BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Why Is Charming Charlie Filing For Bankruptcy Now?

This article is more than 6 years old.

Fashion accessories retailer Charming Charlie filed for bankruptcy and plans to close 100 stores by the end of the year.

Facing dwindling cash balances, the company on Monday voluntarily filed for Chapter 11 bankruptcy protection, noting that it couldn’t secure enough inventory for the holiday shopping season.

The closures represent about a quarter of the company’s locations. Charming Charlie has about 370 stores in the U.S., four in Canada and 16 franchised locations in the Middle East and the Philippines. The Houston-based retailer, which employs about 1,000 full-time employees and 4,600 part-time workers, also will shutter its Los Angeles office and will reduce headcount at its Houston corporate support center and distribution center. The company's news releases did not list which locations were closing.

"By reducing the size and scale of our operations, we have the opportunity to stabilize the business,” interim CEO Lana Krauter said in a statement. “We also will be better equipped to read and react to trends and what our customers want, which had been the hallmark of our success.”

Founded in 2004, the retailer sells jewelry, handbags, apparel and beauty products organized into color-coordinated store displays. Products, which typically range from $5 to $50, are priced in a so-called “sweet spot” between the more expensive Macy’s and Kohl’s and lower-priced Claire’s, Robert Adamek, Charming Charlie senior vice president and chief financial officer, said in a court filing.

“The general shift from brick-and-mortar retail has been further exacerbated by merchandising miscalculations, lack of inventory, an overly broad vendor base, all of which has led to underperformance and reduced sales,” according to Adamek.

Charming Charlie’s revenues have dropped more than 22 percent and operating income by 75 percent in the last several fiscal years, according to Adamek. A company spokesperson wasn't immediately available for comment.

Earlier this year both Fitch and Moody’s listed Charming Charlie among distressed retailers at risk of default.

“Of course, like so many specialty retailers, they over expanded,” said Paula Rosenblum, managing partner at RSR Research and Forbes.com contributor. “They made a presumption of market size that was incorrect and that’s no surprise.”

But Rosenblum was bewildered at the timing of the declaration right in the middle of the holiday shopping season.

“Normally you want to have as much cash in the bank as you can when you file, and that’s one reason why retailers tend to file after the holiday season,” she said.

In the company’s court filing, Adamek said cash-on-delivery demands paralyzed the stream inventory and they couldn’t secure appropriate inventory for the November and December holiday season. The retailer's cash balances are less than $1 million and it has about $1.8 million available in its revolving credit facility.  The company said it secured $20 million in new-money financing to support operations as well as a $35 million debtor-in-possession asset-backed loan.

Rosenblum said she “absolutely” expects the company to survive with the restructuring and cash infusion. If creditors didn’t think there was a way out, they would have used the rest of the holiday season as a liquidation sale. Instead, a majority supported Chapter 11 restructuring.

The company joins a host of other specialty retailers that have filed for bankruptcy this year, including PacSun, Wet Seal, Payless ShoeSource, Rue21 and Gymboree.

These retailers need to realize that they’re not able to take all the business from competitors and not everyone will want what they sell, Rosenblum said. In Charming Charlie’s case, they face the fact that most stores that sell apparel also sell at least some jewelry since it tends to be a high-margin product.

“The trend is to say, ‘Oh look, at the moment, our product is hot, our styling is hot. The market will just keep expanding, let’s blow this thing out, let’s get in every mall there is or every strip center there is and sell the heck out of it,’” she said. “But markets aren’t infinite.”