Dive Brief:

• Women's apparel retailer A'gaci filed for Chapter 11 bankruptcy protection this week after a rapid brick-and-mortar expansion in recent years "spread the organization too thin to effectively respond to the rapidly changing trends in the retail market," the company's chief financial officer said in a court filing.
• After building out 21 new stores over the past two years, A'gaci is now looking to close 49 stores — almost 65% of its footprint — in bankruptcy, A'gaci CFO Mark Butterbach said in the filing. Along with the overexpansion, Butterbach said the consumer shift toward online shopping, trouble implementing a new business software system, and major hurricanes last year — which "ravaged" some of the retailer's most profitable stores — forced the company into bankruptcy.
• The Texas-based fashion retailer, which operates 76 stores and brought in $136.2 million in sales in 2017, went into court with $62 million in liabilities, including a senior revolving credit facility of $10 million and a $5 million term loan from Bank of America, according to Butterbach. It also had unsecured claims on its business (including payments owed to vendors and landlords) totaling $61 million.

Dive Insight:

Some of the headwinds that blew A'gaci into bankruptcy echo those we've heard from other retailers that have sought Chapter 11 protection recently: namely, overexpansion and the growing prominence of e-commerce.

And A'gaci's recent physical expansion was particularly poorly timed — it came just as mall traffic was declining. (A'gaci's own e-commerce sales were $12.8 million last year, or about 9.4%, of its total sales, according to Butterbach.)

But every bankruptcy is unique in some way. While other retailers lost sales from last year's catastrophic hurricanes, A'gaci is the first large retailer to point to last year's major weather events as a cause of its bankruptcy. Butterbach said that the hurricanes caused the temporary closure of eight stores in Texas, 12 in Florida and four stores in Puerto Rico, two of which have not yet reopened.

The hurricane damages, the overexpansion and delays in rolling out a major new enterprise software system together demolished A'gaci's bottom line. The retailer's earnings fell by $7.2 million in the past year, from $4.7 million in 2016 to around negative $2.5 million in 2017, according to Butterbach's filing. The timing of the earnings hit was also terrible — it came as a major debt maturity loomed in 2018.

Now the retailer — which was founded in 1971 and boasts "crazy talented, fashion-devoted buyers who are experts on all things now" — is looking to shrink its physical footprint and focus on its more profitable stores.

In that respect, its bankruptcy looks much like other apparel and specialty retailers that filed in 2017 that used Chapter 11 to downsize their business and/or debt loads as mall traffic has shrunk dramatically. Those retailers include Payless, Gymboree, rue21 and True Religion, all of which entered Chapter 11 in 2017 and exited during the year, having executed in-court plans largely prepared before filing for bankruptcy.

A'gaci's is the first major retail bankruptcy of the year. The industry and other observers will be watching closely to see if the rash of closures and bankruptcies in 2017 — which surpassed recession levels — will level off in 2018, or if the bleeding will continue.