Two more retailers on Wednesday joined the trickle of what’s expected to become a surge of Chapter 11 filings.
Pressured by a lack of consumer spending and still-tight credit markets, Gottschalks Inc. and Goody’s Family Clothing Inc. became the latest victims of the retail slowdown.
In its Wednesday filing, Gottschalks, based in Fresno, Calif., said it will continue to pursue the option of a sale of its business or other transaction with third-party investors within 60 days. Knoxville, Tenn.-based Goody’s, which had exited Chapter 11 in October, said in its Tuesday filing that it will liquidate all 282 stores.
Gottschalks became the latest distressed retailer whipsawed by the lack of liquidity in the credit markets and the pullback in spending by consumers that began in the fall and still shows no signs of letting up. In December, department store sales fell 7.2 percent from year-ago levels, the Commerce Department reported Wednesday.
Observers had been particularly nervous about Gottschalks since mid-December, when a proposed deal with Everbright Development Overseas Ltd. stalled. Sources said Everbright, based in the British Virgin Islands with operations in China, has been in discussions with El Corte Inglés, Spain’s largest department store retailer, about an investment in Gottschalks. El Corte already owns a 15.1 percent stake in the chain through U.S. unit Harris Co. Credit sources said they don’t expect the company to liquidate but rather to orchestrate a sale or investment involving Everbright and El Corte Inglés.
“When the deal fell through with Everbright, all thought that a bankruptcy could be avoided, but El Corte and Everbright thought it would be more beneficial to purchase the company out of bankruptcy,” said Bob Carbonell, chief credit officer for credit ratings service Bernard Sands.
Financial and restructuring sources told WWD the two would benefit from a bankruptcy filing as they can buy the retailer at a better price than if they did so outside of a Chapter 11.
The most recent proposal on the table, sources told WWD last week, involved Everbright and El Corte each contributing $25 million for a total $50 million capital infusion into the troubled chain. Should Everbright and El Corte strike a deal, they could become the stalking horse bidder under bankruptcy court rules and could be displaced by higher offers.
Gottschalks has received $125 million of debtor-in-possession financing from a group of lenders led by GE Capital. In the Chapter 11 petition filed Wednesday in a Delaware bankruptcy court, the retailer listed assets of between $100 million and $500 million, and estimated liabilities in the same range. It operates 59 Gottschalks department stores, and three Village East specialty stores. The stores are located in California, Washington, Oregon, Nevada, Idaho and Alaska.
In an affidavit filed with the bankruptcy court, J. Gregory Ambro, executive vice president and chief operating officer, said that, of its 62 locations, Gottschalks owns five sites and leases the balance. He also confirmed that Gottschalks has been in talks to “modify the amount of the proposed investment from Everbright or raise additional capital from third parties [principally its existing investor, The Harris Co.].”
He said the company expects to post a loss before interest, taxes, depreciation and amortization of $12 million for 2008, with revenues forecast at $557 million. In 2007, the retailer posted $5.5 million in earnings before taxes, depreciation and amortization, and revenues of $626 million. Interest wasn’t included in the 2007 number.
Gottschalks’ top unsecured creditor is Harris Co., which is owed $16.2 million. The Redlands, Calif.-based Harris in July agreed to extend the repayment date for a line of credit until May 2010 from this May. Ambro’s affidavit said the original principal amount was $22 million, but has been reduced by several principal payments.
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