By  on June 10, 2008

The economy has claimed another retail casualty.

Joining the likes of The Sharper Image and Linens-N-Things, Goody's Family Clothing Inc. on Monday filed for Chapter 11 bankruptcy court protection, a casualty of both the economy and its own missteps, from expansion into urban areas to introducing higher-priced merchandise.

The financial environment is pressuring retailers across the price spectrum, with declines in comp-store sales and widespread markdowns adding up to what industry executives say are some of the worst business conditions in recent memory. Credit sources are keeping close tabs on Mervyns after its credit approval for $40 million in orders was withdrawn by CIT Group Inc. last month, and Gottschalks Inc., due to its many California locations in areas where consumers are cash-strapped and elect to purchase necessities instead of what's new in fashion.

The Knoxville, Tenn.-based Goody's, which filed its voluntary petition in Delaware, said it plans to streamline its business and reorganize. Nineteen Goody's affiliates also filed on the same day. They include GFC Aircraft Leasing; Goody's MS; Goody's Retail MS; Goody's Giftco and Goody's Holding TN.

Goody's has arranged a $210 million debtor-in-possession financing facility. The DIP financing includes $175 million under a revolving credit facility from General Electric Capital Corp.; $15 million under a term loan facility from GB Merchant Partners, an affiliate of Gordon Brothers, and $20 million under a junior term loan from PGDYS Lending, an affiliate of Goody's parent, Prentice Capital Management.

Prentice is no stranger to bankruptcies. It bought Levitz Furniture during its second bankruptcy in 2005, which subsequently entered its third tour of bankruptcy and was liquidated in November. Prentice also provided financing to G&G Retail when it was in bankruptcy in 2006, and tried to acquire the company, but was outbid by BCBG Max Azria Group.

The retailer in its filing did not list its largest secured creditors, but credit analysts believe Goody's lender CIT tops that list.

The top two unsecured creditors are: Levi Strauss & Co. in Eugene, Ore. ($9.1 million) and Lee Co. in Charlotte, N.C. ($4.7 million). Other apparel vendors who made the top 20 unsecured creditors list include Jeri-Jo Knitwear Inc., Edison, N.J. ($3 million); Skechers USA Inc., Manhattan Beach, Calif. ($1.9 million); Unionbay Sportswear, Seattle ($1.7 million); Larry Levine/E-LO Sportswear, Harrison, N.J. ($1.3 million), and Gloria Vanderbilt, New York ($1.1 million)."We plan to close 69 underperforming stores, consolidate our distribution centers by closing one facility in Russellville, Ark., significantly reduce expenses, and create a more appropriate capital structure," said Paul White, Goody's chief executive officer.

Bob Carbonell, the chief credit officer at Bernard Sands, a credit checking firm, said, "As in every bankruptcy, we will await the judge's ruling on DIP financing and examination of the terms of the financing agreements before recommending shipments to our clients."

In a filing with the bankruptcy court, David Peek, executive vice president, chief financial officer and secretary, said, "The debtors have experienced operational losses for the past three years [which] are the result of a number of factors, including the tightening of the credit markets, a strain on merchandise flow and a sizeable, but isolated number of underperforming stores in the chain."

One credit analyst noted four geographic areas that have been pressured by a pullback in consumer spending: California, Nevada, Arizona and Florida. He cited Mervyns, which has stores concentrated in California, Nevada and Arizona, and Gottschalks, which has stores in California, as retailers that also are taking some lumps as consumers feel the heat of the economic downturn. The analyst also believes that some of Goody's underperforming stores were in Florida, where the retailer has six sites. In addition, some stores in the Atlanta area are likely unprofitable as many of those leases also include expensive monthly rent tabs, the analyst said.

The analyst said the blame for poor performance can't be placed entirely on the economy. "The economy was the final straw, but not the only reason. The company had been underperforming even when the economy had been good," he said.

Some said Goody's, which did well targeting the rural consumer in smaller markets, should never have traded up by opening stores in urban locations, where it met competition from the better apparel-focused retailers such as Kohl's Corp. and J.C. Penney Co. Inc.

Another misstep was when the retailer elected not to communicate with the trade last summer, which caused some factors to pull back on approvals for orders, one credit analyst said. A financial source said the lack of communication left a "bad impression" among members of the trade.Also hurting Goody's was the higher-priced merchandise of some of its private label goods. The average for an Ashley Judd-branded item was $30, compared with a $15 ticket price for most goods in the store, one financial source said. Goody's in June 2007 inked a deal with the actress for three exclusive labels, namely AJ; Love, Ashley, and Ashley Judd. The collections range from organic and knit T-shirts and sweaters to blazers, blouses, cardigans and pants. The deal also includes an extensive denim offering featuring Judd's signature stitching on the back pockets and floral details on the inside waistband.

Peek, in his filing, said the company employs nearly 10,000 full-time and part-time employees. As of May 3, Goody's had assets of $313 million and liabilities of $443 million. In 2007, the retailer posted $1.1 billion in revenue, but sustained net operating losses of $128 million. For the three months ended May 3, the retailer suffered an additional $9.6 million loss. Earlier this year, Goody's shuttered 18 stores. According to Peek, those stores were selected either because they were too large, not in Goody's targeted small to midsize markets, or just unprofitable.

Goody's targeted value-conscious consumers with an average household income of $55,000. The company describes its business strategy and operation as a moderately priced family apparel specialty store operating in small to midsize markets primarily through the Southeast. The retailers' key national brands include Adidas, Levi's, Nike, Dockers, Chaps, Reebok, Lee and Alfred Dunner. Goody's private brand collections include Ivy Crew, Mountain Lake, Duck Head Jeans Co., Kid Crew and Ashley Judd.

Despite the company's goal to reorganize, there are doubts about its ability to do so, as well as questions regarding its niche in the market.

One credit source said Goody's has many economic negatives going against it at the moment, namely the price of gas and the cost of food. Another financial source said so far, retailers that have gone into bankruptcy have been unable to restructure, instead going the liquidation route because the new rules shorten the tour in bankruptcy as well as the time in which to decide what store leases to reject.

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