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House of Fabrics Seeks Protection Under Chapter 11 : Retailing: Stiff competition and sour economy pinch the chain. Restructuring will eliminate 208 stores.


Faced with high costs and heavy debt despite its recent belt-tightening, the nationwide House of Fabrics retail chain said Thursday it has sought protection from creditors under Chapter 11 of the Bankruptcy Code.

The once-thriving retailer of fabrics and home sewing items, which was founded in Los Angeles in 1946 and grew into a network of more than 600 stores, has been hurt by stiff competition and the struggling California economy, analysts said.

While the company plans to continue to operate 427 stores in 41 states, it said it will ask the U.S. Bankruptcy Court to let it cancel leases on 208 other stores that are to be shut down under a plan announced in August.

House of Fabrics, now based in Sherman Oaks, has already closed 46 stores under that restructuring plan. In all, about 3,100 jobs will be lost as a result of the store closings--shutdowns that will culminate in late January.

Twenty-three of the company's 161 California stores will close, eliminating 350 jobs.

However, House of Fabrics plans no additional layoffs and daily operations at the remaining stores will continue as usual, said Gary L. Larkins, company president and chief executive. House of Fabrics employs about 11,000 people nationwide.

"While we would have preferred to complete our restructuring out of court," Larkins said, "we now believe that it is in the best interests of all the company's constituents to complete the restructuring through a court-supervised process that fairly recognizes the interests of--among others--our vendors, other creditors and shareholders."

House of Fabrics listed assets of $373.8 million and liabilities totaling $242.1 million. The company said it owes 11 lenders--a group led by Bank of America--$127 million. It said it reached agreement with the lenders on collateral guarantees that will make them secured creditors. About 1,000 vendors are listed as unsecured creditors. B of A officials could not be reached for comment.

"We have aggressive plans designed to help us complete the restructuring as fast as possible," Larkins said. "We hope to be in and out (of Chapter 11) within a year."

For the six months ended July 31--the company's most recent reporting period--House of Fabrics reported a loss of $13.1 million, versus a $4.7-million loss in the year-earlier period, on a 12.6% decline in revenues to $224.8 million.

Founded by Charles and David Sofro, sons of a junk dealer, House of Fabrics flourished during most of its history but has struggled over the last two years, largely because of increased nationwide competition, said Marcia Aaron, an industry analyst at the San Francisco offices of Alex Brown & Sons.

With about 10% of the national market, House of Fabrics has ranked a close second to industry leader Fabri-Centers of America, a company based in suburban Cleveland.

"House of Fabrics and Fabri-Centers squeezed themselves and all the competitors in the market by over-expanding this decade," Aaron said.

However, Fabri-Centers eliminated some of the competition in August and strengthened its own hand by acquiring the 343-store Cloth World chain from a St. Louis company.

Facing stiff competition in the Midwest and South, House of Fabrics is now expected to concentrate much of its marketing efforts in the West, particularly in California. Of the House of Fabrics' 138 remaining stores in California, about half are in the southern part of the state.

To meet changing consumer demand, House of Fabrics said it plans to reduce its inventory of products for hand-sewn clothing and increase store supplies of materials used in decorations and crafts. Michael's, a retail chain that already focuses on the decorations and craft market, is House of Fabric's principal competition in Southern California.

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