Tide Turns for Sportswear Company Under Chapter 11 : Apparel: The filing comes after a creditor’s lawsuit froze Sweats & Surf’s bank accounts. A recession hasn’t helped either.
Sender Hart visited California from his home in Israel in 1975 and, even though he spoke no English, decided to move here. After several short-lived business ventures, Hart used his savings to start a specialty retail apparel company in 1984.
Hart’s Sweats & Surf Inc. grew rapidly. Today it has 48 shops, most of them in California, that sell sweat shirts and sweat pants and trendy beachwear in a variety of colors and styles. Sales last year hit $28 million, Hart said, and profits were more than $1 million. As sole owner of the Chatsworth-based company, Hart’s fortunes were good enough for him to buy a $1.7-million Malibu home in 1988.
But lately the tide has turned against him. Sweats & Surf is now operating under bankruptcy protection in federal court in Los Angeles. The company’s filing under Chapter 11 of the federal bankruptcy laws was necessary, Hart said, because Sweats & Surf has been locked in a bitter legal dispute with a former clothing supplier, Pannill Knitting Co.
Pannill claims Sweats & Surf owes it $1.52 million, but Hart claims Pannill broke their contract. In any case, on April 26, Pannill was granted a writ of attachment in federal court in Los Angeles that allowed it to freeze all of Sweats & Surf’s bank accounts. Unable to pay its employees or other creditors, Sweats & Surf convinced Pannill to lift the writ. But the damage was already done, and Sweats & Surf sought bankruptcy court protection, said attorney Barry Cappello, who is representing Sweats & Surf in the Pannill litigation.
Without the protection of the bankruptcy court to assure its vendors that Sweats & Surf’s bills could be paid, the company would have been unable to operate, Cappello said. Under Chapter 11, a company continues operating but is shielded from creditors’ claims while it works out a plan to pay its debts.
Pannill, based in Martinsville, Va., was acquired by Sara Lee Corp. early last year. A Sara Lee spokesman referred questions about the case to Arthur Lowry, an attorney handling the Sweats & Surf suit for Pannill, but he declined to comment.
Hart can’t blame all of his problems on the lawsuits, however. With the help of financing provided by Security Pacific National Bank, Hart expanded Sweats & Surf aggressively only to run into the same recession that has brought hard times to the nation’s retailers. Carter Hawley Hale Stores, the Los Angeles-based owner of the Broadway department stores, filed for bankruptcy protection earlier this year. The Buffums’ department store chain recently said it would close its doors for good at the end of May.
At Sweats & Surf’s stores, business is down about 25% this year, Hart said. According to its bankruptcy court documents, the company is carrying more than $10 million in debt, including the disputed $1.52 million claimed by Pannill.
In 1989, Security Pacific lent Sweats & Surf $5.2 million to help finance its growth, and the retailer opened 15 stores through mid-1990. But banks have turned cautious, and Hart said Security Pacific has turned down the firm’s request for additional financing to help it through its cash crunch. Security Pacific also told Sweats & Surf recently that its loan had been transferred to a division that handles troubled accounts, Hart said.
Sweats & Surf has long been a family operation. Hart’s two sons, Don, 30, and Guy, 25, are vice presidents of the company. But the 59-year-old Hart, a short, stocky former boxer who still speaks in broken English, said he’s now looking for an investor to come to the company’s rescue.
“This company has big potential and the economy is going to change,” he said. “I don’t mind today to take a partner if we can grow and we can pay back and go out from Chapter 11.”
Sweats & Surf’s stores are in malls throughout California (it has one store in New Mexico), catering to a largely young clientele with brightly colored, moderately priced sweats, T-shirts, shorts and casual pants.
The company buys all of its apparel from outside suppliers. Besides its own labels--Sweats & Surf, Blue Wave and Surfin’ Safari--it sells such popular lines as Maui & Sons and Vuarnet. The stores also carry accessories, including thongs, sunglasses and sports watches.
The company distributes its merchandise from its 50,000-square-foot facility in Chatsworth, site of the former headquarters of apparel company Bugle Boy Industries. A mail-order division, which generated about $900,000 in sales in 1989, was suspended late last year because Sweats & Surf didn’t have the funds to continue its operation.
The acrimonious relationship with Pannill dates back to the start of Sweats & Surf. Hart said he decided early on to deal with one mill for all its sweats--which accounted for more than 50% of the company’s business--because that was the only way to ensure consistent quality and color.
But Hart contended that Pannill repeatedly failed to make shipments on time and frequently sent smaller quantities of goods than Sweats & Surf had ordered--despite many assurances from Pannill that it would set aside the inventory needed by Sweats & Surf.
With shelves in many of his stores going bare, Hart said he was losing business because of Pannill. He said he didn’t immediately change suppliers because it would have cost millions of dollars to remove all the Pannill goods from the stores and restock them with sweats from a different supplier.
But in May, 1988, Pannill told Sweats & Surf that it would only be able to meet about 50% of its order for the entire year, Hart said, and that’s when he decided to sever the relationship. Two months later, Pannill sued Sweats & Surf in federal court in Virginia for $1.52 million worth of goods that it alleged had been shipped to Sweats & Surf that it had not received payment for.
Sweats & Surf countersued, asking for more than $20 million in damages for breach of contract, fraud and other counts related to the business Sweats & Surf contends it lost due to Pannill’s failure to ship all the goods it promised. The case has been moved to federal court in Los Angeles, and the trial is set to start June 11.
Sweats & Surf has a new supplier for its sweats, Bassett-Walker Inc. of Charlotte, N.C. So far, Hart said, there are no plans to lay off any of his 450 employees or to close stores.
The next step, said attorney David Gould, who is representing Sweats & Surf in the bankruptcy reorganization, is for the company’s largest creditors to meet later this month and form a committee to represent them. The company will continue to operate under present management, Gould said, and a plan will be negotiated with creditors for Sweats & Surf to pay its bills.
The company’s recovery won’t be easy, analysts say. “Specialty retailing in general is going through a pretty tough period,” said analyst David A. Williamson at the investment firm Advest Group in Hartford, Conn. And in the intensely competitive California market, he said, “you have to be different in order to succeed.”
But Gregg Sloate, a retail analyst at Seidler Amdec Securities Inc. in Los Angeles, said he expects business to pick up for retailers by the fourth quarter of this year. He added that Sweats & Surf has a “nice concept” and the outlook for the type of lower-priced apparel it carries is fairly positive.
Hart said he’s determined to see Sweats & Surf recover from its current problems. “I’m a real good fighter,” he said. “We’ll be back.”
