PAUL HARRIS FILES CHAPTER 11
Byline: Vicki M. Young
NEW YORK — Paul Harris Stores Inc. has embarked on its second tour of bankruptcy proceedings, while its J. Peterman subsidiary has been pulled from the ashes, yet again, for a third lease on life.
Paul Harris on Monday filed a voluntary Chapter 11 petition in Indianapolis to reorganize under bankruptcy court protection. Court documents were not immediately available. LaSalle Bank National Association, a unit of ABN AMRO Holding NV, will provide the retailer with a $45 million debtor-in-possession, or DIP, financing facility. LaSalle was also the retailer’s lender prior to its filing.
Two other subsidiaries, Paul Harris Distributing Inc. and Paul Harris Retailing Inc., also filed. The moderately priced chain previously filed for Chapter 11 in February 1991, and emerged in August 1992.
The specialty chain’s J. Peterman division did not join in on Monday’s Chapter 11 filing. Instead, the majority of that unit’s assets were sold for $4.3 million prior to the filing. According to Paul Harris, J. Peterman sold its leasehold interest in the Grand Central Station site to an affiliate of Kenneth Cole Productions Inc. for $2 million. KCP officials declined further comment.
Schottenstein Bernstein Capital Group purchased the intellectual property rights to the J. Peterman name for $700,000. In addition, Schottenstein is part of a joint-venture group that has started liquidating J. Peterman’s inventory. Paul Harris has received an up-front payment of $1.6 million under the arrangement, and could receive more pending completion of an accounting of the J. Peterman inventory.
Richard R. Hettlinger, senior vice president and chief financial officer for Paul Harris, told WWD Tuesday: “We view this as a very good opportunity for Paul Harris to reorganize and focus on our key business issues. It is the best step for our shareholders, employees and customers.”
Hettlinger said that the DIP facility provides the company with enough liquidity to purchase new inventory for the holiday season. He stated that he wasn’t expecting an extended stay in bankruptcy court proceedings, and also ruled out any immediate plans to sell the company.
Glenn Lyon, president and chief executive officer, noted that the company in the last six months, as part of its refocusing efforts, has reduced the careerwear portion of its merchandise mix. So far, the sweater business remains the retailer’s strongest category, while its knit business is also showing signs of strength. Both categories will be highlighted during the fall and holiday selling seasons.
“In order to generate revenue, I’ve had to be more aggressive than I’d planned to be,” Lyon said, emphasizing that the strident stance will continue into the holiday season. “Paul Harris will be aggressive promotionally. We will have deeper discounts ongoing than planned.”
Earlier this month, the company eliminated 46 positions at the company’s headquarters in Indianapolis. According to the cfo, the company isn’t planning on any additional personnel reductions. “We don’t plan on any significant store closures for the immediate future. The reason is that we’re going into the holiday season when stores typically generate positive cash flow.” Hettlinger added that the company, which operates a combination of 290 full-price stores and 26 outlet stores in 28 states, does evaluate its store base for future viability on an ongoing basis.
Of all its store sites, the 12,000-square-foot flagship at 430 North Michigan Avenue in Chicago — opened in March 1999 — is most unusual. That site has a 1,500-square-foot area dedicated to a J. Peterman in-store shop. The J. Peterman sale notwithstanding, Hettlinger said that the in-store shop will continue to sell full-priced J. Peterman stock. The in-store site will continue indefinitely until inventory purchased specifically for that shop is sold off.
The J. Peterman operation began the year with 12 freestanding sites, and ended up closing one location during the first half of the fiscal year.
Scott Bernstein, a principal at Schottenstein, told WWD Tuesday: “The intellectual property rights include all copyrights, trademarks and the rights to use them. We’re not sure what we will do with them yet.”
Bernstein disclosed that the inventory at the Grand Central site has been shipped to other J. Peterman locations. Liquidation sales have already begun at the remaining eight sites, and are likely to take between eight and 10 weeks to complete. He speculated that the real estate leases at those sites “probably” will be returned to their respective landlords.
Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates, questioned J. Peterman’s viability. “Like other theme stores, you have to have the right product at the right value for your customers. I don’t see any reason for Peterman to exist. Peterman always has had a strong image, but strong image doesn’t always translate into the right value [perception] for customers.”
According to Bernstein, “The J. Peterman name has a lot of value. How we obtain that value hasn’t been determined yet. Paul Harris has not been able to realize that value, but in the upcoming weeks and months we will determine how we can realize the Peterman name, mystique and reputation for quality.”
J. Peterman gained national recognition after being parodied in the hit TV comedy “Seinfeld.” The ailing J. Peterman catalog, however, became bankrupt in January 1999. On the verge of liquidation, Paul Harris snapped up the operation for $10 million during a bankruptcy court-required auction of J. Peterman assets. The purchase of the then Lexington, Ky.-based operation included inventory, trademarks, fixtures, Web site, catalog mailing list and 10 of its 13 leases.
Schottenstein has several interesting options. The Schottenstein family owns an interest in Value City Department Stores and American Eagle Outfitters. In February, Value City breathed new life into then-bankrupt Filene’s Basement by purchasing the operating assets. That deal closed in March.
Shares of Paul Harris closed at 47 cents on Monday in over-the-counter trading, but were halted Tuesday at Nasdaq’s request for more information. The stock has a 52-week high of $4.87 and a low of 37 cents.
A week ago, shares of the stock were in free fall, losing nearly two-thirds of their value in a single session as the liquidity crisis came to a head. The retailer targets female consumers between ages 25 to 45 years old. Opening price points for T-shirts start at $10 and for pants at between $10 and $15. Higher-priced merchandise includes dress pants at $50, dresses at $80 and jackets in the $70 range.
Liquidity concerns about Paul Harris have been circulating in the financial community since mid-summer. For the second quarter ended July 29, net losses widened 22-fold to $12.5 million, or $1.14 a share, against $561,000, or 5 cents, during the comparable year-ago period. Sales rose 6.9 percent to $60.4 million from $56.5 million in the 1999 period.
While merchandise sell-through in September improved by 15 percent over the prior year, sales were hurt by slow receipt of new inventory. The retailer succeeded at reducing old inventory to $4.5 million at retail, less than one-fifth the $23.2 million in the year-ago period.
Hettlinger’s optimism about the holiday season is far from universal. Aram Rubinson, an analyst at PaineWebber, wrote in a research note dated Oct. 13: “A looming heating oil crunch may continue to divert some discretionary income away from retail.” Higher prices at the pump, he wrote, have been consuming as much as 2 percent or more of retail industry comparable-store sales.
Rubinson concluded that “weakening fundamentals have not been caused by a depressed consumer. Rather, our theory has been that rising gas prices are diverting dollars away from traditional retail stores. That will continue to be the case, and may last through Christmas.”
Hettlinger isn’t concerned, even though the retailer’s targeted consumer has an annual income level that is less likely to be able to cushion the blows of rising costs elsewhere. “We will continue to bring in exciting merchandise during the fall and holiday, as well as focus on our customer service. If you have the customer service and exciting fashion merchandise, the sales will come. Rising fuel costs do not impact on that. If we look back over history, unless there’s a major depression, people [will] continue to dress well. By providing an array of merchandise that we are excited about, that our customer is excited about, we will have a successful season.”