United Retail Group Files for Chapter 11

Plus-size women’s apparel retailer United Retail Group, which owns the Avenue brand and is a subsidiary of Redcats USA, today announced that it filed for Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York and plans to sell the company.

Under Section 363 of the Bankruptcy Code, United Retail Group has entered into an asset purchase agreement with private equity firm Versa Capital Management. Versa Capital will serve as the stalking horse bidder during the court-supervised auction of the business.

United Retail Group listed assets of $117.2 million and debt of $67.3 million in Chapter 11 documents. Redcats USA bought the United Retail Group for $198.9 million in September 2007.

Versa Capital has agreed to buy the company’s assets through the bankruptcy process for cash and the assumption of certain liabilities, and plans to operate Avenue as a going concern while keeping the majority of Avenue stores open, according to the filing.

Avenue mailed a print catalog for less than three years before stopping in March 2003.

The United Retail Group has filed motions to maintain vendor relationships and payments, as well as motions to honor gift cards and the Avenue’s loyalty reward program.

To provide liquidity during the restructuring process, United Retail Group has arranged a $40 million debtor-in-possession facility from its existing revolving credit lender, Wells Fargo, to provide sufficient working capital for Avenue to continue to operate the business as usual.

According to the filing, since being acquired by Redcats USA in 2007, Avenue experienced operating losses driven by sales declines in retail stores that have not been offset by growth in the online business.

Beginning with the hiring of a new management team in the second half of 2011, Avenue has instituted a turnaround plan focused on new brand positioning, pricing, product, merchandising and marketing initiatives, as well as rationalizing the company’s lease portfolio.

United Retail Group spokesperson Mac McNeer says 14 stores are slated for closure and at least 300 will remain open. The rest (the company has 433 stores in 37 states) will depend on landlord concessions. The timetable for the auction sale will likely be 60-90 days, he says.

United Retail Group’s 2011 sales were $300.6 million, compared to $313 million in 2010. The company employs about 4,422 workers. Retail store sales account for 85% of Avenue’s total sales, representing about $276.9 million for the year ended Dec. 31, 2011.

Lee Helman, managing director for investment firm Financo, says the Chapter 11 filing was done to allow Versa to own the business in the context it decides.

The bankruptcy process allows the buyer to only assume those leases where the stores are profitable. “I am confident that Versa has a well-thought out plan in place to run the business as a smaller company and establish a solid foundation for the company’s future,” Helman says.

Chris Kampe, managing director with investment firm Tully & Holland, says the process allows debtors to affirm or reject contracts (including operating leases), which provides a special benefit for brick and mortar retailers like Avenue because it can get rid of unprofitable stores.

“It may be possible for United Retail to exit all of the leases of its unprofitable stores and emerge from bankruptcy smaller, but profitable and viable,” Kampe said.