Dive Brief:

• Teen apparel retailer Papaya Clothing has joined the growing ranks of niche apparel sellers filing for bankruptcy. Facing liquidity problems and looking to shrink its store footprint, the retailer’s parent, Cornerstone Apparel, Inc., sought Chapter 11 bankruptcy protection in the federal court system’s Central California District last week, according to a court filing.
• Papaya had expanded rapidly in recent years, opening 50 of the 80 stores it currently operates over the past six years, according to a Thursday court filing from company President and Chief Financial Officer Tae Yi. “The expansion effort took a heavy financial toll on the business operations of the debtor” as Papaya racked up construction and operating costs, Yi said. Those costs, combined with flagging retail sales, proved an unmanageable challenge for the company without bankruptcy protection.
• Papaya asked the court for the ability to exit leases for eight stores it is currently operating and another 22 it has already shut down. The retailer also asked for leeway to honor potentially hundreds of thousands of dollars in outstanding customer discounts, returns and loyalty rewards as it looks to restructure its debt and stay up to date on utility payments and other obligations.

Dive Insight:

Like many distressed retailers, Papaya was in some measure a victim of its own success. After opening in 1999, the company expanded rapidly in recent years only to run into a sectorwide slow down.

Similar to recent bankruptcies — including Gymboree, rue 21 and Payless — Papaya is hoping to remain an operating retail company, rather than using bankruptcy to liquidate or transform itself into a wholesale apparel company or IP licensor.

From Yi’s account, the retailer, which is owned and managed by the team behind Everblue Casuals and Career Image, is successful. Papaya brings in about $134 million in sales, boasts a rapid product development timeline and consistently leads its category in sales per square foot of space, Yi said in the filing.

But the company, as with many niche and apparel retailers across many categories, is overstored and faces declining mall traffic, as well as a crush of competitors from off-price sellers and e-commerce. In that respect, it resembles children’s apparel retailer Gymboree and teen retailer rue 21.

Rue21’s  once-bright star fell quickly after an over-eager expansion effort following its 2013 takeover by private equity firm Apax Partners. By mid-April, the company announced on Facebook that it had plans to shutter almost 400 of its approximately 1,200 stores and then filed for Chapter 11 bankruptcy protection in May with the aim of reducing its debt and winning additional capital to restructure.

Gymboree also expanded rapidly in the past decade before it began struggling under its debt load from Bain Capital’s leveraged buyout of the company seven years ago. As competitors in the space like Carter’s and The Children’s Place advanced, and others like Target, off-pricers and e-commerce sellers moved in, Gymboree watched its sales flag. With its suppliers pressing for better terms, loans maturing and bond interest payments coming due, Gymboree went with a majority of its creditors to bankruptcy court in June with a plan for relief. The company could close as many as 450 of its 1300 stores as it retrenches and restructures.

The fate of these struggling retailers will largely hinge on whether they can maintain a loyal following of customers with a reduced retail footprint. They'll also have to scrounge up ways ways to sufficiently finance investments in their stores and their futures (namely digital capabilities and customer experience) as they try to manage their debt and other obligations in bankruptcy. In the long run, some brands might not survive the retail shakeup, with many analysts expecting consolidation and some e-commerce replacement of brick-and-mortar retailers.