Bauer Files Chapter 11, A&F Closes Ruehl

CCMP Capital Advisors slated to buy specialty chain for $202 million.

Eddie Bauer is making budget cuts.

The difficulty of coaxing money — whether out of the coffers of lenders or the wallets of consumers — overwhelmed two more specialty store chains on Wednesday.

This story first appeared in the June 18, 2009 issue of WWD.  Subscribe Today.

After a long struggle with declining sales and high levels of debt, Eddie Bauer Holdings Inc. and eight affiliates filed for Chapter 11 bankruptcy protection, while Abercrombie & Fitch Co. opted to shutter its 29-store Ruehl concept after a five-year run and a one-month strategic review.

The two retailers join a long list of chains hitting road bumps in the recession, from Steve & Barry’s to the D.e.m.o chain of Pacific Sunwear of California Inc., and are further proof — if any were needed — of the Darwinian nature of the current economy. Bauer has battled liquidity issues and sliding sales for several years, while Ruehl’s parent A&F needs to focus on its core operations and overseas expansion as it has been under fire for not being promotional and quick enough to adapt to changing consumer tastes.

Bauer has entered into a stalking-horse purchase agreement with the Rainier Holdings affiliate of CCMP Capital Advisors LLC, the private equity firm that owns Cabela’s and numerous other retail nameplates outside of fashion, to be acquired for $202 million in cash, with adjustments for working capital and other considerations. “Eddie Bauer is a good company with a great brand and a bad balance sheet,” said Neil Fiske, president and chief executive of the Bellevue, Wash.-based chain. “Unfortunately, a crushing debt burden placed on the company from the Spiegel reorganization in 2005, combined with the severe, prolonged recession, have left us with no choice but to use this process to reduce the debt load on the business.”

The CCMP deal is subject to an auction and approval from the U.S. Bankruptcy Court in Delaware.

Bauer, which operates 371 stores and saw its 2008 sales decline 1.8 percent to $971.3 million, was founded in 1920 and is considered one of the iconic names in outdoor and leisure apparel. The company became a stand-alone firm in 2005 as part of the reorganization of former parent Spiegel Inc., which filed for Chapter 11 in 2003. A deal to be acquired by affiliates of Sun Capital Partners Inc. and Golden Gate Capital for about $286 million was rejected by shareholders in February 2007, precipitating the departure of then-ceo Fabian Mansson.

Bauer’s bankruptcy petition listed between $100 million and $500 million in both assets and liabilities. Among the unsecured claims, the largest belongs to The Bank of New York, which holds a $75 million bond. U.S. Customs Service holds a $2.5 million claim.

The specialty chain has a $100 million committed debtor-in-possession financing facility from Bank of America, GE Capital Corp. and CIT Group/Business Credit. Bauer also filed under the Companies’ Creditors Arrangement Act in Canada in the Ontario Superior Court of Justice (Commercial List) because of its Canadian subsidiary, Eddie Bauer of Canada Inc.

Following news of the filing, ratings agency Moody’s Investors Service downgraded Bauer’s probability of default to “D” from “Ca.” Standard & Poor’s downgraded its credit rating to “D” from “CCC,” noting the financial covenants in its credit facility were “severely straining its liquidity.”

An affidavit from Marvin Toland, senior vice president and chief financial officer, noted Bauer underwent both a rapid growth period along with a slow erosion of brand identity as it shifted from an outdoor outfitter heritage to a casual apparel chain aimed at mature customers while under Spiegel’s ownership.

A&F has faced similar challenges in the last year as consumers have moved away from its core all-American fashion sensibility. Ruehl, the brainchild of A&F chairman and ceo Mike Jeffries, was meant to be different from the get-go, with Jeffries spinning the tale of its being founded by a German leather goods family that emigrated to New York decades ago. The stores were dark, and the storefronts, even in malls, were meant to resemble town houses. But in this economy such lore clearly doesn’t resonate with a consumer looking for markdowns over mystique.

“Given the current economic environment,” Jeffries said Wednesday, “we believe it is in the best interests of the company to focus its efforts and resources on the growth opportunities afforded by our other brands, particularly internationally.”

The company said it is “currently in the middle of negotiations and reviewing all alternatives from subleasing to conversions. Decisions will be made on a location-by-location basis.” Conversion possibilities include not only the 16-unit Gilly Hicks division — still in its early stages — but Hollister and A&F as well, the firm said.

The New Albany, Ohio-based company said it registered a $51 million pretax impairment charge in the first quarter as it conducted a strategic review of the business. It expects an additional $65 million in pretax charges related to Ruehl, covering lease-related charges, severance and other items.

The company modified its credit agreement so that most of the charges for Ruehl are excluded from minimum coverage and maximum leverage ratios. Among the terms are a reduction in the amount of available credit to $350 million from $450 million, an increase in fee and borrowing costs and a limit of $600 million in capital expenditures for fiscal 2009 and 2010, with no more than $275 million to be spent during the current year.

Ruehl had struggled more than its sibling divisions as comparable-store sales fell 23 percent last year following a decline of 9 percent in 2007 and an increase of 14 percent in 2006. Net sales grew 12 percent last year to $56.2 million, but sales per square foot were $217, lower than any other division and 23 percent below the prior year. Ruehl hasn’t had a comp increase since August 2007, and all of its declines since then have been of the double-digit variety, highlighted by a 39 percent fall in March.

More tellingly, perhaps, the division racked up an operating loss of about $58 million last year.

The move “cleans up the organization so that they can focus on the core drivers of sales and earnings, A&F and Hollister,” said Dana Telsey, founder and chief research officer of Telsey Advisory Group. “As they expand internationally, it’s critical that those two engines are running better.”

Calling the move “the right decision” and “widely expected,” Pali Capital retail analyst Amy Wilcox Noblin said the embattled division went wrong on product, price points and fit, a “problem that extends” to the company’s namesake chain and surf-inspired Hollister.

UBS retail analyst Roxanne Meyer agreed, adding that, despite strides made in Ruehl’s assortment, the move “underscores that it may continue to be difficult for Abercrombie’s other brands, given its aspirational pricing and still evolving assortments.”

While higher-priced concepts have struggled within every sector of retailing in the recession, Majestic Research retail analyst Chandi Neubauer said that A&F’s problems have more to do with fashion missteps than anything else.

“I just don’t think they have the fashion right,” Neubauer said. “I’ve seen new dresses hit the floor, I know they are trying. But either they are too late, or they are getting it wrong.”

She described Gilly Hicks as having a “50-50 shot, I think. It could easily be the next victim,” she said, noting the merchandise, which is primarily lingerie, is too expensive for its core teen customer.

Still, anchored by the strength of its balance sheet, Abercrombie will be able to weather the economic storm, Neubauer said. However, if the company wants to regain market share, it will need to “reinvigorate” its brands with “new, fresh” merchandise,” she said.

“If they bring in good product, I definitely think the customer will come back.”

Shares of Eddie Bauer lost 5 cents, or 20.2 percent, to close at 18 cents Wednesday, while A&F finished the day ahead $1.17, or 4.5 percent, at $26.97. Making up some ground lost earlier in the week, the S&P Retail Index rose 3.27 points, or 1 percent to 320.66, while the Dow Jones Industrial Average finished off 0.1 percent at 8.497.18.

Also on Wednesday, S&P said specialty jeweler Finlay Enterprises Inc. didn’t make a semiannual interest payment and lowered its corporate credit rating to “D,” representing default, from “CCC.”