Tower Records Filed for Chapter 22 on August 20, 2006 (Long Disruption)

12 years ago today Tower Records Inc. filed for bankruptcy for the second time in 2.5 years, ending the company’s run in the United States (and most other places of the world).

The company first filed for bankruptcy in February 2004. The music retailer had approximately 90 stores and more than $110mm in debt that it owed to the likes of AIG Investment Group, Goldman Sachs & Co., JPMorgan Chase and…wait for it…Bear Stearns Securities Corp. The first bankruptcy was a short prepackaged bankruptcy that eliminated $80mm of debt in a debt-for-equity swap, leaving the company’s famous and eccentric owners with 15% of the company. The company attempted a sale process but had no takers. CIT Group provided the company with a $100mm DIP credit facility. O’Melveny & Myers LLP and Richards Layton & Finger PA represented the company (and both signatories to the petition actually still remain at those firms).

Interestingly, with some limited exception, the narrative explaining the company’s demise is not-all-too-different from what we see from retailers today. SFGate wrote at the time:

Tower's difficulties reflect those of the music industry during the past few years. Industry sales declined from $10.49 billion in 1999 to $8.93 billion in 2002, according to a report from the National Association of Recording Merchandisers, which attributed the swoon to digital downloading and copying. Retailers are also under pressure from online sales by firms such as Amazon.com, and from deep discounting by such rivals as Wal-Mart, and fierce competition from other chains like Borders and Barnes & Noble.

CBSNews added:

The filing is expected to help clear the way for selling the 93-store chain that suffered from rapid changes in the music business, especially the exploding popularity of downloading music for free from the Internet. Discounters such as Best Buy, Circuit City and Wal-Mart Stores also undercut Tower's prices and hurt the chain's earnings.

Those trends and a major slump in the music industry followed fast on the heels of the company's 1998 decision to expand using $110 million of borrowed money. The expansion drove Tower to a peak of more than $1 billion in annual revenue with nearly 200 stores in 21 states and numerous franchises internationally. But it has been rapidly downsizing since 2001.

A filing last April with the U.S. Securities and Exchange Commission revealed the retailer had lost money for 13 straight quarters.

Wait. Amazon ($AMZN)? Check. Deep discounting from the likes of Walmart ($WMT)? Check. Too much debt to fund an over-expansion? Check. Revenue declines on the basis of technological innovation? Check. We guess the more things change, the more they stay the same.

And stay the same they did. Even then. It took just 2.5 years for the company to wind its way back into bankruptcy court. And for all of the same reasons. Two months later, Great American Group, a firm that specializes in liquidations, emerged as the highest and best bidder in an auction for the company, winning with a bid of $134.5mm; it beat Trans World Entertainment Corporation ($TWMC), an entertainment media retail store operator that — shockingly — still exists. You may be familiar with it: it’s largest specialty retail brand is fye, which as of May 2018, still operated 253 stores. It is hanging by a thread, but it still exists — largely on the back of its etailz segment, which apparently thrives by doing omni-channel business with Amazon, Ebay, Jet.com/Walmart and Wish.

Anyway, Trans World had hoped to continue operating at least some of the Tower locations; it lost the bidding by $500k. And, accordingly, Tower Records liquidated. While there is such a thing as Tower Records in Asia, the name is all but a distant memory today.