Rue21 files for Chapter 11 bankruptcy as shopping mall stores suffer

Fashion and accessories retailer Rue21 filed for Chapter 11 bankruptcy protection late Monday after its budget-conscious customers migrated to fast-fashion competitors and nimbler online sellers, closely resembling the struggles of other mall chains.

The company had already begun closing nearly 400 of its 1,179 stores in 48 states and warned Tuesday in a court filing that it may shutter additional locations to shore up its finances.

Those moves include cuts to Rue21's workforce of 15,800 employees, of which 12,300 are part-time workers.

But the privately held retailer is not bleeding cash, and it secured support for its debt-cutting plan from multiple key creditors.

Those factors suggest that Rue21 may avoid liquidation, a fate that has recently befallen mall clothing store chains Bebe, The Limited and Wet Seal.

"Even in a challenging environment, we are fortunate that Rue21 has highly relevant brands, an enthusiastic and loyal customer base, and hundreds of highly performing stores," Rue21 CEO Melanie Cox said in a statement. "The agreement with our lenders represents their confidence in Rue21’s future success even at a time of significant retail industry change."

Rue21 turned a $54 million profit in 2016 when measured before interest, taxes, depreciation and amortization, down 48.5% from 2015, according to a court filing. Revenue was up 1% to $1.14 billion.

The Warrendale, Pa.-based retailer, founded more than 37 years ago, said that it needed bankruptcy in part to reestablish normal deals with vendors that had begun to demand cash on delivery in exchange for products amid talk of a possible restructuring process.

With its customers averaging fewer than $35,000 in annual income, price sensitivity is high. Many of those shoppers have migrated online.

"The retailer was pushed into bankruptcy because of supply chain challenges and the tightening of trade credit terms months ahead of the filing, but also points to the general downturn in the retail industry, which includes decreased sales and increased operating costs in light of the shift away from brick and mortar retail sales to online channels," Reorg Research distressed debt legal analyst Jessica Steinhagen said in an assessment of the case.

In a court filing, Rue21 also cited "an evolution of customer tastes" for undermining its girls fashion products, which represented 50% of its revenue in 2016, down from 54% a year earlier. The world of affordable fast-fashion retail has blossomed in recent years, as stores like Forever 21 and H&M undercut the competition.

"At the same time, the retail industry in general has experienced significant headwinds, requiring traditional brick-and-mortar retailers to adapt to an increasingly digital-focused consumer," Rue21 said in a court filing. "While the company’s online presence is expanding and improving, the company’s historic online platform was not as robust as that of certain of its competitors."

Still, the company said it "remains a valuable and iconic brand with a large and loyal customer base."

It's not the company's first experience with bankruptcy.

Rue21 emerged from Pennsylvania Fashions Inc.'s 2003 bankruptcy. The retailer went public in 2009, then went private in 2013 through transactions engineered by Apax Partners that resulted in the company's tie-up with Rhodes Merger Sub Inc.

The deal to go private was paired with transactions that piled up hundreds of millions of dollars in debt for Rue21, according to a court filing.

The company, a wholly owned subsidiary of Rhodes Holdco Inc., said it had $832 million in funded debt in a credit facility, term loans and notes, with the first round maturing in October 2018.

© 2017 USATODAY.COM


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