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Saturday, June 21, 2008 3:25 AM

Ponzi Scheme at Steve & Barry's

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The Wall Street Journal is reporting Steve & Barry's Faces Cash Crunch.

As one of the country's fastest-growing store chains, Steve & Barry's LLC was billed as the future of discount retailing. It boasted of massive expansion plans, built on the back of fire-sale prices of clothes and shoes promoted by the likes of actress Sarah Jessica Parker and professional basketball player Stephon Marbury.

That future now looks bleak.

The closely held retailer is racing to find rescue financing of about $30 million. If it is unable to secure backing, it could seek protection from creditors sometime in the next month, say several creditors, bankruptcy lawyers and retail experts familiar with the matter.

The cash crunch comes even as Steve & Barry's expands across the country.

Co-founder Barry Prevor said the U.S. market could support 5,000 stores. Its founders have dubbed their effort the "Google of retailing."

But some of the forces pushing Steve & Barry's growth were not tied to end-consumer demand, but the needs of mall owners in a softening commercial-real-estate market. Much of the company's earnings came in the form of one-time, up-front payments from mall owners. Those payments were designed to lure the retailer to take over vacated sites, say several people familiar with the company.

Without these payments, the stores are barely profitable, if at all, people familiar with the company's finances say.

Without additional capital, the company's fate will largely be determined by the commercial-lending unit of General Electric Co. It provided the company with a roughly $200 million credit facility in March, and the company is already in default on that loan, said three people familiar with the matter.
One Hell Of A Business Model

The company's only earnings are upfront revenue to take over distressed leases. And what's GE doing anyway messing with this anyway?

GE Weekly Chart

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XLF Weekly Chart

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If it seems like GE trades like a finance company, it's because GE is a finance company (masquerading as a conglomerate).

Mike "Mish" Shedlock
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