Charming charlie caught short as suppliers withheld inventory

Posted December 12, 2017 8:17 p.m. EST

Charming Charlie's suppliers held up millions of dollars' worth of inventory before the critical holiday season, forcing the cash-strapped retailer into bankruptcy court following years of declining sales and merchandising mistakes, court records show.

Houston-based Charming Charlie, which filed for Chapter 11 bankruptcy protection on Monday, explained in the filings that many of its vendors refused to ship merchandise unless it paid upon delivery. As much as $45 million in inventory is now stranded in distribution centers and ports, and the company has reported it has only $700,000 in cash.

"Usually retailers have always tried to file after the holiday because they could get the Christmas sales," said Reshmi Basu, reporter with Debtwire, a debt market intelligence service. "In this case, the vendor issues were so big that they couldn't wait."

Moody's Investors Service on Tuesday slapped a junk-bond rating on an outstanding $150 million loan to the company and said it would no longer monitor it.

The Chapter 11 filing could mark a turning point for Charming Charlie, which grew with abandon even as other retailers closed stores to account for online shopping and other changes in consumer preferences. Court filings show how the chain of about 390 jewelry and accessories boutiques, founded in 2004 by Houston entrepreneur Charlie Chanaratsopon, has for years been collapsing under its own weight during an especially challenging time for the entire industry.

Now, the company is seeking court approval of $20 million in new financing, as well as a $35 million asset-backed loan. It said the additional funding will let it meet its financial obligations during the bankruptcy process as it restructures its debt and operations.

As part of the overhaul, the company plans to close roughly 100 store locations, primarily in Texas, Arkansas, California, Oklahoma, Maine and Rhode Island. It also intends to invest more heavily in its website to boost e-commerce sales and rethink its merchandise.

Company executives could not be reached for comment.

Charming Charlie stores, glitzy and inexpensive, mimic the rainbow with clusters of merchandise grouped into 26 colors. That strategy, the company said, became a problem when customers rejected accessories in certain shades, forcing the company to resort to markdowns that ate into profit margins.

In 2014, it attempted to "refine the brand" by eliminating some product categories. The company said the move resulted in a dramatic decline in foot traffic, eroding the profitability of what had become a "disproportionately large" store base.

At the same time, the specialty retail sector became even more competitive as e-commerce giants such as Amazon, as well as direct-to-consumer upstarts and other players, jockeyed for market share. Adam Melvin, an analyst at S&P Global, said that dynamic compounded the company's missteps in merchandising and marketing.

"Those did occur at the wrong time," he said. "As a result, its challenges were accelerated."

Late last year, Moody's downgraded its rating on the Charming Charlie's debt, warning the company would likely have to amend its payment terms as its performance deteriorated. It noted that the company, a relatively small player despite its fast growth, struggled to compete against companies with larger operations, wider selections and deeper pockets.

This summer, Charming Charlie devolved into crisis mode as cash flow slowed to a trickle. The company said in court filings that lenders, questioning its creditworthiness, had already begun to cut off shipments or refuse to release them.

At the end of October, CEO Chanaratsopon and Steve Lovell, then-president, both stepped down as the company negotiated with lenders to obtain $4.5 million cash needed to obtain some of the holiday inventory that suppliers had been withholding.

Chanaratsopon, who now serves as non-executive chairman of the board, still control about 70 percent of the company along with other members of his family. Private equity firm Hancock Park Capital holds most remaining shares.

Basu said the company has focused on shoring up its finances and targeting struggling stores for closure. It hasn't released details of its new strategy.

"It's too soon to tell what they're doing to do," Basu said.