While filing again for Chapter 11 bankruptcy protection in the U.S., Payless ShoeSource is conducting the largest liquidation sale in the country by the number of stores. It plans to close all its 2,587 North American stores before the end of May, taking advantage of the Easter selling season if necessary to complete the process.

The company began liquidating its North American stock on Sunday, Feb. 17, offering initial discounts of 40 percent on the merchandise, valued at $1 billion. All of the affected stores, which range in size from 500 to 10,000 square feet, should remain open at least through the end of March. Online sales have already ceased.

The group's retail operations outside North America are not concerned with the bankruptcy filing and will continue operating. Payless has 420 stores across Latin America. It also has its own stores in the U.S. Virgin Islands, Guam and Saipan, as well as 370 international franchised stores in 16 countries across the Middle East, India, Indonesia, Indochina, Philippines and Africa.

While the North American operation had an Ebitda loss of $63 million last year, largely due to heavy markdowns, after a $4 million loss in 2017, the group's Latin American operation alone contributed positive Ebitda of $23 million. The 371 franchised stores pay royalties of 6 to 8 percent on their sales, and Payless believes that it can expand this type of business in the future.

Catering to the whole family, Payless has been focusing on the low-priced segment of the shoe market, where margins are not particularly high. The company's current majority shareholder is Aldan Capital, with a stake of 66.5 percent, which helped it out of its first bankruptcy in April 2017.

At that time, the company attributed its bankruptcy to “antiquated” inventory management systems and port strikes on the U.S. West Coast, which delayed shipments before Easter and glutted inventories. The company re-emerged in August 2017, having shuttered 635 stores and cut $435 million in debt.

In the current bankruptcy petition, filed in the Eastern District of Missouri, Payless declaring outstanding debt of $470 million, of which nearly half is due to factories and other unsecured creditors such as Skechers.

Payless blamed disruptions in the supply chain, which hurt its revenues for the 2017 holiday season, and a breakdown of its computer system in the summer of 2018, which crippled its back-to-school operations. An “oversupply of inventory” from the autumn of 2018 which continued through the present season forced “steep markdowns, which depressed margins and drained liquidity,” the filing reads.

Between filings, like other shoe retailers, the company tried to take more of an omn-ichannel approach, combining physical stores with e-commerce, but cash restraints held back the initiative, which was rolled out in only about 200 stores, less than one-tenth of the company's fleet in the U.S.

In a statement, Stephen Marotta, chief restructuring officer, summed things up by saying that Payless had emerged from its previous bankruptcy with three lingering problems: insufficiently consolidated systems and corporate overhead structure, excessive debt and a bloated retail footprint. Much of the debt resulted from the leveraged buyout – completed in October 2012 for $2 billion – of Payless' former parent company, Collective Brands, by Wolverine Worldwide and the private equity firms Blum Capital Partners and Golden Gate Capital.

The total business was generating annual sales of around $2.4 billion. In that deal, Wolverine acquired Sperry Top-Sider, Saucony, Stride Rite and Keds, while Blum and Golden Gate acquired Payless. The two parties split the financing for the acquisition almost equally.

Evidently, the high debt load has led Payless to lack cash to invest in merchandising and the customer experience, which is something that has become an important point of differentiation in the market.

According to the latest bankruptcy filing, Payless retains about $470 million in outstanding debt. Its largest unsecured creditors include a number of Chinese companies, some of them footwear suppliers.

The effective liquidation of its North American operations is the latest episode in the consolidation of the American retail sector, which has also affected sports retailers like Sports Authority and department store chains like Sears.

Payless had emerged from a prior bankruptcy procedure ill-equipped to survive in the current retail environment. Its new bankruptcy comes at around the same time as the approval by a New York court of a petition for bankruptcy protection filed 11 months ago for Nine West Holdings. As part of the bankruptcy process, the company decided one year ago to close all its 70 stores in the U.S. and proposed a reorganization by its new owner, the Authentic Brands Group, of its remaining businesses, including Anne Klein. There are still a handful of Nine West stores in operation in the U.K., France and Croatia.