Pacific Sunwear of California Inc. is likely to emerge from bankruptcy with about 450 stores, 25% fewer than it had prior to its Chapter 11 filing, said Ivan Friedman, founder and chief executive of RCS Real Estate Advisors in New York, which is handling lease negotiations for the Anaheim-based retailer.
“Most landlords are interested in keeping PacSun at its malls,” Friedman told the Business Journal in a phone interview, adding that closures would be based on individual stores’ performance and not concentrated in particular geographic areas.
PacSun’s revenue in fiscal year 2015 was about $801 million, down 3% from the roughly $827 million it reported for 2014. Its same-store sales decreased 2.6% during fiscal 2015.
It employs 1,995 full time and 7,054 part time. About 526 people work at its executive offices in Anaheim and at its distribution facility in Olathe, Kan. The other 8,523 support store operations across the country.
The company declined comment about the projected store closings, and it’s unclear how those would affect employment numbers.
Retail leases for PacSun’s 593 locations cost it about $140 million a year, a figure that will likely drop with store count reduction and ongoing lease negotiations with more than two dozen mall owners, including Dallas-based Centennial Real Estate Co., which runs MainPlace Mall in Santa Ana. A list of leases the retailer intends to maintain will be submitted to the U.S. Bankruptcy Court in Wilmington, Del., by Aug. 26, the expected timeline for the consummation of PacSun’s reorganization plan.
A June 22 auction of PacSun’s assets was canceled after no bids were submitted by the June 15 deadline, and San Francisco-based private equity firm Golden Gate Capital will now acquire all of the assets, pending the bankruptcy court’s approval.
The retail chain filed for bankruptcy in April and was looking for “a higher and better offer than that contained in the currently-filed plan of reorganization” with Golden Gate, which will write off $88 million in debt in exchange for a 100% stake in the company. The private equity firm has offered another $20 million upon PacSun’s emergence from Chapter 11 to “support its long-term growth objectives.”
PacSun also got $100 million in debtor-in-possession financing from Wells Fargo Bank and is able to “draw capital as needed to manage seasonal swings in cash flow,” the retailer has said. Wells Fargo also has committed to a five-year, $100 million revolving line of credit effective upon the company’s emergence from bankruptcy.
The retailer’s plan of reorganization, which was updated last week, allocates $3 million for secured claims; $1 million to honor gift card obligations and merchandise credits; and $33 million for unsecured vendor claims. The new owner also will assume three mortgages totaling about $39.4 million. PacSun prior to the bankruptcy filing was exploring a sale of its three-story, 180,000-square-foot headquarters on East Miraloma Avenue in an effort to raise cash.
Unsecured Claims
PacSun estimated its general unsecured debt to be $11 million to $22 million, for which it allocated $400,000. The debt, however, excludes claims from “Wage and Hour Lawsuits” brought by two former PacSun employees that may reach $135 million, according to court documents.
Charles Pfeiffer and Tamaree Beeney have filed separate class-action suits that allege the retailer violated California labor laws by “failing to authorize and permit employees to take duty-free rest breaks every four hours or major fraction thereof and to compensate employees … and requiring employees to undergo security checks and perform closing duties off-the-clock without compensation.”
U.S. Bankruptcy Judge Laurie Selber Silverstein last week said each can file a claim against the retailer on behalf of hourly, nonexempt employees who worked in PacSun stores in the state between March 18, 2007, and “the 181st day prior to filing of the bankruptcy petition.” That encompasses about 28,000 people.
PacSun “strongly” denied the allegations and said it believes “various defenses exist,” according to court documents filed last week. “To the extent liability exists, the PacSun defendants believe the ultimate recovery will be a fraction of the amount asserted by the plaintiffs and that there would be no entitlement to administrative or priority status.”
PacSun’s plan of reorganization said its brick-and-mortar sales were impacted by several “industry-wide factors” that have created a more competitive and challenging market, “including continuing fundamental shift in consumer behavior away from traditional mall shopping toward online-only stores.” It also said the action sports segment of the retail industry, around which its early success was centered, “is no longer as relevant as it was in the 1990s.”
