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Z Gallerie Bucking up Balance Sheet in Ch. 11

Retail Editor 8, Clint Engel -- Home Textiles Today, April 27, 2009

Lifestyle retailer Z Gallerie has filed for Chapter 11 bankruptcy in what it says is a strategy to strengthen its balance sheet as it moves forward with its remaining 57 stores.

The move should give the company the opportunity to get out from under lease obligations associated with 21 stores it has closed and an Atlanta distribution center it no longer needs.

The privately held retailer of home furnishings and decorative accessories said all of its remaining stores will stay open and that "it has sufficient cash to operate all aspects of its business, including custom furniture orders through its stores and Web site, and is seeking court approval to do so."

"In light of current economic conditions, our company has had to make some difficult decisions," cfo Mike Zeiden said in a news release.

The filing and restructuring "will allow us to eliminate certain lease liabilities from discontinued stores, and to continue to operate and serve our customers well," he said.

The Gardena, Calif.-based retailer's list of its largest 20 unsecured creditors appears to include a number of landlords but no home textiles suppliers.

In his declaration in support of emergency motions, Zeiden said the business — owned by him and siblings Joseph Zeiden and Carole Malfatti — experienced uninterrupted sales growth through 2006, when sales peaked at $236 million with 74 stores.

But then business began to decline — down 5.6% in 2007 to $223.8 million, and down 15.2% in 2008 to $189.9 million. Net income was $56,530 in 2007 and the retailer lost $4.7 million in 2008. Zeiden said sales continued to decrease in early 2009.

In November, Z Gallerie renewed its revolving secured financing with City National Bank with an outstanding balance as of the bankruptcy filing of about $10.6 million. It said it "pledged substantially all of its assets to CNB as security" for the financing. The owners also gave personal guarantees.

Zeiden said in the document that the bankruptcy filing is "cooperative with CNB," and should let the retailer reorganize its business around its strongest stores while shedding "burdensome locations and related assets."

The company said it will ask the court, among other things, for permission to pay any pre-petition wages and benefits, honor existing customer programs and deposits, and maintain Z Gallerie's cash management system.

Vendors who do business with the company going forward will be paid on an administrative priority basis for all goods and services, it said.

Asked if Z Gallerie is receiving support or resistance from existing product suppliers, spokesman Dan Hilley said, "We can't speak for our vendors, but we believe our relationships are very stable.

"We have made many efforts to remain current with our vendors, and we expect any outstanding invoices for goods and services received before the filing date to be relatively small," he said.

Earlier this year, Z. Gallerie closed 21 of its 78 stores in various markets, culling out the poorest performers in hopes of strengthening its operations.

Zeiden said that recently, Z Gallerie has seen sales increases on its daily business reports despite having fewer stores.

The retailer closed all four of its stores in Ohio, along with single stores in New York, Michigan, Minnesota and Tyson's Corner, Va. It also closed two stores in Colorado and its Coconut Point, Fla., store, among others.

"Our hope is that it's going to make us stronger," Zeiden said. "We'll be able to focus on the stores we have, narrow the inventory we have to carry and better focus on our customers."

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