Warnaco Group Files for Chapter 11

Troubled apparel maker Warnaco Group Inc. filed for bankruptcy protection Monday, the result of relying on struggling department stores to distribute its portfolio of designer brands that includes Calvin Klein, Speedo and Chaps by Ralph Lauren.

Warnaco’s strategy of selling designer labels to department stores has been flawed since the mid-1990s, when sales at those retailers began shrinking dramatically, in contrast to the rapid growth of mass merchandisers and discounters.

“There’s definitely a problem for Warnaco that needs to be understood as a failure of department stores,” said analyst Richard Hastings of credit rating firm Global Credit Services.

The Chapter 11 filing marks a setback for Chief Executive Linda Wachner, who built Warnaco into a major force in fashion by manufacturing designer-label clothing for the masses.

Wachner, an erstwhile darling of Wall Street whom Fortune magazine two years ago called one of corporate America’s most powerful women, encountered troubles in the late 1990s, including legal disputes with Calvin Klein Inc. and Fruit of the Loom Ltd. over licensing. Wachner, the company’s largest shareholder, owns more than 22% of Warnaco.

The New York Stock Exchange suspended trading of the company’s common stock, and Standard & Poor’s slashed the junk bond rating for Warnaco’s credit.

Auditors warned in April that they doubted Warnaco could continue operations, and shareholders filed a lawsuit, alleging the company concealed its true value.

U.S. Bankruptcy Court in Manhattan approved $600 million in fresh financing from a group of banks led by Citibank, JP Morgan Chase & Co. and Bank of Nova Scotia, Warnaco said Monday.

The financing package should provide enough funds to maintain normal business with its vendors and uninterrupted distribution of products to customers, Warnaco said.

“The financing is to cover our operating needs. There are no required divestitures or anything of that sort,” said Tony Alvarez, a turnaround expert who joined Warnaco in the last month and who will serve as chief restructuring officer.

Nevertheless, analysts expect the firm’s restructuring plan to include some asset and license divestitures to raise cash. They also said it was time for the company to seriously evaluate its distribution strategy.

In the fiscal first quarter, Warnaco posted a loss of $62.5 million, compared with a profit of $27.1 million in the period last year.

Warnaco is up against manufacturers with more experience selling to mass merchandise and discounters, including Sara Lee Corp., VF Corp. and Russell Corp.

By starting to turn away from department stores, Warnaco alienated its core retail partners, said Kurt Barnard, president of Barnard’s Retail Consulting Group.

“It became less interesting to carry those lines because every Tom, Dick and Harry could carry them,” Barnard said.

Warnaco said its international operations will be largely unaffected while under protection from its more than 1,000 creditors. The company listed $2.37 billion in assets and $3.08 billion in debts.

Friday, Warnaco shares fell 39 cents to 15 cents on the NYSE. They were as high as $27.34 two years ago.