Outlet-mall kingdom forced to sell pieces of its empire


THE typical American home contains 30 pairs of women's shoes, 22 men's ties, 1.8 cars, four remote controls, 2.5 televisions, 25 battery-powered devices and enough closet space to house a Chinese family of three.

Americans spent enough money in stores last year to give $583 to every person on the planet.

So it takes unusual levels of skill and execution to fail to prosper in the U.S. retailing business.

Prime Retail Inc., based in Baltimore, boasts a portfolio of 43 shopping malls and a stock price of 16 cents.

Last week, the company announced that it expects to violate some loan conditions this year and that it might not be able "to continue as a going concern." This is another way of saying it could soon have an intimate and enduring relationship with Judge James F. Schneider at the U.S. Bankruptcy Court on Lombard Street.

At a glance, Prime's struggle seems like a long-awaited sign of limits to how far Americans will travel to shop and how much they will buy.

All Prime's properties are outlet malls, a kind of shopping center occupied mainly by clothing and accessories manufacturers, as opposed to independent merchants, that spread into deserts, prairies and cornfields by the scores in the 1990s.

Originally attached to shoe factories and textile mills in New England, outlet stores began clustering near tourist haunts such as Williamsburg, Va., in the early 1980s. Then, in a crusade to bring retail civilization to towns such as Story City, Iowa, outlets spread to places that lacked tourists.

After that, outlets popped up in locations without much human habitation at all on the theory that shoppers would track them down like bloodhounds.

Few people have gone broke overestimating the power and determination of the U.S. consumer, and just about every dubious, rosy prediction about the future of outlet malls came true. Prime Retail's thriving center in Perryville, home of not much more than an Interstate 95 tollbooth and a new L.L. Bean store, is an impressive monument to Visa and MasterCard.

Unfortunately for Prime and its shareholders, not all the company's malls are doing as well as Prime Outlets at Perryville. The company is a sick man in an industry that is relatively healthy despite the recent economic downturn and increased competition from Wal-Mart and other discounters.

Prime labors under the triple handicap of crushing debt, under- performing centers and the hangover of a disastrous foray into Internet sales.

Like many, Prime listened too quickly and too well to sirens who said everybody would buy everything on the Web. Prime, which originally bet that shoppers would drive for hours to buy discounted J. Crew sweat shirts, then bet that they wouldn't, spending millions to try to sell the merchandise remotely.

When it finally realized that consumers still like to see, touch, sniff and try on the goods, even if they have to travel to Hagerstown, Prime had blown $18 million on eOutlets.com and waded into the quicksand where it is still stuck.

Rising vacancies and tenant bankruptcies have also hurt Prime, but its main problem is almost $900 million in debt. The company merged with another outlet operator a few years ago and financed the deal with borrowed money, intending to pay off much of it with proceeds from a secondary stock offering.

But the market in real estate stocks slumped. Prime scrapped the offering and has been living on crumbs since 2000. It owes its avoidance of bankruptcy proceedings to the forbearance of its lenders and the creativity and energy of its financial staff.

The company executed a lifesaving refinancing a year ago, at an interest rate of 14.75 percent, but the economic slump and the shock of Sept. 11 added to its misfortunes. Recently, Prime had to amend the refinancing, and it is still deep in the woods.

It dodged one booby trap this week by unloading a mall in Edinburgh, Ind., which will give it enough cash to meet a $9 million debt payment due May 1. But it still must sell other centers to make payments of $15 million on July 1 and $1 million on Nov. 1, and the high interest rates extract an additional $800,000 a month from Prime's treasury.

Even if it sells enough properties to banish the debt monster, Prime will still have to make a go of operating the remaining malls, which may not be its best properties. It must worry about more than 700 tenant leases expiring this year. Even if it gets back on its feet operationally and financially, Prime could be cold-cocked by pending litigation from the eOutlets debacle.

Prime boss Glenn D. Reschke says he is optimistic about the company's prospects, pointing to a fourth-quarter increase of 2.9 percent in Prime's "same space" sales per square foot, a decent pop.

"Our problem is with our balance sheet, not our business," he says. "I think we are here to stay."

That's not the message emitted by Prime's 16-cent stock. But on the other hand, the economy is recovering, and Prime has a secret weapon: the American shopper.

There may come a time when U.S. consumers signal that no, the world isn't ready for a 229,000- square-foot outlet mall in Lebanon, Tenn. But it hasn't happened yet.

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