The fate of Pacific Sunwear of California Inc. could be decided in a bankruptcy auction that’s scheduled for next month, with a stalking-horse bid in place and the possibility of additional interest in the Anaheim-based teen apparel and accessories retailer on the horizon.
PacSun lost $8.5 million on sales of $801 million in its most recent fiscal year, which ended Jan. 30. The 593-store chain filed for bankruptcy last month and now is “conducting a marketing process to seek a higher and better offer than that contained in the currently-filed plan of reorganization” with Golden Gate Capital. The San Francisco-based private equity firm is poised to acquire all of the retailer’s assets in exchange for $58 million of debt it held. Golden Gate is holding an additional $30 million in PacSun’s existing debt and has offered another $20 million upon its emergence from Chapter 11 to “support its long-term growth objectives.”
Wells Fargo Bank is providing $100 million in “debtor-in-possession” financing, which comes on top of $41 million PacSun already owes it.
The bids, which “must yield sufficient proceeds to pay the DIP claims … and the term loan claims in full in cash” are due June 15. The auction is scheduled for June 22 at the offices of the retailer’s attorney, Klee, Tuchin, Bogdanoff & Stern LLP in Los Angeles, or at an “alternative location in New York or Delaware.”
Golden Gate Capital will serve as a stalking horse bidder and will not be entitled to a break-up fee. The auction will be cancelled if no other qualified bids are received by the deadline. Golden Gate Capital would then be deemed the winner “and the debtors shall proceed to the confirmation hearing with respect to the plan,” according to documents filed with the U.S. Bankruptcy Court in Wilmington, Del.
PacSun, along with its investment banker, Guggenheim Securities LLC in New York, has “developed a list of parties whom they believe may be interested in … and have the financial resources to consummate a sale.” The list includes “both strategic investors and financial investors,” according to court documents.
The retailer, meanwhile, is looking to reduce its costs on store leases, which currently total about $140 million a year. It has hired New York-based RCS Real Estate Advisors to perform an in-depth analysis of its store portfolio. RCS has developed a “Real Estate Action Plan” to determine the most suitable course of action for each store and is negotiating with landlords on lease modification proposals. Its compensation will be 1% to 5% of PacSun’s yearly savings on total occupancy costs.
“The results of those negotiations will inform what the debtors’ lease footprint will look like going forward, and, by extension, which leases will be assumed and which will be rejected,” PacSun said in the documents filed with the court.
RCS Founder and Chief Executive Ivan Friedman said his firm also handles lease negotiations for Disney Store, as well as teen retailer Aéropostale Inc., the latter of which filed for bankruptcy this month.
He declined to comment specifically about PacSun but said, “There is no retailer out there today that doesn’t think they have too many stores. With e-commerce [up] and mall traffic down, large retailers, those with 100 stores or more, want to consolidate stores that are nearby.”
Retailers typically view rents in relation to a store’s sales.
“For example, if a store had $1 million in annual sales and paid about 12% on rent, that would be about $120,000 a year,” Friedman said. “And if rent gets to be higher, the store may not be profitable.”
Each retailer’s profit margin is different, and rents “can range from 5% to 20%” of sales.
For most, the 12% to 14% range is a “healthy area,” he said, and “if it goes over 20%, the company is not going to be profitable.”
Landlords are less likely to negotiate mid-lease, but when it’s up for renewal, they’ll typically decide if they can get someone in at a higher rate or lower the rent for the existing tenant.
“Everybody has to protect their business,” Friedman said. “They have bills to pay, too.”
Larger chains, such as PacSun or Aéropostale—both of which have dozens of leases with companies that operate multiple shopping malls—usually enjoy “benefits of scale” during the negotiation process.
Bankruptcy also changes the equation.
“In bankruptcy, the idea is that if you can’t make a deal to make the store profitable, you have a right to close it; you don’t have to wait until the end of the lease,” Friedman said.
PacSun has a store in Irvine Spectrum, and Irvine Company is listed under its claims for $51,760.86, along with Newport beach-based Craig Realty Group, which is a landlord to five PacSun stores at different shopping centers and has claims totaling about $35,220.
Other local companies that have submitted claims against PacSun include vendors RVCA Clothing in Irvine, which is asking for $840,706; Costa Mesa-based Hurley International, looking to recover $2.8 million; Volcom in Costa Mesa, requesting $442,490; and San Clemente-based Rainbow Sandals Inc. and Stance Inc., which are hoping to get $429,097 and $105,165 respectively.
The teen retailer, founded in 1982 in Newport Beach as a surf shop, blamed “the continuing fundamental shift in consumer behavior away from traditional mall shopping toward online-only stores” for its most recent troubles.
