Byline: Thomas J. Ryan

NEW YORK — County Seat Inc. reported a loss of $92.4 million in the third quarter ended Oct. 28 and said it might default on its debt obligations in the first half of 1996 unless it is able to amend its credit agreements.
The loss largely reflects the write-down of $80.2 million in assets. Of that amount, $74.7 million represents the write-off of goodwill to reflect the current value of the company. The remaining $5.5 million represents the write-off of fixed assets of stores with a history of negative cash flow.
Goodwill of $87.6 million was initially recorded in its 1989 leveraged buyout conducted by Donaldson, Lufkin & Jenrette Securities Corp., which currently owns 80 percent of County Seat. The purchase price assumed significant growth rates in sales, improved store productivity, stable gross margins and sufficient cash flow to repay debt and fund expansion. The Dallas-based firm, which operates 734 mall-based stores primarily selling jeans and related accessories, said it anticipates difficulty in meeting several debt covenants in the first half of fiscal 1996 unless it can amend its bank agreements. It had projected violations of its covenants in the third and fourth quarter but was able to arrange concessions on Oct. 28.
The company has arranged to meet with its bank group in February and believes satisfactory amendments will be received. However, it gave no assurances that a deal could be reached.
In the nine months, County Seat lost $121.5 million against a loss of $15.3 million. The latest nine months includes $10 million in refinancing charges. Sales rose 6 percent to $413.8 million, but same-store sales slid 2.7 percent.
Meanwhile, the retailer plans to drastically slow its aggressive store opening campaign and reduce its capital structure.
“Due to decreased cash flow, the inability to access equity markets, and restrictive debt covenants, the company’s ability to grow through new store openings is now severely hindered,” the 10-Q said.
The company said sales, gross margin and operating income have been “substantially below plan” since the second quarter.
Only seven new stores and one remodeling are slated in fiscal 1996, with capital expenditures planned to be $2.3 million. By comparison, County Seat said it will end up spending $15.3 million this year to open 56 new stores and remodel 20.
As of Oct. 28, County Seat operated 681 County Seat stores and 32 County Seat Outlet stores, as well as 21 Levi’s Outlet stores under license with Levi Strauss & Co. The company sells brands such as Levi’s, Girbaud and Calvin Klein as well as its proprietary brands — County Seat, Nuovo and Ten Star.
County Seat is downsizing its central organization through staff and expense reductions, implementing productivity programs and pursuing cost-effective programs with strategic partners. In addition, management is reviewing unprofitable stores for possible closures.
Citing County Seat’s poor performance and need to restructure its balance sheet, Moody’s Investor Service slashed County Seat Stores Inc.’s subordinated debt ratings to B1 from B3.
“This is a company that clearly needs to be restructured. The only question is when,” said Filippe M. Goosens, a senior analyst at Moody’s Investor Service.
Goosens said the jeans business has become a “highly competitive market,” but the once-hot area appears to be softening. In addition, specialty stores continue to lose market share to department stores, which have benefited from lower prices and their ability to offer a wide selection of merchandise. He said County Seat’s same-store sales continue to be weak, dropping in the high single digits in November and December.
Goosens said County Seat’s planned reduction in capital expenditures and operating expenses should boost cash flow, and sales may get a boost from the company-wide rollout in 1996 of Calvin Klein and Tommy Hilfiger jeans.
However, he pointed out, the constraints on capital spending will hurt County Seat’s ability to compete in what is expected to be a difficult environment in 1996. Goosens noted that with the write-offs in the quarter, County Seat’s book net worth is now a negative $151.2 million.
Besides the write-off charges, the latest quarter includes a $1.2 million provision related to the cost of a proposed public offering, which now has been indefinitely postponed due to continuing poor operating results and a weak market for retail stocks.
In the year-ago quarter, the firm posted a loss of $338,000.
Sales edged up 1.4 percent to $159.5 million from $157.3 million, but same-store sales slumped 7.2 percent.
Gross margins shrank to 25.8 percent of sales from 29.4 percent, while selling, general and administrative expenses as a percentage of sales increased to 22.9 percent from 22 percent. Interest expense was $5.7 million. — Fairchild News Service

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