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Pacific Sunwear files for Ch. 11 bankruptcy protection

April 7, 2016 05:30 PM
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(Bloomberg)—Pacific Sunwear of California Inc. filed for bankruptcy protection after what it called years of management blunders that left the youth-oriented clothing chain unable to compete successfully in an increasingly cutthroat retail environment.

The company said it will use its time in court to find a buyer or be taken over by affiliates of the private equity firm Golden Gate Capital, its senior lender.

CEO Gary H. Schoenfeld blamed past managers for a series of mistakes—including two failed expansion plans—that made it harder for the company to keep up with increased competition and the changing tastes in youth-oriented fashions.

“The company’s expansion to nearly 1,000 stores created too large a store footprint with numerous underperforming stores and above-market occupancy costs,” Schoenfeld said in court papers Thursday. He also posted a message to customers on PacSun.com.

In the late 1990s, PacSun, No. 338 in the Internet Retailer 2015 Top 500 Guide, began opening stores based on urban fashions in addition to its surfwear shops. The experiment failed and by 2008 the company had closed 225 stores. It now has fewer than 600.

‘Structural issues’

“We plan to solve the two structural issues that operationally we could not fix on our own,” Schoenfeld said in a statement. “First is a very high occupancy cost of approximately $140 million per year, and second is nearly $90 million of long-term debt coming due later this year.”

The lender deal should allow the chain to cut debt and bring in $20 million, either in the form of equity bought by investors or new debt. Schoenfeld said the company should win court approval of its plan within 120 days.

Pacific Sunwear has about $299 million in assets and owes creditors about $305 million, according to court papers filed in Wilmington, Del. Senior lenders Wells Fargo & Co., which is owed $31 million, and Golden Gate, owed about $81 million, will be repaid in full. Suppliers will also be repaid in full, with half their money coming once the company exits bankruptcy and the rest by Dec. 15.

Bid process

Under the proposal, Pacific Sunwear would solicit bids for its assets. Should someone offer enough to fully pay off senior lenders, the company would sell itself instead of moving ahead with the debt-for-equity deal it worked out before filing for bankruptcy.

The company must also give creditors a chance to vote on the plan. That vote will be taken into consideration by the bankruptcy judge, who makes the final decision.

Wells Fargo has agreed to lend as much as $100 million for the company to use while it reorganizes and to provide a $100 million revolving line of credit.

Without the restructuring, PacSun might be facing face a total shutdown. The chain has struggled to adapt to shifting consumer tastes, as younger consumers opt for the trendy and less-expensive apparel sold by chains such as H&M and Forever 21.

Fast fashion

The growth of fast-fashion stores and online merchants has driven storefront and mall-based chains including American Apparel Inc. (No. 330 in the Top 500) and Quiksilver Inc. (No. 702 in the Second 500) into court-supervised restructurings in the past year. Other specialty retailers, such as Sports Authority Inc. (No. 277), have also sought creditor protection.

Anaheim, Calif.-based PacSun has had losses every year since 2008, while its shares have plunged about 96% in the past 12 months. It instituted a cost-cutting program last year that it said would bring about $15 million in savings in 2016.

To help handle the bankruptcy case and the debt restructuring, the company hired the law firm of Klee, Tuchin, Bogdanoff & Stern LLP. Guggenheim Securities is the company’s investment banker.

The case is In re Pacific Sunwear of California Inc., 16-10882, U.S. Bankruptcy Court, District of Delaware (Wilmington).

 

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