How One Fabric Store Survived Bankruptcy as Hancock Collapsed

Here’s a “man bites dog” story from the retail industry: The lone G Street Fabrics store near Washington, D.C., has emerged from bankruptcy protection as its giant competitor Hancock Fabrics Inc. is emptying its remaining 185 stores in going-out-of-business sales.

Both retailers were stung by the craft industry’s changing dynamics. Fewer people sew their own clothes, and those who do are buying more fabric online, leading sales at traditional stores to slump.

G Street Fabrics—an iconic name from Washington, D.C.’s department-store era—took in about $7.3 million in revenue in 2014, which marked a decline from $9.3 million in 2013.

Hancock Fabrics, one of the country’s largest fabric chains, also struggled with pension and retirement benefit costs. The Baldwyn, Mass., retailer filed for bankruptcy in February as it shut down 70 money-losing stores before deciding that it would shut down completely.

Officials running Hancock Fabrics store-closing sales have slashed inventory prices to draw customers.

G Street Fabrics turned to bankruptcy in June and shut down two locations in northern Virginia. Company officials also used the power of bankruptcy to get out of monthly leases that cost $13,201 and $24,354.

But its busiest, flagship location in Rockville, Md., will remain open. A bankruptcy judge recently approved the company’s plan to pay $2.3 million of its non-bank debt over the next five years, according to documents filed in U.S. Bankruptcy Court in Greenbelt.

Founder Judah Greenzaid opened the company’s first store on G Street in downtown Washington in 1942, back when department stores like Hecht’s and Woodies drew people to the city’s core. His descendants—Michael Greenzaid, Joel Greenzaid and Nadine Davison—still own it.

New Jersey bankruptcy lawyer Kenneth A. Rosen called G Street Fabrics’ bankruptcy a rare mini-downsizing.

“You don’t see that in retail cases anymore,” said Mr. Rosen, of law firm Lowenstein Sandler, who traced the trend to changing lending dynamics.

Mr. Rosen said lenders to retailers are less patient and willing to let retail executives figure out which stores deserve to stay open. Liquidation firms who compete with each other for the job to execute store-closing sales, meanwhile, offer an attractive, quick way for lenders to cash out.

Retailers also have a much harder time using bankruptcy to survive after a 2005 law change, according to the study from advisory firm AlixPartners.

Roughly 55% of major U.S. retailers that have for filed bankruptcy since 2005 ultimately shut down, the firm’s study found. Authors compared that rate against a Fitch Ratings study on all types of companies, which found that non-retailers liquidate in bankruptcy less than 5% of the time.

The 2005 law change set a new deadline for companies with real estate leases. Specifically, company executives have up to 210 days after a bankruptcy filing to decide whether to keep or cut a nonresidential property lease. (When you factor in the time needed to run a proper going-out-of-business sale at a closing location, retailers really have only 120 days to decide.)

Before the 2005 change, retailers could spend years in bankruptcy, tinkering with merchandise and experimenting during the high-traffic holiday season. By shortening that time, Congress aimed to prevent bankruptcy cases from expensively dragging on and give landlords certainty sooner.  A group of lawyers, judges and other restructuring professionals want federal lawmakers to push the deadline back to one year.

Write to Katy Stech at [email protected]. Follow her on Twitter at @KatyStech