Hilo Hattie, the Hawaii retailer popular for its aloha shirts and souvenirs, has posted an operating loss of $3.7 million since filing for bankruptcy in October and might need to liquidate.

Curtis Ching, assistant U.S. trustee, filed a motion last week asking federal Bankruptcy Court to convert the case to a Chapter 7 liquidation from Chapter 11 reorganization due to the company's deteriorating financial condition, shrinking inventory, diminished receivables and increasing payables.

The motion said that the success of Hilo Hattie's reorganization hinged on its planned move to Royal Hawaiian Shopping Center, but that the move failed because Hilo Hattie didn't have the money to finance the relocation from its Nimitz Highway store.

Hilo Hattie said it has not received any offers for any portion of its business and that its long-term leasehold interest in its Nimitz store has been on the market since early in the bankruptcy case.

The company reported in a recent filing that its inventory level had fallen by $2.3 million, its payables had increased to $2.5 million and its receivables had declined by $297,889 from the time of its Oct. 2 bankruptcy filing through April 4.

A hearing on the Chapter 7 motion is scheduled for June 22.

Another critical hearing is set for May 11 on a motion by the unsecured creditors' committee to appoint a Chapter 11 trustee, who would assume control of the company from Hilo Hattie's current executive team.

Hilo Hattie, which has seven retail stores and nearly 200 employees, said in an opposition motion this week that the appointment of a trustee likely would be a death knell for the company since vendors and landlords who have extended credit and granted concessions based on their relationship with current management would lose confidence in the prospects for Hilo Hattie's survival.

The retailer said in the filing that it has been having discussions with owners and managers of large malls, shopping centers and a major Waikiki hotel conglomerate regarding the opening of one or more Hilo Hattie stores.

Hilo Hattie disclosed it has talked to General Growth Properties about mall space at Ala Moana Center; Kyo-Ya regarding space in one or more of its Waikiki hotels that are operated under the Sheraton, Westin and Starwood brands; Aloha Tower Marketplace; Queen's Market Place in Kona; and Kapaa Center on Kauai.

Management expects to have one or more letters of intent for some of those locations in the next 30 days, the filing said.

Hilo Hattie officials and attorneys could not be reached for comment.