The new owners of Hilo Hattie said its bankruptcy filing yesterday was triggered by a severe decline in visitors to the isles.

While the company already had financial troubles before a group of California investors purchased it just three months ago, the added burden of an economic downturn, substantially fewer tourists and declining consumer spending worked against stabilizing the company's financial situation.

“;The purchasers have had an unfortunate set of circumstances,”; said Hilo Hattie founder Jim Romig, who sold the company for an undisclosed price on July 11 to a California investor group led by Ted Nelson, owner of the Hawaii franchise of Fantastic Sams.

“;In a very short period of time since they purchased the business, we've lost two airlines and have seen our fuel costs skyrocket, while the Japanese visitor trade has been diminished dramatically,”; he said. “;The combination of all those things ... just worked against all retail operations in the state, Hilo Hattie being one of them.”;

The company, originally founded in 1963 as Kaluna Hawaii Sportswear on Kauai, has made a name for itself for decades by selling aloha shirts and souvenirs but has been losing money since 2006, when it recorded a modest profit of $500,000 on gross sales of $69 million, according to court documents.

The company posted a loss of about $4.6 million on gross sales of $56 million in fiscal 2007, and expects an even bigger loss for fiscal 2008, said Nelson, principal of TOC Inc., the company that owns Pomare Ltd., doing business as Hilo Hattie.

“;The global economy and national economy has had a very serious impact on the Hawaii economy in general,”; he said. “;Not only Hilo Hattie, but our fellow merchants in business are all challenged by the turn of events.”;

Hilo Hattie's stores and 265 employees will not be affected by the bankruptcy. In fact, the company is currently looking to fill fewer than a dozen open positions, Nelson said.

In yesterday's filings, Hilo Hattie said it had $21.5 million in total assets and $23.2 million in liabilities as of Sept. 27. The company also has more than 500 creditors, according to James Wagner, attorney for Pomare.

It owes $1.25 million to its largest unsecured creditor, Maui Divers of Hawaii Ltd., which advanced the company the money to retire its debt to Central Pacific Bank, which held the mortgage on its Nimitz Highway leasehold property.

 

  Hilo Hatties Files For Chapter 11 Bankruptcy

 

  There were indications the company was in deep financial trouble when in June Hilo Hattie asked its venders to agree to a payment plan. 

 

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“;We're optimistic with the plans they have that they're going to be successful and that we will be paid back in full and we'll continue to do a lot of business together for many, many years,”; said Robert Taylor, president and chief executive of Maui Divers of Hawaii Ltd., which will continue to operate its jewelry concessions in Hilo Hattie's seven stores in Hawaii and two in California.

Meanwhile, Hilo Hattie has come to a tentative agreement with Kamehameha Schools to move forward with plans to relocate its flagship store from Nimitz Highway to Royal Hawaiian Shopping Center in July. The move prompted the company to put its prime Nimitz property on the market. The building, which has more than 30 years remaining on the lease, is assessed at nearly $7.9 million, according to county records.

The new owners have known about Hilo Hattie's financial challenges for at least six to nine months. In June the company informally agreed with its vendors to restructure about $6.5 million in unsecured debt over a period of one to four years starting on June 1.

Hilo Hattie also has put in place a $5 million interim line of credit from California-based North Tustin Partners Inc. to allow it to pay bills as normal and give vendors confidence to continue to ship products, even though it is under Chapter 11 bankruptcy reorganization, said Wagner, adding that most companies emerge from Chapter 11 reorganization in six to nine months.

“;It's a good thing,”; he said. “;They have a real interest in growing the company and having it survive. It gives them time, takes pressure off from the day-to-day and monthly demands and gives time to restructure their debt.”;

However, Hawaii's economic climate is expected to further decline with retailers in particular struggling to wait out a recovery in tourism in 2010.

“;It means a fresh start,”; Nelson said. “;Filing reorganization allows us to put all our creditors on hold while we execute our plan. So it's a clean slate for us, and it gives us the opportunity to perform the way I know we can, and we will.”;