A Tight Squeeze: Goody’s, Gottschalks in Chapter 11 Filings

Two more retailers on Wednesday joined the trickle of what’s expected to become a surge of Chapter 11 filings.

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Two more retailers on Wednesday joined the trickle of what’s expected to become a surge of Chapter 11 filings.

This story first appeared in the January 15, 2009 issue of WWD.  Subscribe Today.

Pressured by a lack of consumer spending and still-tight credit markets, Gottschalks Inc. and Goody’s Family Clothing Inc. became the latest victims of the retail slowdown.

In its Wednesday filing, Gottschalks, based in Fresno, Calif., said it will continue to pursue the option of a sale of its business or other transaction with third-party investors within 60 days. Knoxville, Tenn.-based Goody’s, which had exited Chapter 11 in October, said in its Tuesday filing that it will liquidate all 282 stores.

Gottschalks became the latest distressed retailer whipsawed by the lack of liquidity in the credit markets and the pullback in spending by consumers that began in the fall and still shows no signs of letting up. In December, department store sales fell 7.2 percent from year-ago levels, the Commerce Department reported Wednesday.

Observers had been particularly nervous about Gottschalks since mid-December, when a proposed deal with Everbright Development Overseas Ltd. stalled. Sources said Everbright, based in the British Virgin Islands with operations in China, has been in discussions with El Corte Inglés, Spain’s largest department store retailer, about an investment in Gottschalks. El Corte already owns a 15.1 percent stake in the chain through U.S. unit Harris Co. Credit sources said they don’t expect the company to liquidate but rather to orchestrate a sale or investment involving Everbright and El Corte Inglés.

“When the deal fell through with Everbright, all thought that a bankruptcy could be avoided, but El Corte and Everbright thought it would be more beneficial to purchase the company out of bankruptcy,” said Bob Carbonell, chief credit officer for credit ratings service Bernard Sands.

Financial and restructuring sources told WWD the two would benefit from a bankruptcy filing as they can buy the retailer at a better price than if they did so outside of a Chapter 11.

The most recent proposal on the table, sources told WWD last week, involved Everbright and El Corte each contributing $25 million for a total $50 million capital infusion into the troubled chain. Should Everbright and El Corte strike a deal, they could become the stalking horse bidder under bankruptcy court rules and could be displaced by higher offers.

Gottschalks has received $125 million of debtor-in-possession financing from a group of lenders led by GE Capital. In the Chapter 11 petition filed Wednesday in a Delaware bankruptcy court, the retailer listed assets of between $100 million and $500 million, and estimated liabilities in the same range. It operates 59 Gottschalks department stores, and three Village East specialty stores. The stores are located in California, Washington, Oregon, Nevada, Idaho and Alaska.

In an affidavit filed with the bankruptcy court, J. Gregory Ambro, executive vice president and chief operating officer, said that, of its 62 locations, Gottschalks owns five sites and leases the balance. He also confirmed that Gottschalks has been in talks to “modify the amount of the proposed investment from Everbright or raise additional capital from third parties [principally its existing investor, The Harris Co.].”

He said the company expects to post a loss before interest, taxes, depreciation and amortization of $12 million for 2008, with revenues forecast at $557 million. In 2007, the retailer posted $5.5 million in earnings before taxes, depreciation and amortization, and revenues of $626 million. Interest wasn’t included in the 2007 number.

Gottschalks’ top unsecured creditor is Harris Co., which is owed $16.2 million. The Redlands, Calif.-based Harris in July agreed to extend the repayment date for a line of credit until May 2010 from this May. Ambro’s affidavit said the original principal amount was $22 million, but has been reduced by several principal payments.




Rounding out the top 10 unsecured creditors are: Liz Claiborne, North Bergen, N.J., $2.1 million; The CIT Group/Commercial Services Inc., Los Angeles, $1.5 million; Finlay Fine Jewelry, New York, $1.1 million; The Estée Lauder Cos. Inc., Melville, N.Y., $885,372; Wells Fargo Century, New York, $680,191; Jones Group, Edison, N.J., $566,803; L’Oréal, Monmouth Junction, N.J., $537,509; Alfred Dunner, New York, $490,322, and Phillips-Van Heusen, Bridgewater, N.J., $477,220.

Other fashion firms among the top 20 unsecured creditors list include: Byer California, San Francisco, $460,443; Sara Lee/Hanes Brands, Chicago, $442,311; Quiksilver Inc., Huntington Beach, Calif., $438,390; Columbia Sportswear, Portland, Ore., $277,997, and Warnaco, Milford, Conn., $275,149.

Credit sources have been keeping their eyes on Finlay Enterprises Inc., owners of Finlay Fine Jewelry, which lost 94 Macy’s sites where it leased stores, and all 47 of its Lord & Taylor shops. Finlay said the Macy’s locations generated about $120 million in revenue, while the L&T stores brought in roughly $44 million. The firm also has debt from its acquisitions of Congress, Carlyle, and Bailey Banks & Biddle. As of Aug. 2, Finlay’s total liabilities were $634.4 million, $200 million of it in long-term debt.

James Schaye, president and chief executive officer of Hudson Capital Partners, who worked on the liquidation of jewelry firms Friedman’s Inc. and later Whitehall Jewelers, which bought Friedman’s when it was in bankruptcy, said, “There’s a lot of stress in the jewelry sector right now.”

For now, Schaye doesn’t expect to see any more department store bankruptcies. “I think you’ll see a continued significant amount of store closings, but a lot of vendors and banks are also doing everything they possibly can to support the retailers,” he said.

So, if not department store retailers, who might be at risk?

Stevan Buxbaum, executive vice president of Buxbaum Group, a consumer product appraisal, liquidation and advisory firm, said, “You’ll see a whole lot more smaller regional players filing, those under 100 stores. The factors aren’t approving credit and the banks are tightening credit standards. The problem is it’s the smaller businesses that create jobs, and the [potential filings] will make it harder for job creation.”

Rumblings that Goody’s would file its second Chapter 11 petition in seven months surfaced in December. Then earlier this month there were increased talks about a liquidation, particularly since the retailer hadn’t been paying suppliers since mid-December. The timing of a possible filing hit the critical stage when word leaked in the financial and restructuring communities that a proposed plan to try to save the company was nixed by creditors, who since have concluded that Goody’s should never have come out of bankruptcy.

Gordon Brothers Retail Partners and Hilco Merchant Resources will conduct going-out-of-business sales at Goody’s.

Both Alfred Dunner and Warnaco are also unsecured creditors in the Goody’s bankruptcy, at $884,292 and $626,248, respectively. Lee Co. in Charlotte, N.C., is also a creditor, and is owed $920,615.

David G. Peek, executive vice president and chief financial officer of Goody’s, said in an affidavit that the company as of Jan. 3 has assets at book value of $202 million, net operating losses including restructuring costs of $91 million and revenues of $786 million. He also said the company had approached Stage Stores Inc., a Houston-based competitor who at one time expressed interest in the distressed retailer, about an investment or acquisition of Goody’s.

He noted the company was hurt by poor sales during the holiday season. In October, comparable-store sales declined by 19.2 percent, causing a $4 million shortfall in planned EBITDA, compared with its projection of a 2.9 percent decline when it exited bankruptcy proceedings. In November, comps dropped by 18.4 percent, causing a $7.3 million shortfall to planned earnings before interest, taxes, depreciation, amortization and restructuring costs, versus a forecast of a 4.4 percent decline.

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