Diversified Retail Group Inc. -- a Rockville retailer with 41 specialty stores including Athlete's Foot, Stride Rite and Flair Graphics -- has filed for protection from creditors under Chapter 11 of the federal bankruptcy code. The company is the latest victim of rapid expansion in a market where consumers are becoming increasingly wary.
"We expanded into a soft retail market," said Diversified Chairman Leonard Briskman. "The financing was just not there. We had been working with the banks and were under the impression that certain financing would be there."
The firm was hurt by tightening credit, according to Stanley Salus, the company's bankruptcy attorney, who called the move "simply a sign of the times." Many banks are scrutinizing loan applications more strictly these days following an increase in the number of bad loans.
The publicly held company opened 12 new stores in the last year and remodeled three other stores. The company also had added 12 new stores in the previous year.
Retail analysts noted that Diversified's problems are somewhat unique because of the company's rapid expansion. However, its difficulties were compounded by rivalry from department stores and other specialty stores at a time when retailers are playing hardball in a soft market.
The shoe stores, in particular, were facing tough competition from other stores, such as Foot Locker and Kid's Foot Locker, which have recently expanded in the area, experts said.
Foot Locker "is a more powerful draw," said George Hechtman of the Richmond retail consulting firm of McMillan, Doolittle. "They have one of the most powerful marketing programs around," he said.
In addition, Diversified was hit by a general slowdown in the retailing industry. "When you're in second place, any slowdown will affect you more than others," Hechtman said.
Diversified joins a growing list of troubled local retailers. The Garfinckel's department store chain last month filed for Chapter 11 bankruptcy, which it then turned into a liquidation. And Fantle's drugstore chain also is in Chapter 11. Under Chapter 11, companies continue operating, with protection from creditors, under court supervision.
"The retail market started to turn the other way" in the last year, Briskman acknowledged. New stores "didn't come on stream as well as we had hoped and the existing stores were having problems all over," he said.
The company will close or sell some stores, according to Briskman, who declined to estimate how many stores the company will keep open. All of the stores will be open today, he said.
Several of the company's employees said yesterday they had not been informed of the bankruptcy. The company, which had revenue last year of $13.5 million, has about 50 full-time and 300 part-time employees.
Briskman said he was informing workers and hoped the company would be able to keep the majority of them employed. Under Chapter 11, the company has 120 days to come up with a plan for reorganization.
Diversified has assets of about $6.7 million and debts of about $5.2 million, according to its attorneys. The largest creditor is Sovran Bank, which is owed about $1.5 million. Footwear makers Nike and Reebok are next in line, but, unlike Sovran, their claims are not secured by any of the company's collateral.
Diversified holds franchises or licenses for all of its stores, which are in the downtown Washington area, some suburban shopping malls and in Baltimore. It is not, however, the sole franchisee in the area for Athlete's Foot and certain other operations.
An employee at the Georgia Avenue Athlete's Foot store, which has been open for about 18 months, said the store's sales had recently been about half that of its opening months.
"This is pretty much a drug area," he said. "It's not like being in a mall." He added that the store had inventory problems because buyers were not stocking the type of merchandise shoppers wanted.