In May 2001, unable to get credit from enough of its lenders, housewares retailer Lechters, Inc., filed for Chapter 11 bankruptcy. It then secured new bank financing in the amount of $86 million. Suppliers, however, remained concerned about Lechters’ ability to meet future obligations. Many suppliers took back their terms of sale specifying the number of days the company had to pay for its merchandise and instead asked for cash in advance or on delivery. Smaller home-furnishing retailers like Lechters struggle against big rivals, such as Bed Bath & Beyond, which are more valuable to suppliers and thus can demand better terms and pricing. In spite of these problems and an annual net loss of $101.8 million on sales of $405 million, management believed the company could eventually succeed with its strategy under the bankruptcy.
Which is more critical to the short-term survival of a company faced with Lechters’ problems: liquidity or profitability? Which is more important in the long term? Explain your answers.