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Core of Anna’s Linens Could Survive Bankruptcy

Anna’s Linens Inc. in Costa Mesa is conducting a going-out-of-business sale, but don’t write off the household-goods retailer just yet.

An insider group is looking to “retain Anna’s name and operate over 100 stores,” Chief Financial Officer J.E. Rick Bunka said during a creditors hearing on Aug. 7 at the U.S. Bankruptcy Court for the Central District of California in Santa Ana.

Anna’s Linens filed for Chapter 11 bankruptcy protection on June 14 after defaulting on an $80 million line of credit from Salus Capital Partners LLC of Needham Heights, Mass.

It hired Hilco Merchant Resources LLC in Northbrook, Ill., and Boston-based Gordon Brothers Retail Partners LLC to manage liquidation of all of its merchandise, store furniture, fixtures and equipment. The joint venture said it will pay 111% of Anna’s Linens’ inventory value, estimated at $61.5 million to $67 million, according to court documents.

Anna’s Linens also retained Hilco Streambank, officially known as Hilco IP Services LLC, in Dedham, Mass., to coordinate the marketing and sale of its intellectual property, including rights to its name, trademarks, copyrights, domain names and customer lists.

New York-based RCS Real Estate Advisors is marketing subleasing opportunities for the 249 stores that remain open. Eight stores have been closed to date.

Bunka said that about three-quarters of Anna’s Linens’ inventory will be sold by the end of August and that “it will make very little sense” to keep those stores’ leases. That’s unless a single buyer is able to acquire a major chunk of them.

“Our expectation is we will have a fairly small number of stores operating in early September,” he said, adding that the retailer plans to consolidate inventory from stores that will be vacated.

Store closings may signal layoffs unless new owners take over the leases.

Workers

Court documents show Anna’s Linens has more than 2,331 employees, 40 of whom work at its corporate office. That’s down from the 133 corporate employees it had prior to the bankruptcy filing.

The retailer plans to keep only 24 staffers across the company, people who are the “most crucial” to “completion of the debtor’s [going-out-of-business] sale and to maximizing the remaining assets,” according to an Employee Retention Plan it filed with the court. Those employees include three vice presidents, an information technology director, corporate controller, and human resources and accounting managers.

Bunka said about 30 “interested parties” have surfaced who are considering taking over smaller blocks of stores but that “none have expressed interest in a substantial block” of over 100 aside from the insider group.

Bids for Anna’s Linens’ intellectual property and lease takeovers are due on Aug. 24. A silent auction is scheduled for Aug. 27 at the Los Angeles office of the retailer’s attorney. Successful bidders should surface a day later, and a closing deadline is set for Sept. 15.

“You expect whoever purchases, let’s say, the largest footprint of 100 stores is most likely going to be the buyer of the customer list, the [intellectual property], and the Anna’s Linen’s name?” said Michael Hauser, an attorney with the U.S. Trustee’s office who conducted the hearing.

“Correct,” Bunka said.

The CFO, who came on board in February, shed light on Anna’s Linens’ descent into bankruptcy as he answered questions about the company’s operations prior to the Chapter 11 filing.

L.A., Long Beach Ports

He said management hired consultants who suggested the company revise its purchase and markdown plans in order to alleviate excess inventory, a step it executed in the fourth quarter last year. The L.A. and Long Beach port strike that caused irregular merchandise deliveries from overseas this past winter didn’t help matters. Stores simply started to run out of some merchandise.

“Margins were significantly depressed during that time period,” Bunka said, adding, “that flushing of inventory, that is what caused the first credit default.” He referred to the company’s March 30 notice to its lender “of a default for failure to maintain specified operating expenditures to gross margin dollars ratio associated with the credit agreement.”

Anna’s Linens also tried to negotiate with its largest 20 vendors to “convert certain trade payables into long term Junior Secured Notes Payables to create additional long term liquidity,” but fell short of the $10 million goal, Bunka said.

Maybe it was a little too late.

Woes

Anna’s Linens’ woes track back to 2011, according to court documents.

Founder and Chairman Alan Gladstone started the company in 1987, and by 2013, it had amassed 309 stores. Some of its new markets, including Puerto Rico and St. Louis, proved unsuccessful.

The company also “overbuilt otherwise healthy markets,” and its “core demographic changed as Generation X and Millennials replaced Baby Boomers as the primary home furnishing shoppers. Merchandise didn’t resonate with the new shoppers, and aged and unfashionable inventory remained in the stores, reaching a high of $380,000 per store by fiscal year 2013.”

Anna’s Linens, which generated $416.2 million, $394.3 million and $370.2 million in sales in 2012, 2013, and 2014, respectively, from its retail and e-commerce channels, defaulted with its longtime lender, Union Bank, in March 2014. It opened the line of credit with Salus in July 2014 to repay Union Bank.

The prepetition lender, which is also providing Anna’s Linens’ “debtor in possession financing,” is first in line to get its money back once the dust settles. But what will remain for hundreds of unsecured creditors that have supplied the company with merchandise and other services?

“Based upon what everyone knows today, the best payout is going to be 3 to 5 cents on the dollar,” Hauser said.

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