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PacSun's Bankruptcy Won't Affect Employees Or Customers

If all goes according to plan.
Photo: Araya Diaz/Getty Images

Photo: Araya Diaz/Getty Images

Once a favorite of suburban mall shoppers, Cali surf shop PacSun filed for Chapter 11 bankruptcy protection on Thursday in Delaware. The company cites the "fundamental shift in consumer behavior away from traditional mall shopping toward online-only stores" as a contributing factor to its recent cash-flow problems, as well as bad decisions by prior management to open too many stores, invest in unprofitable brand extensions and "shift away" from key brand partners. The documents name-check competitors like American Apparel, Wet Seal and Delia*s who have also had to file for bankruptcy protection or liquidate. PacSun currently operates 601 stores, all in the U.S and mostly in shopping malls. 

But why file now? Facing tough times in 2011, PacSun secured a loan of $60 million from private equity firm Golden Gate Capital and a $100 million credit facility with Wells Fargo. Both of those loans are supposed to be paid back by December. It became clear to the company in late 2015, despite positive comparable store sales in 13 of the last 16 quarters, that it didn't have the means to meet those agreements. PacSun has some major debts: it owes Nike $5.7 million and Hurley $2.9 million for merchandise and Simon Property Group (the mall company) $3.8 million for occupancy charges. It also owes FedEx $1.25 million. 

As part of the bankruptcy plan, Wells Fargo has agreed to a debtor-in-possession credit agreement of up to $100 million, which will provide cash to keep things running during the bankruptcy restructuring, and will provide a five-year,  $100 million line of credit. Golden State Capital will convert over 65% of its debt into equity of the reorganized company and also provide at least $20 million in new loan. PacSun plans to continue its recent turnaround strategy to reduce store occupancy costs (it has closed about 200 stores since 2011) through landlord negotiations or lease rejections. It doesn't plan to close stores throughout the bankruptcy proceedings and the nearly 2,000 full time employees and 7,000 part time employees won't be affected. 

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During the fiscal year ending January 30, 2016, comparable store sales decreased 2.6 percent and totaled $800.9 million. The fourth quarter was a bit better: sales totaled $232.9 million, a 0.2 percent increase in comparable stores from the previous year. "Our slightly positive comp store sales performance was at the better end of what many retailers experienced over the Holiday season, which continues to validate our core strategies as we reestablish the new PacSun," said CEO Gary Schoenfeld in a statement. The retailer is going to need more than slightly better sales to survive the bankruptcy plan, but it's still a good sign for the brand's future.

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