Why Frederick's of Hollywood Was Smart to Close Stores

Just a year ago, the Frederick’s of Hollywood lingerie retail operation closed virtually all its stores as it entered Chapter 11. As a part of the process, it sold its inventory and e-commerce operations to Authentic Brands. The move was made out of desperation, but it is not the end of an industrywide process that will take more retailers under if they do not close stores and move online more quickly.

Research firm Morningstar recently released a study that reviewed the bankruptcies of Sports Authority and Eastern Mountain Sports and the “downsizing” of Men’s Wearhouse and Hancock Fabrics. At the heart of the story was an analysis by Green Street Advisors that forecast major retailers, like J.C. Penney Co. Inc. (NYSE: JCP) and the Kmart and Sears divisions of Sears Holdings Corp.(NASDAQ: SHLD), would close hundreds of mall-based stores as a means to get back to 2006 profits per square foot.

The Frederick’s of Hollywood decision, although it was forced on the company, may be the single most important action it took to survive and avoid liquidation.

Naturally, Amazon.com Inc. (NASDAQ: AMZN) will be blamed for all the brick-and-mortar suffering. Amazon sells cheap lingerie. But so does Macy’s Inc. (NYSE: M) and dozens of other retailers that have e-commerce operations. While Amazon kills these companies, they continue to participate in killing one another. The root cause is that e-commerce has been too crowded. Amazon has become the scapegoat because of its size.

Frederick’s of Hollywood was not given an alternative choice. Other brick-and-mortar operators should be so lucky.