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Last markdown for Filene's Basement

Downtown closing sparked spiral

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By Jenn Abelson
Globe Staff / May 24, 2009
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In August 2007, days before the metal grates came down on Filene's Basement in Downtown Crossing, teary employees gathered among the barren shelves for a farewell breakfast. It was a dark day in the history of the storied merchant: Here, workers had found a second family and shoppers had discovered the best bargains in Boston, making this location the most successful in the chain.

Shuttering the flagship store, even temporarily as part of a redevelopment project, didn't seem right. But management promised that Filene's Basement would return better than ever in 2009. The new flagship location would debut in time to celebrate the Boston retailer's 100th anniversary. And the premiere of a documentary film chronicling its rise out of the bargain bins would help seal its retail legacy.

But instead of a grand reopening, the question today is whether Filene's Basement will survive this year. The merchant filed for bankruptcy protection this month, the second time in a decade, and its future has never been more uncertain. The Downtown Crossing location remains a gaping hole in the ground. One third of the chain's shops have closed their doors for good. And the filmmakers have run out of money.

"This has been very painful for me and the entire organization," Mark Shulman, president of Filene's Basement, said in his first interview since the company filed for Chapter 11 protection earlier this month. "Some people went through the first bankruptcy a decade ago and now are going through it again. It's awful."

The company's downward spiral has been accelerated by an extraordinary confluence of economic events. The downturn, which has pummeled many a retail outlet, is only partly to blame: The most recent expansion into suburbs proved unprofitable and tied up too much cash; deep discounting from Macy's to Saks Fifth Avenue fiercely increased competition; bloated overhead costs depleted funds. Losses at the Basement ballooned to $62 million in 2008 from $6 million in 2006, according to securities filing.

And, as it turned out, the shutdown of the flagship - where millions of shoppers flocked annually for its famous automatic markdown policy - was a blow from which Filene's Basement could not recover.

"Filene's Basement never should have abandoned that Downtown Crossing store. They should have found a temporary location while the area got redeveloped," said Mike Tesler, president of Retail Concepts, a consultancy in Norwell, and a former Basement executive in the 1990s. "They lost nearly 25 percent of their revenues. It was closing the heart and soul of the organization. You can't survive without it."

The beloved Basement had a modest start in 1909 as a way for its founder, Edward A. Filene, to sell off excess merchandise from his father's Filene's department store upstairs on Washington Street. Filene's Basement was a pioneer in discounting and its automatic markdown policy, which provides deeper discounts on items the longer they remain unsold, set it apart.

Bargain hunters flocked to the Basement. Loyal shoppers remember jostling for merchandise, hiding items throughout the store hoping they'd get marked down again, and charging the front doors to grab discounted wedding dresses during its Running of the Brides event. (Filene's later sold off the Basement as a separate company, and Macy's, which eventually bought the Filene's department stores several years ago, turned them into the Macy's nameplate.)

During the 1990s, Filene's Basement aggressively expanded outside of Boston, but attempts to replicate the magic of the Downtown Crossing shop foundered. Away from city's bustle, the brand had little recognition and the stores lacked distinction. By 2000, the company had shrunk from 56 stores to 14 and filed for bankruptcy protection. A few years later, the new owners of Filene's Basement brought in Heywood Wilansky, a former department store executive, as president to remake the chain to appeal to upscale shoppers.

"We had fallen on very hard times, and we looked like a copycat of T.J. Maxx with similar price, same merchandise and marketing, same fixtures," said Wilansky, who later was promoted to chief executive of Retail Ventures Inc., the holding company that owned the Basement. "We had no future walking the same path as T.J. Maxx because they had huge marketing dollars and huge marketing power," he added. "We needed to differentiate ourselves by changing the Basement from a moderate off-price player to a higher-end off price player."

The Back Bay location, opened in 2006, epitomized the new Filene's Basement, featuring fancy tiles, mahogany wood, and well-stocked shelves of clothing and shoes in many sizes. And in the beginning, there was even a doorman in cap and white gloves to help harried shoppers.

