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Call it a boom for the merchants of doom.

It's shaping up to be a banner year for retail liquidators, as several major retail chains go out of business while others look to close stores now that the economy is cooling.

Northbrook-based Hilco Merchant Resources LLC is at the middle of the shakeout as one of the nation's top five liquidators. From a small office park just off the Edens Expressway, Hilco CEO Michael Keefe is marshaling a force of 170 field managers, mostly independent contractors, who are overseeing going-out-of-business sales at about 400 locations nationwide.

Hilco is one of three firms heading up the liquidation of Montgomery Ward & amp; Co., which has inventory valued at $1.8 billion retail — making it one of the largest store liquidations ever.

Hilco also is among a group of liquidators involved in closing Bradlee's Inc., a Massachusetts-based discount chain with retail inventory valued at $400 million, and is the lone firm charged with selling $500 million worth of merchandise for Irvine, Calif.-based home improvement chain HomeBase Inc., which is closing some stores and converting others to a new format.

"It's dramatic to see so many retailers closing, because things have been so good for so long," says Mr. Keefe. "Activity in our industry is at a peak, no question about it."

'Tip of the iceberg'

Industry sources say liquidators sell $5 billion to $8 billion worth of merchandise every year. This year is shaping up as exceptional, with an estimated $3.5 billion worth of goods being liquidated in the first quarter alone.

Most of the liquidation sales — which include store closings for merchants still in business as well as closeouts for those going out of business — are handled by a small fraternity that includes Hilco, Boston-based Gordon Bros. Group LLC, New York-based Schottenstein Bernstein Capital Group LLC and Great American Group and Nassi Group LLC, both based in the Los Angeles area.

"This is just the tip of the iceberg," says Micheal Frieze, CEO of Gordon Bros. "For the first time in awhile, we've got something less than a robust economy. A lot of retailers were hanging on in good times; now, they're in trouble. I'm looking at six different deals right now that will be another half-billion dollars."

Gordon Bros., the industry's largest player and co-lead in the Wards sale, is Hilco's largest competitor. Mr. Keefe, 40, spent seven years with Gordon Bros. before joining Hilco last March with another Gordon Bros. executive, Cory Lipoff.

Under Messrs. Keefe and Lipoff, Hilco generated revenues of more than $100 million during the last half of 2000. In this year's first quarter, it expects revenues to top $500 million.

Retail liquidation, an industry that traces its modern roots to the going-out-of-business sale of the W. T. Grant Co. chain in the mid-1970s, is a lucrative but secretive business.

Average returns vary, but experts say profits have diminished as payouts to retailers have risen to about 80 cents on the dollar, based on the cost of the merchandise, from the 50 cents typically paid a couple of decades ago.

Today, liquidators routinely work on a fee basis and enter into complex profit-sharing agreements with stores' owners — or creditors, in the case of a bankruptcy. Historically, the liquidator paid a lump sum to buy the retailer's inventory.

"(Liquidators) are well-trained, and they come in with a very dispassionate eye," says Scott Baskin, president of Burr Ridge-based Mark Shale, an upscale clothier that reorganized under bankruptcy protection from 1995 to 1997 and had Hilco close four of its stores. "They have an experienced eye in trying to evaluate what things are worth and how quickly to mark them down. They're very good at it."

Beyond bankruptcy

The Wards liquidation sale will clear out more than 250 stores and 10 warehouses, and is slated to last 10 weeks — the industry average. The Bankruptcy Court has granted a consortium of six liquidators the right to hold the sales. They will pay Wards an undisclosed amount for the inventory. Terms of that deal will be subject to public bidding, although no one expects the incumbents to be outbid.

Mr. Keefe says liquidation sales tied to bankruptcies are less profitable than store closings for retailers not in bankruptcy proceedings.

"That's not really the kind of transaction we're looking for — where everyone sits around a courtroom and bids until there's no juice left," says Mr. Keefe.

That's why retail liquidation is just part of the entity assembled by Jeffrey Hecktman, CEO of Hilco Trading Co., a 13-year-old firm that owns a majority stake in Hilco Merchant Resources and several other businesses that target distressed companies for services such as appraisal, real estate disposal and bridge loans. Hilco Trading also is looking to acquire retailers, and currently owns chains in Canada and England.

"I think Hilco is one of the few new players trying to make a run at being a leader in this business," says Henry Miller, who heads up the restructuring unit at New York-based Dresdner Kleinwort Wasserstein and was a financial adviser to Wards during its previous bankruptcy.

"(Liquidators) are tough guys who come in and make order out of chaos. They're involved with a vast number of unpleasant things, but there's a real art to what they do."

©2001 by Crain Communications Inc.

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