UPDATE: February 12, 2020: Stage Stores is preparing for a possible bankruptcy as it looks for options to restructure its debt, the Wall Street Journal reported Tuesday.

The retailer, which is undergoing a rapid transformation from department store operator to off-pricer, has been late paying its vendors, according to the Journal. The newspaper noted that the situation is fluid and an out-of-court solution to the company's debt and liquidity woes is still possible.

Stage Stores did not immediately respond to Retail Dive's request for comment.

Dive Brief:

• Stage Stores has brought on the investment bank and financial services firm Peter J Solomon and law firm Kirkland & Ellis as it looks to refinance its bank debt, according to an emailed Debtwire report that cited anonymous sources. Stage Stores did not immediately reply to request for comment.
• The report follows Stage Stores' release of its holiday performance, which included a comparable sales increase of 1.4% for the nine weeks ending Jan. 4, a figure below the company's expectations. The sales miss, and reduced earnings guidance for the year, prompted "liquidity concerns" around the company, Debtwire reported, citing sources involved in the company's supply chain.
• Citing the holiday results and "meaningful deterioration in vendor payment trends," retail-focused credit analysis firm Pulse Ratings downgraded its rating for Stage Stores.

Dive Insight:

Stage Stores' financial struggles come at a critical, and unique, time for the retailer. The company is in the middle of a massive, ambitious plan to transform itself from a department store chain to an off-pricer via its Gordmans banner, which Stage Stores purchased from bankruptcy in 2017.

In a January presentation, Stage Stores stated flatly that "our future is off-price." In 2019, Stage Stores — which also operates the Bealls, Goody's, Peebles and Palais Royal banners — converted 89 stores to its off-price Gordmans brand. It ended the year with 158 off-price stores, which was 100 more than it had in 2017. For 2020, the company aims to jack up the pace of off-price conversions, with plans to fully convert its portfolio and end the year with 700 off-price stores.

Ambitious as that is, the company's logic is fairly straightforward. Off-price creates a "buffer against economic downturns" as well as a "treasure hunt experience [that] is difficult to replicate online," Stage Stores said in its presentation. Those two attributes of off-price as a sector explain its lasting success since the recession era and continued ascendance as other traditional retailers falter.

Department stores, especially, have gone into swift decline in recent years. Bon-Ton and Sears have gone bankrupt, with the former liquidating and the latter perpetually shrinking even after a bankruptcy sale of its remaining stores. Meanwhile, J.C. Penney is in deep financial distress, and Macy's and regional players like Belk and Dillards are grappling with diminishing sales.

And the outlook for the sector just keeps getting worse. Watching the two divergent sectors — department stores and off-price — it's a logical move to try to follow off-price. Macy's, too, has rapidly built out its off-price Backstage unit as a way to spur traffic and add sales. 

Long-term prospects of Stage Stores' transformation strategy aside, the company's plan is radical not just for its pace but also for the limited resources the company is working with. Its sales have mostly declined over the past decade, and profits turned negative starting in fiscal 2016.

In September, a Pulse report noted, "With limited liquidity, we view the accelerated conversion of 700 locations as very ambitious." The firm also noted that the Gordmans stores so far outperforming the department stores were "on a relatively small scale and may not be indicative of results from a larger sample size."

Stage Stores CEO and President Michael Glazer, in a press release, pinned the disappointing sales during the holidays on "lower pre-conversion department store sales relative to our projections," as well as a warmer holiday season. He also said that "we remain confident that our off-price strategy will lead to profitable growth in the future" despite the sales miss.