February 5, 2009

Wait, Is Right Start Not Honoring Gift Cards And Store Credit?

With the news that Right Start and babystyle have filed for Chapter 11 bankruptcy [yet again], I made the slightly offhand, slightly serious suggestion that anyone with a gift card should hustle over to a store and use it up quick.

But now I've heard from one customer and a store employee--who, unfortunately, has been through several bankruptcies in the kid, baby, and toy industry--who say that Right Start is being kind of dodgy about accepting either gift cards, merchandise credits, or returns.

Returns, frankly, I can understand, even if I think it sucks. But merchandise credits seem like a pretty straightforward obligation, and I always considered gift cards to be basically the same as cash in a retail situation. And I would be wrong. Here's what the Right Start mployee--who requests anonymity in hopes of staying employed for at least a little longer--says:

We have been told to not accept gift cards as payment. Merchandise credits (any credit issued for a return of product) are in a gray area. What the stores are being told is that the court didn't specifically state that we could not accept credits, so we're going to take those until the court orders us to stop.

I'm not sure how much you know about retail bankruptcy, but this is not the norm. Under the court, merchandise credits and gift cards are considered the same.

Under normal circumstances, (and what I've seen done in the past), is refused all returns without an original receipt until the court approved us using merchandise credits. Then we can return the items people received as gifts, and the parents have the full value of the item to apply to something else.

What our direction from on high is now is to return whatever people want to return, and give them credit on a merchandise credit. Since the court still hasn't approved us using the credits, though, people run the risk of losing the value of the card (and since they no longer have the product, they're just SOL). We shouldn't be issuing new cards without court approval. Since they haven't given us approval yet, they could cut us off at any time, and the customer would have no recourse.

So, if anyone has a merchandise credit, they should use it ASAP. If anyone has a gift card, I'd recommend them trying to use it, but it probably won't be accepted as payment. If anyone has a return, they should try to exchange it for other merchandise. There's a chance the court will approve all the gift card & merch credit debt so they can be used, but lately the courts haven't been very consumer friendly - the KB Toys judge gave people like a month to use them at a reduced value.

The employee goes on to say that in KB's case, the company didn't let any customers know about the monthlong window until a few days before it expired. Also, that many store folks feel the Right Start corporate office is not handling the situation well, or treating customers well, or employees either, for that matter.

My advice is basically the same as it was, only with more emphasis and urgency; if you have any Right Start or babystyle credit, use it up as fast as you can. And remember to be nice to the store folks. However bad it might be for you to lose that $19.95 store credit, their situation is almost certainly worse.

UPDATE WITH ACTUAL FACTS: As the NYT pointed out in November, gift cards are treated as unsecured loans to the company, so when a company goes bankrupt, gift card holders are considered unsecured creditors who are likely to get hosed. It's up to the bankrupt company to petition the judge to allow the continued use of gift cards. I just reviewed Right Start's filing, and there is no request at all for the continued honoring of gift cards.

UPDATE ON RIGHT START'S DEMISE: There was some earlier grousing in the comments about how the babystyle and TinyRide acquisitions doomed Right Start. According to the company's bankruptcy filing, there's some evidence of that, or at least that the acquisitions were executed badly, or suffered some lethal setbacks. Right Start quickly pumped its own inventory into TinyRide, which maxed out its own credit line, which couldn't be expanded quickly enough by adding babystyle's inventory to the secure asset base. The result: Right Start entered the worst retail season in decades with no cushion and no credit.

But the company was basically screwed before it acquired babystyle or TinyRide. At least six of the twelve new locations Right Start opened in 2007 missed revenue projections, they admitted, "some by more than fifty percent." Whether it was the location, the concept, or the management, that's utterly horrible performance.

Grain of salt disclaimer, since I'm not a bankruptcy expert, you'll want to consult your own attorney and beancounter rather than making financial decisions based on what you read on some blog: As for how vendors and other creditors might fare in the company's liquidation, RS/bs owes about $3.6 million to Wells Fargo, which is secured by inventory held on the books at $6.6 million [that's the wholesale cost]. There's $250k more babystyle inventory being held at Customs by UPS, pending payment. Babystyle's warehouse also filed a lien for $429k against its inventory, too. The companies owe $700k in sales tax. So expect that the first $5 million to come through the door is spoken for. After the corporate slashing a couple of weeks ago, combined payroll seems to be about $250,000 every two weeks. Combined accounts payable--primarily trade vendors, including landlords, but not bs's warehouse--is $9.2 million. The judge set a hearing for Feb. 19.

The best-case scenario for secured creditors is for Right Start to unload its $7m inventory on another company for somewhere between $5-7m. Barring an impossible fantasy--like an acquisition of the entire company by someone willing to invest in stores that apparently can't make money even in the best of times--the best case scenario for employees is probably to conduct an orderly liquidation, a classic "going out of business" sale, that gives them a couple more pay periods of work. For any vendor hoping to get paid for the merch they sold to RS/bs, you can play with the numbers, factor in the retail environment and the effectiveness of clearance sales--and count yourself lucky if there's 22 cents left for each dollar you're owed. [$2million/ $9.2 million] So yeah, gift card people are screwed.


The Dallas store has a sign posted that as of February 4th, they are no longer honoring gift cards.

The babystyle website went down "for maintenance" as soon as rumors of the bankruptcy hit the intertubes, and never came back up. They now have a message posted saying that they're gone, and that the stores won't be accepting any gift cards or credits. (I actually tried to post this to your first babystyle item, but the comment system was tweaking for some reason.)

Right start is expected to begin accepting girft cards and merch credits August 1 2009. In case anyone still has one......

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