By and  on August 6, 2009

Pummeled by consolidation at department stores where it had a substantial licensed business operation, Finlay Enterprises Inc. and seven affiliated companies filed for Chapter 11 bankruptcy court protection in Manhattan late Wednesday.

According to court papers, the jewelry firm entered into a stalking horse agreement with Gordon Brothers Retail Partners for the liquidation of Finlay’s assets. The agreement still requires Manhattan bankruptcy court approval, after which it will be subject to better offers at a court auction.

The Chapter 11 petition said that, as of July 4, the company had $331.8 million in assets and $385.5 in liabilities. In the fiscal year ended Jan. 31, the company registered a net loss of $107.3 million on sales that rose 5.2 percent to $754.3 million.

Embarking on a diversification strategy as the consolidation trend spread, Finlay acquired Carlyle & Co. Jewelers in 2005, L. Congress Inc. in 2006 and, from Zale Corp., the Bailey Banks & Biddle chain in 2007, helping to preserve sales but also adding to its debt load. At the time of the filing, Finlay had 77 licensed department store locations, down from about 700 less than two years ago, and 106 stand-alone stores.

Arthur E. Reiner, chairman, president and chief executive officer, said in court papers that licensed departments accounted for 64 percent of sales in 2008, with an average sale price of $272. However, the average selling price for items within the stand-alone stores is $1,200 or more, Reiner said.

Reiner noted that, in the three-year period ended Jan. 28, 2006, stores owned by Macy’s Inc., then Federated Department Stores, and May Department Stores Co., acquired by Federated in 2005, accounted for more than 70 percent of Finlay’s sales. Two subsequent restructuring initiatives by Macy’s following the May merger reduced the licensed department operation by 288 sites and Finlay’s annual revenues by more than $350.5 million. Earlier in his career, Reiner spent more than 30 years with Macy’s, most recently as chairman and ceo of Macy’s East.

The licensed operation also suffered when Lord & Taylor in 2008 elected not to renew its agreement and when Belk Inc. ceased using Finlay’s services in the Parisian stores it acquired from Saks Inc. in 2006 as well as those of a privately held firm purchased the same year.

Finlay also was hurt by the January bankruptcy and subsequent liquidation of Fresno, Calif.-based Gottschalks Inc.

Even jewelry firms unaffected by consolidation have been hit hard by the recession. According to the Jewelers Board of Trade, a credit and collections bureau, 1,140 jewelry businesses closed in 2008 and bankruptcies were up 18.6 percent in the sector. Whitehall Jewelers, Friedman’s and Crescent Jewelers were liquidated last year and Fortunoff filed for Chapter 11 earlier this year and has since liquidated. Among fine jewelers, Henry Dunay Designs Inc. and David Webb filed for Chapter 11 in June, following filings by Michael Beaudry Inc. and Doris Panos Designs Ltd.

According to Reiner, Gordon Brothers began liquidation of certain Finlay locations in March, and expects to complete liquidation of the licensed departments by Oct. 1 and the stand-alone sites by Dec. 31.

According to the court filings, the largest unsecured creditor is U.S. Bank in New York, holding senior notes valued at $40.6 million. Among other unsecured creditors are Movado Group Inc. in Paramus, N.J., holding a claim of $283,722 that is partially secured, and Yurman Design Inc. in New York, at $203,794, also partially secured.

The two largest secured claim holders are General Electric Capital Corp. at $37.5 million, and HSBC Bank, USA, which holds two claims totaling $201.3 million.

Finlay started in 1887 as a mail-order jewelry business.

In a separate development Thursday, Zale said it would take a pretax charge of $50 million for the fourth quarter ended July 31, including $23 million to cover contingent rent obligations for 34 of 45 Bailey Banks & Biddle retail locations sold to Finlay two years ago. Negotiations are continuing for the other 11 locations, the aggregate base rental obligations of which are $33 million.

Zale, which said in February that it planned to close approximately 115 underperforming stores as their leases matured, reported Thursday that it closed 118 units during the fourth quarter and 191 so far during calendar 2009, of which 31 were kiosks. The 191 units lost about $14 million during the 12 months prior to their closures and carried $56 million in inventory. An additional $27 million in pretax charges will be taken during the fourth quarter to cover the closures.

Zale expects a net cash flow benefit from the Bailey Banks and store closure actions of about $55 million, with $30 million realized during the just-concluded fiscal year and the remainder expected in fiscal 2010.

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