Hilo Hattie bankruptcy is second for retailer

Hilo Hattie — the "Store of Hawaii" — could have its fourth owner in eight years after the venerable retailer filed bankruptcy Thursday.

The Chapter 11 filing by the 52-year-old kamaaina company follows a 2008 bankruptcy and was prompted by a 34 percent plunge in sales last year despite record tourism arrivals and spending.

"This was a very, very difficult decision to make, but it is the best way to protect the employees and the company’s long-term interests,"Hilo Hattie owner Donald Kang said in a written statement.

Seeking bankruptcy protection was necessary after the company could not pay its bills and faced debt collection and eviction actions, according to filings in U.S. Bankruptcy Court.

The company reported about $11 million in debts. Major assets include $2.2 million in inventory and the lease for the retailer’s flagship store on Nimitz Highway in Iwilei valued at an estimated $4 million.

Over the last month, Hilo Hattie abruptly closed three of its seven Hawaii stores — in Kihei, Kona and Hilo — as an emergency cost-cutting move. The closures resulted in layoffs for 60 employees and left the company with 109 workers. Yet that was not enough to stave off bankruptcy given hefty losses in past years and mounting debts.

The company reported a $5.1 million operating loss in its fiscal year ended Sept. 27, which was up from a

$2.4 million operating loss the year before.

Sales plunged to $15.6 million in the recent fiscal year from $23.6 million the year before, the filing said.

Mark Storfer, executive vice president of Hilo Hattie, said in a written statement that the company adjusted "every part"of its business plan within control to adapt to what he termed "rapidly changing dynamics"of Hawaii’s retail landscape.

Storfer did not return a call seeking more details.

The company in a general statement said the bulk of visitor spending is going to airlines and hotels, with less money left for shopping, dining and activities.

Hilo Hattie hopes to continue operating its remaining four stores but is also seeking to sell the lease for its Nimitz store. The company also is seeking to sublease the 40,000-square-foot second floor of that store. It is unclear whether Hilo Hattie would keep operating the store if it sells the lease.

It’s possible that someone could seek to buy Hilo Hattie with a plan to resolve its debts and restructure operations. Something similar happened in 2009 as part of the company’s previous bankruptcy case.

Kang, who owns local garment maker Royal Hawaiian Creations, bought Hilo Hattie in 2009 while it was in Chapter 11 after a competing bidder, Maui Divers Jewelry, dropped out. Kang was then Hilo Hattie’s largest unsecured creditor, and he pledged to invest $3 million in the business to put it on better footing. About $14 million in debt was wiped out by the earlier bankruptcy.

The 2008 bankruptcy was prompted by a drop in sales following an aggressive mainland expansion where big stores in cities including Nashville, Tenn., Tempe, Ariz., and Orlando, Fla., didn’t do well and were closed at a hefty price.

Company founder Jim Romig attempted to rebound from the expansion debacle in part by ending apparel manufacturing in favor of cheaper imports. But that move hurt Hilo Hattie’s reputation and sales.

Romig sold the company to an investor group that attempted to improve merchandise quality and revive the retailer, but an unfolding recession upended the plan and led to bankruptcy.

Akey to turning around Hilo Hattie initially was replacing the Nimitz store, where many customers are bused in, with a new flagship location at Royal Hawaiian Center in Waikiki.

"We believe the model used at Nimitz over the decades has been obsolete,"Storfer, then a consultant for Hilo Hattie, said in 2009. "We need to be where our customer is. That is critical to our strategy moving forward."

However, the retailer couldn’t obtain $6 million in financing to open in Waikiki. Asubsequent plan called for opening roughly a half-dozen more stores in heavily traveled tourist destinations, though that expansion plan wasn’t carried out.

Some changes Hilo Hattie did make included relocating a store at Ala Moana Center in 2012 and featuring island apparel with a distinct focus on kamaaina or "local" style.

In the new bankruptcy filing, Hilo Hattie said most of its neighbor island stores underperformed relative to projections. Besides the three recently closed stores, Hilo Hattie has stores in Lihue and Lahaina.

Kang once again is Hilo Hattie’s biggest creditor, with $2.8 million in loans and $4.1 million owed to Royal Hawaiian Creations as a merchandise supplier.

Other major creditors include a $130,000 state tax lien and two loans from First Hawaiian Bank totaling $850,000. Several landlords are also owed roughly between $50,000 and $1.2 million each.