Two national retail and entertainment brands the pandemic pushed into bankruptcy emerged from Chapter 11 after months of reorganizing and shedding real estate, signaling that using less property is a path toward financial stability even for businesses that can't switch to an online model.
Tuesday Morning, an off-price home goods retailer that offers a treasure-hunt shopping experience, and CEC Entertainment, the parent company of popular kid's birthday party venues Chuck E. Cheese and Peter Piper Pizza, filed for bankruptcy protection weeks apart in the second quarter, both blaming a loss of revenue from government-mandated temporary closings of brick-and-mortar retail stores and entertainment venues. Both retailers rely on experiences that can't replicated with a website.
While there has been speculation that trimming real estate would be a key component to financial reorganization even for these kinds of property-reliant experiential retailers, the emergence of these major companies from bankruptcy now proves the approach is in use. Through the bankruptcy restructuring process, CEC Entertainment permanently closed about 60 venues. Tuesday Morning rejected nearly 200 leases and sold its Dallas headquarters in a sale-leaseback deal, while also selling other Dallas properties and exiting a distribution center in Phoenix.
Before the pandemic, "everybody was re-evaluating their footprint, not only based on size, but also based on their customer needs," said Bob Young, a executive managing director for Weitzman, a Texas-based retail real estate brokerage, in an interview. "Like other retailers, Tuesday Morning and Chuck E. Cheese were doing what near every operator with rented space was doing: Evaluating" the size of their real estate, said Young, who is not directly involved with either company.
The impacts of the pandemic are expected to continue to ripple through retail real estate this year as companies further scrutinize their property needs. Young said he expects other retail and dining operators to restructure their businesses either in or out of bankruptcy court, leaving some real estate on the sidelines.
"Now, with the pandemic, it has changed the perception of how we interact," said Young.
Tuesday Morning emerged from bankruptcy Monday with 490 of what it calls "its best performing stores," down from 687 U.S. locations at the beginning of last year. Tuesday Morning CEO Steve Becker said in a statement the company has a more "streamlined operating model," and is "well-positioned to execute on our strategy." The retailer expects to pay vendor claims in full while protecting shareholders with funding the company was able to secure in the bankruptcy process.
Young said he expects Tuesday Morning to focus on catering to its treasure-hunting customers and refine a digital strategy to make the business more resilient. Tuesday Morning products cannot currently be bought online.
One of Young's colleagues at Weitzman is helping oversee the Texas portion of a national expansion of Kids Empire, a children's indoor playground concept that is betting on entertainment, especially for children, will thrive again. That bet could mean Chuck E. Cheese, an eatertainment chain known for its animated rodent mascot, arcade games and for hosting pizza-filled parties, is on the right path by restructuring.
"We're still not bad compared with the tragic time of the financial crisis in 2009," Young said. "I think the silver lining in Texas, specifically, is we are seeing well-located vacancies being back-filled today and there's a level of comfort this area, Dallas-Fort Worth, will continue to grow and support new concepts."
CEC Entertainment, based in Irving, Texas, is exiting bankruptcy with about 494 corporate-operated venues, down from 555 corporate locations at the end of 2019. The company also has nearly 200 franchised locations that were not involved with the bankruptcy process.
Through the bankruptcy restructuring process, CEC Entertainment closed 54 venues leaving the parent company with 461 corporate-owned Chuck E. Cheese venues and 33 corporate-owned Peter Piper Pizza venues and eliminated about $705 million of debt.
CEC Entertainment is still working to open the remainder of its temporarily closed locations and has about $100 million earmarked to support operations and growth initiatives.
"We look forward to beginning a new chapter as a stronger and healthier company well positioned to execute on our long-term goals," CEC Entertainment CEO David McKillips said in a statement. "We look forward to growing through key opportunities and implementing our strategic plan."
Bankruptcy can be a double-edged sword, it often has a negative connotation for a business but can give companies a path forward that may not have existed otherwise, said Young with Weitzman. For retailers such as J.C. Penney and Neiman Marcus that emerged from bankruptcy in various forms, court protection gave them a way to continue operations anew after filing from bankruptcy last year as the pandemic and changing consumer habits disrupted their businesses.
While bankruptcy protection might hint at failure, "the structure itself as a place to restructure a company and have a pathway forward is important for operators," Young said. "There's not a small or national retailer that hasn't changed its game as a result of the pandemic to grow sales and maintain customer loyalty and both [Tuesday Morning and Chuck E. Cheese] have that customer loyalty."