By and  on January 6, 2011

The retail landscape has its first casualty of 2011.

Anchor Blue Inc., the Corona, Calif.-based teen specialty store operator owned by private equity firm Sun Capital Partners, has closed its corporate offices and is in the process of winding down operations at its 120 stores. Officials at Sun Capital declined to comment Wednesday and calls to Anchor Blue officials weren’t returned, but suppliers and store associates confirmed that operations were being shut down and details on the chain’s liquidation were expected on Friday.

The troubled teen retailer survived a three-month stay in bankruptcy, beginning in June 2009, and a series of downsizing moves, but found itself at a loss to compete in an increasingly promotional youth retail market. In an effort to work down inventories and generate cash, it had been running “buy two, get two free” promotions for much of the holiday season. Anchor Blue also had been among a series of retailers operating stores with large amounts of empty space within its walls and concentrating its inventory in the remaining square footage.

The pending liquidation ends Sun’s seven-year stewardship of the chain — and adds another fatality to the private equity player’s list of unsuccessful investments. Most conspicuous among these was Mervyns, the midtier retailer shuttered in late 2008, and, like Anchor Blue, a store that faced an uphill battle for survival as the economy on the West Coast soured even in advance of the global recession. Other Sun investments to wind up on retailing’s scrap heap include Steve & Barry’s and the Bachrach men’s specialty chain, as well as Wickes Furniture and Sam Goody music stores. Lee Cooper, acquired by Sun in 2005, filed for bankruptcy protection in France in March.

Sun’s biggest remaining retail investments involving apparel are Limited Stores LLC and the ShopKo and Pamida discount chains. It also owns Kellwood Co., intimate apparel producer DBApparel and, in children’s wear, Gerber Childrenswear and Hanna Andersson. The company acquired the 25 percent of Limited it didn’t already own from Limited Brands Inc. for $32 million in June. A previous investment in Gordmans progressed to an initial public offering last year.

With its bankruptcy behind it and new management in place for another shot at rehabilitation, there were few signs a year ago of Anchor Blue’s imminent demise. In the first and second quarters of the fiscal year, the company promoted former Aéropostale Inc. executive vice president and chief merchandising officer Chris Finazzo to executive vice president, brought on board former Levi’s design director Caroline Amrikhas to lead the design team, hired Erik Forsell from the La Jolla Group to oversee marketing and appointed former Papyrus chief financial officer Tom Shaw as cfo.

Later in the year, Shaw added the title of chief executive officer, ending the four-year tenure of Tom Sands, previously of Gap Inc. and Target Corp., in that role.

According to sources, Finazzo left Anchor Blue in June. Earlier in the year, he was indicted in Brooklyn federal court on charges of mail and wire fraud in connection with his involvement in a company with ties to Aéropostale. He was terminated at Aéropostale in 2006.

Anchor Blue had begun experimenting with prototype stores that reduced the footprint to about 3,500 square feet from roughly 6,300 square feet. Ten additional stores were contemplated.

The fate of Anchor Blue is a sign the consumer rebound that characterized the holiday season for many retailers has not lifted all stores onto healthy fiscal ground — and that not every private equity investment is a sure-fire path to gold. The holiday season and the preceding back-to-school period were key performance tests for Anchor Blue that apparently demonstrated to Sun Capital that the chances of its long-term, lucrative survival were not good. As the promotional cadence of the teen retail market accelerated, the prospects for a relatively small player dimmed. Sources said Anchor Blue also was handicapped by a high dependence on denim, a classification promoted heavily throughout the back half of 2010.

Anchor Blue Clothing Co. was started in the Seventies as Miller’s Outpost and, under the direction of founder Dave Miller, grew into a more than 300-unit mall powerhouse in the late Seventies and Eighties. It proved a pesky competitor for larger operations, including Gap Inc. in its earlier days, and was one of the principal players in the Levi’s price war of the early Eighties following the 1975 repeal of fair trade laws. Miller, who died in Los Angeles in October, sold the operations to American Retail Group, the repository for the U.S. interests of the Brenninkmeyer family of the Netherlands. The move toward the Anchor Blue brand and away from Miller’s Outpost came around the turn of the century. Accompanying the nameplate change was a repositioning to endear the brand to the teen market and away from Baby Boomers. Last year, Finazzo said the target customer age range for Anchor Blue was 15 to 22 years old and 60 percent of shoppers were male in most stores, although that percentage jumped to 80 percent in some locations.

Sun Capital came into the picture in 2004, when it acquired the retailer from ARG for a price estimated by financial sources at $400 million. The acquisition gave Sun Capital 213 units, including 42 Miller’s Outpost stores, and Levi’s by M.O.S.T., which held the license to operate Levi’s and Dockers outlet stores west of the Mississippi River. The sources pegged sales from Anchor Blue’s enterprise at more than $300 million.

Anchor Blue filed for Chapter 11 in May 2009 with a bankruptcy petition that showed less than $50,000 in assets and $100 million to $500 million in liabilities. As part of the bankruptcy, Anchor Blue opted to close 50 underperforming stores and sell its 73 Levi’s and Dockers outlets to Levi Strauss & Co. for $72 million. Levi’s was also its largest unsecured creditor, with claims totaling $2.6 million.

“The unprecedented, sustained economic downturn and a related drop in consumer spending, especially in the teenage market, have had a severe impact on our financial performance,” ceo Sands said in a statement about the bankruptcy in 2009. The bankruptcy allowed Anchor Blue to close subpar locations, Sands said.

The retailer emerged from bankruptcy in August 2009 with 113 units concentrated in the Southwest United States. Anthony Polazzi, a principal at Sun Capital, stated at the time, “We believe that the company is well positioned to capitalize on the rebound in the U.S. retail economy, which has suffered from historic revenue declines in the past two years. This is the third affiliate Sun Capital has successfully guided through a bankruptcy process this year and is indicative of our deep support and operational involvement with our affiliates.”

But Anchor Blue never returned to solid footing. The company tried to rev up interest from young consumers by leveraging a collaboration with reality television star and tabloid headliner Heidi Montag on an apparel line called Heidiwood, but that collaboration flopped. The retailer suffered as well from management upheaval. Former Movado executive Michael Bush became president when Sun Capital originally invested in Anchor Blue, but was succeeded by Sands.

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