On page 11 of its annual financial report for investors, Stage Stores includes this reminder about the inherent risk in retail's seasonality: "Our dependence upon cash flows and net earnings generated during the fourth quarter, including the holiday season, may have a disproportionate impact on our results of operations."

The language is boilerplate, one of many risk factors included to satisfy regulatory mandates. But in Stage Store's case, it proved especially pertinent after Q4. It helps explain how the retailer — in the midst of a massive transformation from department store to off-pricer —​ went from raising its guidance for the fiscal year in November to bringing in restructuring advisers, cutting staff and closing stores. Stage Stores did not respond to Retail Dive's requests for comment.

Coming off a Q3 in which comparable sales increased more than 17%, CEO Michael Glazer told investors in November that the company had lifted its expectations for Q4. After initial estimates of a comps increase of 1% to 3%, they now expected Q4 comps to rise by as much as 9%, which Glazer said would help generate more than $35 million in free cash flow, according to a Seeking Alpha transcript.

"There are many, who doubted our ability to truly transition from our department store culture. Nevertheless, we are well on our way, and we will not be denied," Glazer said at the time. "I said last quarter, we are rapidly becoming the best story in retail, and our third quarter results are proof of that statement."

That was November. In January, Stage Stores reported that comparable sales increased 1.4% for the nine weeks that ended Jan. 4. Without company-specific context, that might not seem bad for the 2019 season. In fact, it matched Target's comps and was well above department store peer J.C. Penney, where comps fell by 7.5% during the same period. 

The problem was that Stage Stores expected and was depending on a far larger sales bump for the period. The shortfall created a liquidity problem that reportedly sent the retailer scrambling to restructure its debt. 

"What took me by surprise was that they were caught off guard," said Dennis Cantalupo, president of Pulse Ratings. "Just a couple weeks before, they were very bullish."

A century in department stores

Stage Stores traces its history back to the 1920s, the decade when two of its banners, Palais Royal and Bealls, were founded. 

The Bealls chain was built by Robbie Beall and his two brothers. Robbie started out as an unpaid apprentice printer at a newspaper before joining up with his brothers to open a small department store.  

Bealls and Palais Royal merged in the late 1980s to form a new company, Specialty Retailers, based out of Houston, which would go public under the Stage Stores name in 1996. Over the years the company that would ultimately become Stage Stores bought up several regional department store chains: Fashion Bar out of Denver, which included a chain for juniors called Stage; Beall-Ladymon; Uhlman's; C.R. Anthony Company; Peebles; BC Moore; and Goody's. For the time being, the retailer continues to operate the Bealls, Goody's, Palais Royal, Peebles and Stage banners.

"They were the department store for the not-so-heavily concentrated areas, places where you weren't competing next door to a Macy's," Cantalupo said. "So they were the department store option for those more rural locations. And to an extent, they also didn't compete too much with your discounters. ... They had several different banners that they would use in different geographic areas."

In 2017, Stage Stores gained a toehold in the off-price sector when it bought the Gordmans chain out of bankruptcy. Based out of Omaha, Nebraska, Gordmans was more than a century old and had 100-plus stores when it filed for bankruptcy. On filing, the company's CFO blamed its bankruptcy on demographic changes, a shift to online retail and expensive leases — all common tunes sung by retail executives in court papers over the past four years.

The month before it filed, Gordmans comps fell 20% and had declined more than 9% the year before. Which is to say that Gordmans had issues of its own before Stage Stores took it over. Nevertheless, Stage Stores saw an opportunity, and it outbid other offers to purchase the chain. 

Glazer said at the time, "By acquiring Gordmans, we believe that we have an opportunity to benefit from its off-price competencies, deep connection with a youthful customer, and strong home and gifts businesses."

'Why so fast?'

Observers can debate the wisdom of buying a bankrupt retail chain as part of a turnaround effort, but Stage Stores needed to take action. Its comparable sales declined in four out of five years between 2013 and 2017. The drop was 8.8% in fiscal 2016, the year before it bought Gordmans. Profits were running negative. 

Meanwhile, across the broader retail world, off-price stores had continually grown their footprints, stolen market share from department stores, increased their store traffic, and managed to post impressive sales gains, all without making expensive (and often futile) investments in e-commerce. 

Stage Stores began converting its existing department stores to the off-price format, modestly at first. Stage Stores ended 2017 with 58 Gordmans stores, which increased to 68 in 2018 and 158 in 2019.

The results of those conversations boosted optimism about the Gordmans banner and its role. In July, with 80 stores converted to Gordmans, Glazer said that "we have now reached a critical mass of off-price stores." Those stores that had reached their one-year anniversary had double the sales volume compared to their department store days. 

On those numbers, the company looked to expand its off-price strategy, with plans to add 100 Gordmans stores to its footprint in 2020, so that it would end the year with 400 Gordmans. Just a few months later, Stage Stores accelerated its plans, saying it would convert its entire fleet to Gordmans by the end of this year, leaving the company with 700 Gordmans. The company expected the plan to cost $30 million in capital spending. 

"My concerns at the time they announced it was: Why so fast? You have a relatively small sample size with the Gordmans stores. And there's growing pains. In a perfect world you can convert some stores and learn from those stores for a while," Cantalupo said. "And I'm sure they did learn some things with the original stores. But this is a faster pace than what we have seen in the past. And on a relatively limited budget."

And some question the overall promise of the off-price conversion. "For a company to go wholesale into a completely different line of business is really, really difficult to execute," said Bruce Kaser, head of equity research New Generation Research. 

"On paper, the strategy for Stage Stores looks good. They're in smaller markets, underserved, maybe not a lot of competition," he said. But, he adds, off-price giant TJX has "deep relationships" and "first dibs" on goods from manufacturers, who don't have to worry about TJX making its payments, Kaser said. "For an under-scaled novice to try to out-compete the best in the industry, in what really is probably a limited quantity market — they're just not gonna make it work."

Scaling down

As late as January, after disclosing its disappointing holiday sales, the company maintained that "our future is off-price" and held to its plans to end the year with 700 off-price Gordmans stores.​

But plans for the final footprint appear to be shrinking, according to people familiar with the company's plans who spoke to Retail Dive. The sources said Stage Stores now plans to close more than 200 Gordmans stores and stores slated to become Gordmans this year. That would leave the company with a go-forward footprint of 500 Gordmans stores. At the same time, the company has laid off corporate staff across departments, with heavy cuts to its merchandising team. 

Sources have also told Retail Dive that the company has fallen behind on vendor payments, while insurance for suppliers tightened. 

Following the holiday sales announcement in January, Debtwire reported Stage Stores had brought on investment bank P.J. Solomon and law firm Kirkland & Ellis, which suppliers and other industry players see as a strong sign the company could file for bankruptcy.​ In mid-February, The Wall Street Journal reported that Stage Stores was in fact mulling a possible bankruptcy.

But it's still not clear whether a filing will prove necessary to restructure the company's debt, which was $360.1 million as of November and made up primarily of a revolving loan. Tim Hynes, head of North American Research for Debtwire, said Stage Stores could be trying to find new lenders to replace its revolver loan, which is backed by Wells Fargo. But given the company's financial state, it might have to borrow at higher rates, which could eat into its earnings and value to equity investors, Hynes added.

Hynes also said that store closures wouldn't necessarily portend a bankruptcy filing. "It just means the plan they had put in place initially wasn't working out as planned."