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Extra6/17/2009 3:48 PM ET

Eddie Bauer files for bankruptcy

The sportswear retailer filed for bankruptcy Wednesday in hopes of wiping out an unmanageable debt load. More retailers may follow.

By Catherine Holahan
MSN Money

Eddie Bauer (EBHI, news, msgs) may spend less time in bankruptcy court than even Chrysler. The sportswear retailer filed for Chapter 11 protection Wednesday in Delaware with a buyer waiting in the wings.

Bauer, which operated 370 retail and outlet stores, plans to sell nearly all its assets for $202 million in cash to CCMP Capital Advisors, a private-equity firm that was once part of JPMorgan Chase (JPM, news, msgs). The Bellevue, Wash., company has about $476.12 million in assets and $426.71 million in debts, according to its bankruptcy filing, provided by BankruptcyData.com.

"The story of Eddie Bauer today can be summarized in one phrase: good company, great brand, bad balance sheet," said Neil Fiske, the president and CEO of Eddie Bauer, in a statement.

Like many retailers, Eddie Bauer had struggled to keep up with its debt payments in the face of drastic cuts in consumer spending. Company sales declined nearly 14% for the quarter ending in May, prompting the company to post a $44.5 million loss. Meanwhile, the company's debts continue to come due. Earlier this year, Eddie Bauer tried unsuccessfully to persuade creditors to trade a $300 million loan for equity.

"Eddie Bauer, like all other businesses, and especially retail businesses, is suffering as a result of the worst global economic downturn since the Great Depression," wrote Fiske in an affidavit accompanying the company's bankruptcy filing. "Adverse economic conditions in general and increased levels of unemployment have led to a decrease in consumer confidence and a decline in consumer spending."

American consumers are too strapped to shop. A record 14.5 million people are collecting unemployment, and that number is expected to continue to rise. Incomes have dropped 2.7% since June 2008. And other sources of income, such as home equity and stock holdings, have dried up.

"The consumer is tapped out," says Diane Shand, a director at Standard & Poor's who covers Eddie Bauer. "The fourth quarter was sort of like a train wreck . . . and the fourth quarter this year will be better because of weak comparisons. It is going to be a slow climb back for retailers."

As a result of the economic conditions, many retailers face bankruptcy. Including Eddie Bauer, 16 of the 146 retailers and restaurants tracked by Standard & Poor's have CCC or CC credit ratings.

S&P senior director Jerry Hirschberg cautions that a low rating does not mean a company is an imminent bankruptcy risk. But it is an indication that lenders will be wary of refinancing retailers' debts at attractive rates. Among the companies burdened by low ratings are Internet catalog retailer Oriental Trading, Barney's New York, Loehmann's, electronics and gift retailer Brookstone and convenience store Duane Reade.

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Eddie Bauer was perhaps worse equipped than other retailers to weather such rough economic conditions. Since it was spun off from Spiegel in 2003, Eddie Bauer has tried to restore its brand name and recapture its former glory.

"Heritage brands always have comeback potential -- and few have a heritage as rich and compelling as Eddie Bauer's," said Fiske. "We are already fixing this business. We are restoring a great American brand. We have made progress and know what remains to be done. But we need some help."

Eddie Bauer has 8,600 employees, according to Fiske's statement. The company fired 123 people last year and 193 more people in January. CCMP plans to keep "the majority" of employees, according to a statement. That means that more layoffs are likely on the way. CCMP has promised to honor gift cards from consumers and loyalty reward programs.

The company believes that with a leaner balance sheet it will survive the recession and once again thrive.

"We bleed Eddie Bauer green," said Fiske. "We know we can do it if given a fair chance and a better balance sheet."

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