CACH Cache Inc (CE)

Pacific Sunwear of California Inc. filed for bankruptcy on Thursday with a plan that hands control over to lender Golden Gate Capital with the hope that the private-equity firm has the remedy to turn around the troubled teen fashion retailer.

The company, an Anaheim, Calif., apparel seller, says its fashions aren't the cause of its financial problems but rather its stores' costly leases at the nation's malls, where traffic has dried up in recent years. The drop in mall traffic coupled with the high rents meant the retailer wasn't able to get a handle on $160 million in debt that was slated to mature later this year.

"The problem is the rent structure," said Jeff Van Sinderen, a retail analyst at B. Riley & Co. "Other retailers have struggled with the same issue—mall traffic is running negative. Some retailers have the brand equity but have to ask, 'does it make sense to forward with this number of stores?'"

In the last two years, a parade of teen retailers—plagued by the slowing mall traffic, an increase in online shopping and teens spending more on electronics and athletic wear—have filed for bankruptcy. Among those that have passed through bankruptcy court are American Apparel Inc., Quiksilver Inc., Cache Inc., The Wet Seal Inc., Deb Stores and dELiA*s Inc.

Unlike many retail outlets that find themselves in bankruptcy, Pacific Sunwear filed for chapter 11 protection with a restructuring support agreement already in place. The deal calls for a debt-for-equity swap with Golden Gate.

The San Francisco private-equity firm has a history of turning around apparel sellers.

Golden Gate acquired the retailer Eddie Bauer Holdings Inc. for $286 million in a bankruptcy-run process in 2009. By 2014 it was ready to sell Eddie Bauer to Jos A. Bank Clothiers for $875 million. The deal never transpired, however, and Jos A. Bank instead agreed to merge with Men's Wearhouse Inc.

Golden Gate also reaped a healthy return on women's retailer J. Jill, which it acquired in 2009 for about $75 million. Later, Golden Gate sold a roughly 70% stake in J. Jill to Bahrain investment firm Arcapita Bank. In 2015, Arcapita and Golden Gate exited their stakes in J. Jill, selling it to private-equity firm TowerBrook Capital Partners for about $400 million. Golden Gate made a roughly five-times return on the J. Jill investment, according to a person familiar with the situation.

Under the Pacific Sunwear deal, Golden Gate will convert a chunk of the debt into equity, and invest at least $20 million into the company after it emerges from bankruptcy. Prebankruptcy lender Wells Fargo also agreed to lend a $100 million revolver after Pacific Sunwear's emergence.

Pacific Sunwear does acknowledge "several critical mistakes" made by management over the years, including the decision to no longer sell sneakers in 2008; investing in concepts, like D.e.m.o., a late 1990s concept targeted to urban audiences, and branded footwear and accessories retailer One Thousand Steps, that were eventually were discontinued; changing merchandising strategy; and selling too much inventory at a discount.

Pacific Sunwear eventually switched management and hired Gary Schoenfeld as chief executive in 2009—shortly after the company's performance improved as it closed 200 stores and introduced new fashion campaigns such as the widely marketed "Kendall and Kylie Collection," from the half-sisters of the Kardashians.

During this period Pacific Sunwear also secured a $60 million term loan from Golden Gate, and $100 million loan from Wells Fargo N.A.

Later in 2015, Pacific Sunwear also implemented an annual cost reduction program, which it hoped would yield about $15 million in annual savings, according to a public filing.

On Thursday, Pacific Sunwear's CEO said in an open letter to customers that it intends to keep its doors open throughout the bankruptcy process and operate as usual.

"Most importantly I want to emphasize that our customers should not be affected by this restructuring process," said Mr. Schoenfeld in the letter. "Our Golden State of Mind spirit will continue to be at the core of how we work."

Write to Lillian Rizzo at Lillian.Rizzo@wsj.com

(END) Dow Jones Newswires

April 07, 2016 17:45 ET (21:45 GMT)

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