Largest Christian Bookstore Chain Declares Chapter 11

In case you missed it, last week the Family Christian Stores chain declared Chapter 11 bankruptcy. (See this link for their press release.) This is newsworthy because Family Christian Stores (FCS) is the largest Christian store chain in the country (when counting number of locations, not necessarily sales revenue), 266 stores in 36 states. In 2014 the chain did $230 million dollars in sales…down from $305 million in 2008.

The Details

A common misunderstanding is that this means they are going out of business. That is not the case here. This isn’t a repeat of the demise of the Borders chain in 2011. Instead the corporation is reorganizing using a Section 363 Sale process. What this means is that a new entity has been created by the owners of FCS to buy their assets and restructure their debt. This same Section 363 Sale process was used by Chrysler and GM during the financial crisis of 2009.

A newly formed subsidiary of Family Christian Ministries will be buying the assets of Family Christian Stores for $73,773,000 (which consists of $28M in cash, the assumption of about $43M in property leases and $2M in other accrued operating liabilities). According to their press release they will not be closing stores nor will they be laying off staff. In other words they will try to maintain and do “business as usual.” The sales of these assets is supposed to happen within 60 days. Which is very fast. (There is an excellent interview online with two Chadbourne bankruptcy lawyers about the unique nature of a Section 363 Sale process if you want to more details.)

The entire 150+ page Chapter 11 filing can be found online in a PDF (Family Christian Store Bankruptcy Filing link) from which I have been quoting much of the above details. A list of the top twenty unsecured creditors has also been circulating. It does not have a free online link but can be purchased if you want your own copy (Link to Business-Bankruptcies.com.)

In the list of top creditors there are some big numbers owed to publishers. Seven million owed to Harper Collins Christian Publishing (which includes Zondervan and Thomas Nelson), 1.7 million owed to Tyndale, and around a half a million each to Baker, B&H, Crossway, Barbour, Harvest House, Send the Light Distributors, Waterbrook (Penguin Random House), Ingram/Spring Arbor Distributors, and FaithWords (Hachette). These eleven publishing-related companies are owed a total of $14,000,000. Remember that at least four of these companies publish Bibles as well as books. And most Christian stores do a healthy percentage of their “book” sales in Bibles.

Fourteen million dollars is not “chump change” but compare that to the top creditors during the demise of Borders in 2011. (The list can be found here.) Borders owed Penguin $41 million, Hachette $36 million, Simon & Schuster $33 million, Random House $33 million, and HarperCollins $25 million. Granted, there were around 1,000 Borders locations which primarily carried book inventory.

What I found interesting on the list were the non-book companies who are owed substantial money by FCS. These include gift, greeting card, and music companies. There are nine listed in the top twenty…and are owed a total of $13,000,000. In other words almost the same amount due the top 11 book/bible-related companies.

This reveals that the product mix within FCS has evolved over a number of years. They were shifting their inventory to more of a boutique format and thus book selection suffered in the breadth of titles and the depth of copies carried in-store. This is not a surprise when books, bibles, and music can be purchased online or at competitors who carry larger inventories. But the gift, cards, and jewelry are products that are not as easy to purchase online. And thus the shift.

Before anyone comments on how this is “terrible” and “they shouldn’t be selling that junk” be aware this has been part of the product mix for a long time. I ran Christian bookstores in the 80s and early 90s. Our sales mix back then was 25% books, 15% bibles, 25% music, 20% gift products, 15% other (like church supplies and Sunday school curriculum).

In the case of Family Christian the inventory weight trended toward the non-book items over these past few years.

The Creditors

The biggest unkown in this process is whether or not the money owed to the various creditors will be paid. According to the filing there are over 2,200 total creditors (including the local municipalities in each store’s location, presumably for sales taxes owed).

There is a considerable sum (upwards of $50 million) in secured debt with two banks which will be first in line to get paid. Nearly half is from a revolving credit line which is part of a normal business operation. The balance is a term loan that financed the purchase of FCS in 2012 (read the story of that sale in a Christianity Today article here).

What about all that money owed to publishers and other vendors? Their debt is classified as unsecured which means it could be in jeopardy of being paid. This is an area where I can only speculate, so it is best that I not speculate. Instead we will watch carefully. While you might assume that a larger publishers can absorb a financial hit, what about the little publishers and other vendors? For them losing $50,000 might be the difference in keeping their doors open. It is all a matter of scale. Absorbing a half million dollar loss can be significant for any company.

Implications for Authors

What may be a dark cloud, despite my looking for a silver lining, is if publishers are not paid, authors won’t be paid either. If a debt is unpaid, like the FCS debt, the sale is counted as if it never happened…or as if the book was returned for credit. This means a negative sale on the ledger for that author.

If your contract has not earned out you may not “feel” the impact and will only take a little longer to earn out. If your contract has earned out and you see a regular check, you may see a slight dip in revenue.

BUT

Remember that FCS did not carry either breadth or depth in their book inventory. So it may be that your books were not being carried in their inventory and will not be affected. If however, you are a top level bestselling author you may see some negative activity. But, if you are a top level bestselling author it is unlikely that FCS’s sales were more than small percentage of the total books sold. Or, as is the case with one of our clients, last Fall FCS placed a very large special order print run for one book (100,000 copies) and the publisher sold it to them at a very low price so they could offer it to their customers at a high discount. The concern is that the bill for this sale will not be paid because it is one of those unsecured debts and thus our client will not be paid either.

Final Thoughts

Family Christian Stores may well come out of this difficult time in great shape. It is a tough time to be a retailer (just look at Radio Shack, Sears, and Best Buy!). We should hope and pray for a positive resolution. There are so many people involved in this process. Way beyond the 3,000 employees in this chain who are wondering if they will still have their jobs next year.

It is never good news to hear of a business in trouble. Let us try our best to keep our eyes where they belong in all this. (Colossians 3:1)
UPDATED – 2/17 added further financial details regarding the breakdown of the $73M sales price.

UPDATED – 2/23 a detailed analysis of new information was posted “More About the Family Christian Stores Bankruptcy.”

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