Executives believed this new approach could also help the chain expand more successfully in the suburbs. But by straying from its formula, the new Basement ended up looking like a cookie-cutter chain. Gone was the feeling that made Filene's Basement famous: the sense that shoppers were on a treasure hunt, finding a marked-down Prada purse or a Giorgio Armani suit in the most unglamorous of places. Long-time Filene's Basement employees quietly questioned the strategy and the amount of money spent on these new stores, according to one former executive who was laid off this year and requested anonymity because of a nondisclosure agreement.

The debate grew louder when it came to reinventing the Downtown Crossing shop. At first Filene's Basement executives tried for months to find a temporary spot to keep open the flagship, including looking at a space vacated by a Barnes & Noble on Washington Street. But city officials who attempted to broker a deal say the company did not seem motivated. Some wanted to replace the flagship store's cement floors with wood and paint the beat-up bargain bins a shiny red. Others pushed to retain the Basement's charm, the handwritten signs and industrial decor.

But larger challenges were looming. By 2007, sales were sagging at new stores opened in suburban markets. In January 2008, parent Retail Ventures sold off a majority stake in its other company, Value City Department Stores, leaving Filene's Basement to shoulder millions of dollars more in executive salaries and administrative costs that the two businesses had shared. Banks also reduced the line of credit available to the Basement now that Value City was no longer part of the agreement. But the Basement was unprepared for the new demands.

Last summer, Retail Ventures decided not to renew Wilansky's contract as a way to cut expenses. Then developers for the Downtown Crossing project struggled with financing and the venture stalled. By the fall, as the economy tanked and sales plunged as much as 15 percent, Filene's Basement had trouble paying vendors for merchandise.

Soon enough, plans for the 100th anniversary celebration and a grand reopening party were shelved. Instead, executives began conversations with landlords to try to reduce rents at various locations. When that failed, Filene's Basement disclosed plans in January to close 11 stores, just days before Wilansky's contract expired. And then the first round of layoffs began.

"It's sad, but I wasn't really involved in running it by then," Wilansky said. "But it's a shame. Except for some real estate decisions that were made, I think this might have never had to happen."

Retail Ventures officials declined to comment.

Desperate, executives scrambled to find new investors or new owners, any way to get more cash. They could not have chosen a more inopportune moment: Credit markets had frozen, and Filene's Basement stood at the end of a long line of flailing retailers seeking a financial lifeboat.

By April, it was clear that the options had run out. Vendors were threatening to sue the company to force it into involuntary bankruptcy so they could get their money. Retail Ventures, eager to get the struggling business off its books, paid a California liquidator, Buxbaum Holdings, about $1.6 million to dispose of the chain. Days later on May 4, Shulman, the Filene's Basement president, called employees into a conference room at the chain's Burlington headquarters to deliver the news: Filene's Basement was filing for bankruptcy.

"It was the worst thing I ever had to do, looking at the faces and seeing people who had been with the company for so long. They were stunned," Shulman said. "I share all of the responsibility for what happened. At the end of the day, I was president. We had some missteps, and we can look back and say we should have done things differently. But we got ourselves into a bind and hit the perfect storm."

Now, the future of the Basement is in the hands, yet again, of the bankruptcy court. An auction for the Basement's assets will be held next week.

Shulman insists there is a future for the chain, but it will need to go back to its heritage: bargain alleys and no-frills decor. And he holds out hope the flagship shop will reopen one day. One bidder, retail real estate firm Crown Acquisitions, wants to buy 17 of the 25 shops and has said publicly it will keep the brand alive. Privately, city officials and some employees question whether the firm merely wants to acquire the real estate. All the uncertainty is making it difficult for filmmakers Michael Bavaro and Sue Edbril to finish their Filene's Basement documentary, "Voices from the Basement.' They are trying to raise money so they can complete their film with its yet-to-be determined ending.

Edbril, whose grandmother worked for the Downtown Crossing shop for 35 years, began the film seven years ago with the hope of capturing the Basement's lasting magic. Now her subject is in a financial hole that seems deeper than the crater on Washington Street.

"This is just very, very sad. I never expected this would be the ending," Edbril said. "I hope it's not."

Jenn Abelson can be reached at abelson@globe.com.