Clothestime Rags-to-Riches Story Adds Sad Chapter 11

Clothestime Inc., the troubled discount apparel chain that sprang from an Orange County swap meet booth in the late ‘70s, filed for protection in U.S. Bankruptcy Court on Friday, a victim of intense competition from large, national retailers.

About 140 of the company’s 550 locations will be sold off or closed as the Anaheim-based retailer reorganizes its finances through a Chapter 11 bankruptcy proceeding.

Executives were unable to say how many of the company’s 4,100 employees nationwide would lose their jobs. But because of high turnover rates in the retail industry, executives say they will be able to find jobs for most employees who want to remain.

Clothestime has about 24 stores in Orange County, each with about six employees. Clothestime will make cuts at an Anaheim distribution center that has more than 300 employees.

John Ortega II, company chairman and chief executive, blamed the filing on an increasingly tough competitive environment.

“I’ve never seen it this bad in 25 years,” Ortega said. “It’s got to turn around soon.”

The chain intends to hold a store-closing sale to reduce its inventory levels, Ortega said, adding that, “we expect to be able to provide [customers] with as good or better a selection of goods and services as before the filing.”

Clothestime had $105.2 million in assets and $58.9 million in liabilities as of July 29. However, an updated liabilities total won’t be available for several days.

Ortega said that Clothestime has arranged for $40 million in financing from CIT Group/Business Credit Inc. But the money can only be used to pay debts accumulated after Friday’s filing.

Rumors about Clothestime’s filing have been swirling for weeks in the tight-knit retail apparel industry. Clothestime has lost $18 million in the past two years, pummeling the company’s stock, which traded two years ago at above $10. Clothestime fell another 25 cents on Friday to $1.25 in Nasdaq trading.

Sales at the apparel chain have been slipping as customers flock to such powerful national chains as Wal-Mart, Sears Roebuck & Co. and JC Penney that can offer familiar name brands at attractive prices. That combination is deadly for smaller, specialty chains like Clothestime, which carved out profitable niches during the 1980s by selling their own private-label apparel at low prices.

“Clothestime is fighting in a very, very tough arena,” New York-based retail analyst Kurt Barnard said last week. “Stores like Sears have a much larger assortment of merchandise, and they’re taking a lot of market share from specialty shops and off-price stores.”

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Clothestime recently hired former department store executive Lynne Sperlingto help jump-start its sales, but Clothestime hasn’t had enough time to reverse the sales slide. Last week, executives said they would close an undetermined number of stores and lay off some employees.

Finally, late Friday afternoon, a team of lawyers filed a thick stack of documents in Bankruptcy Court in Santa Ana.

“Clothestime is in good company,” said Howard Raab, president of Park Avenue Transglobal Financial Services Inc., a Los Angeles-based commercial credit service. “There are lots of big retail names across the country that are suffering, like our friends at Kmart. Simply having a recognized name or longevity doesn’t count anymore. You’ve got to keep on top of all the trends.”

Clothestime, founded in 1978, had its origins in an Orange County swap meet booth during the 1970s. The DeAngelo family, which since has turned management over to Ortega, opened its first store in 1978, catering to value-oriented women between the ages of 18 and 35.

Clothestime kept its costs low by opening stores in strip malls and offering private label merchandise at prices that were lower than name brand manufacturers. The strategy generated a fortune for the DeAngelo family.

Former chairman and founder August DeAngelo, now retired but still a board member, still owns about 2.8% of Clothestimes’ shares. His son, Raymond, resigned as chief executive on Jan. 6, receiving a one-time $250,000 payment and the promise of an additional $1 million over the next two years.

Another son, Michael, drew a brief moment of media fame during the late 1980s when his 36,000-square-foot house in the Tustin Hills was featured on “The Lifestyles of the Rich and Famous.”