected when Family Christian attorneys announced a plan to sell the assets to Jackson — effectively allowing him to create a new, debt-free company — citing a lack of transparency.

Other challenges and controversies arose. The June auction process was “at times, nothing short of chaotic,” wrote Judge John Gregg of the U.S. Bankruptcy Court for the Western District of Michigan in court filings.

When Family Christian selected FCS Acquisition as the winning bid, the second-place bidder — a joint venture of Boston-based Gordon Brothers Retail Partners LLC and Northbrook, Ill.-based Hilco Merchant Resources LLC — alleged fraud, claiming the bankrupt retailer had rigged the auction process.

While Judge Gregg acknowledged Family Christian “clearly made mistakes at the auction,” he denied claims of fraud. The court and creditors expressed concern over a phone call CEO Bengochea made to Jackson on the second night of the auction. During the call, Bengochea told Jackson to increase FCS Acquisition’s bid for the company.

Bengochea testified under oath that Jackson had already promised him he would remain as CEO of the company if FCS Acquisition succeeded in buying the company.

“Any requests for higher bids should have been placed on the record at the auction or communicated through legal counsel,” Gregg wrote. “Moreover, the request should have been made to all qualified bidders, not simply to an insider that has assured the Debtors’ CEO of future employment.”

When asked by MiBiz if he regretted making the phone call, Bengochea asserted that he did not do anything wrong.

“My job was to maximize recovery for the creditors, and that’s what we did,” he said.

A case well done

Numerous sources MiBiz spoke with for this report agreed that the Family Christian bankruptcy proceeding seemed drawn-out and at times contentious, but they remarked that in the end, the parties were conciliatory. Moreover, the outcome of the proceedings proved unique among bankruptcy cases nationally.

Many retailers who’ve filed for bankruptcy in recent years have not been able to avoid liquidation, as was the case for Ann Arbor-based bookseller Borders Group Inc., as well as a handful of fashion retailers such as Delia’s Inc., Simply Fashion Stores Ltd. and Cache Inc.

Bankruptcy attorney Wardrop also said that West Michigan does not typically serve as the venue for large-scale bankruptcy cases. That the company remained intact after the sale should prove noteworthy, he said.

“From a lawyer’s perspective, this case showed that West Michigan can do Chapter 11 well,” Wardrop said. “Our judges do them well and our lawyers do them well. This was a place where a difficult case got done timely and got done well.”

Yeomans, the turnaround expert, agreed.

“What’s special about this case is that it made it through Chapter 11 and didn’t have a hedge fund come in and strip it apart,” he said.

Read 9918 times Last modified on Monday, 28 September 2015 11:10
Nick Manes

Staff writer

nmanes@mibiz.com

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