By  on June 26, 2012

Daffy’s is at a tipping point.

Pressures continue to mount for the off-price apparel retail chain, which in the last two weeks has been hit by reports of financial difficulties.

As speculation mounts that the company may soon need a white knight, market sources said Monday that buyers were told to go on vacation. Since last week, the few existing orders that were placed have been canceled, these sources said.

A call to Daffy’s chairman and chief executive officer, Marcia Wilson, for comment was not returned.

Rumors surfaced about two weeks ago that Daffy’s was feeling some financial strain. Last week, credit sources said the Secaucus, N.J.-based chain informed vendors it can’t pay May invoices.

Financial sources on Monday said Daffy’s was still in talks with its lender about its cash-flow issues. How those discussions pan out could determine Daffy’s fate.

Wilson might be forced to go to her fall-back plan, which is to find a buyer for the $150 million, 19-unit chain. Sources said she is already considering her options in that regard.

Wilson in the past has often hinted at the idea of selling the chain. A few years back, she considered selling a stake to a private equity group, but changed her mind. Instead, she stepped down from the ceo post in March 2011 as the firm named Caryn Lerner, the former ceo at Canada’s Holt Renfrew, as the chain’s ceo.

Lerner, who was on hand for the opening of the 20,000-square-foot Daffy’s store in Times Square, left the chain in March, barely a year after she began her new job. Wilson elected not to seek a new ceo, taking back the post herself in addition to her chairmanship duties. At the time, Wilson told WWD that Lerner’s departure from the firm was a “mutual” decision.

Lerner, during her short tenure, had improved Daffy’s assortments. However, market sources said sales in April, May and June were not great.

While vendors last week cited increased competition from flash-sale sites as an obstacle, one other problem just might be Daffy’s business model.

The model that Daffy’s employs, and one that also hurt Syms and Filene’s Basement and helped push those two nameplates into bankruptcy, is one where buyers focus their purchases primarily on closeouts. Closeouts are typically merchandise that’s one season old. It’s also an older model that worked when consumers had fewer choices. The presence of e-tailers, plus hipper fashion chains such as Uniqlo, Forever 21, H&M and Topshop, changes that equation.

Since the economic downturn that began in late 2007, vendors have adjusted their production cycles. They also tend not to hold extra inventory these days versus a time when there was hope that retailers might order more for replenishment needs. Retailers in turn would rather chase sales, which helps their bottom lines as it means less inventory to mark down at the end of the season. That also means less surplus inventory to go around.

While a 19-unit chain doesn’t need that much inventory, most of what’s left over is more easily disposed of by the vendor through opportunistic flash sales or their own outlet stores, oftentimes while the goods are still in-season. While Daffy’s did buy some in-season merchandise, some said there wasn’t enough wear-now goods to attract consumers.

Should Daffy’s be unable to renegotiate with its lender, a sale of the company would have to be considered.

Daffy’s stores vary in size, although the average is between 20,000 to 25,000 square feet. These are also the locations that are considered the more challenged sites in Daffy’s portfolio, sources said. In addition to the Times Square location, other sites are larger. Its two top locations are the ones at Herald Square, at 100,000 square feet, and at 57th Street, at 52,000 square feet.

Daffy’s operates eight stores in Manhattan. Four others are in the New York area, in the Bronx, Brooklyn, Queens and Manhasset. Six stores are in New Jersey: One each in East Hanover, Paramus, Secaucus and Totowa, and two in Elizabeth. There is also one store in Philadelphia.

Wilson is the daughter of Irving J. Schulman, who founded the chain in 1961 as Daffy Dan’s Bargaintown.

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