Steve & Barry's, the clothing chain that tried to undercut competitors by selling celebrity fashion and shoes for less than $10, filed...

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Steve & Barry’s, the clothing chain that tried to undercut competitors by selling celebrity fashion and shoes for less than $10, filed for bankruptcy protection Wednesday in the latest blow to shopping malls battered by the economic downturn.

All 276 of the company’s stores, including five locations in Washington state, are operating as usual. Store managers in Everett, Auburn and Olympia declined to comment.

The company, based in Port Washington, N.Y., announced 172 layoffs and a tentative plan to liquidate all or some assets to repay its debt.

Steve & Barry’s had been one of the fastest-growing retailers in the U.S., opening hundreds of stores selling clothes under the names of Sarah Jessica Parker, Venus Williams and Stephon Marbury.

Company spokeswoman Wendi Kopsick said no decision had been made about how many stores, which are in 39 states, would close.

The privately held parent company and 63 of its affiliates filed for protection from its creditors in the U.S. Bankruptcy Court for the Southern District of New York.

Steve & Barry’s officials blamed a cash crunch as a result of tighter credit markets and sluggish economic conditions. That hurt its plans to open stores and its ability to borrow money.

“The generally poor environment for apparel retailers has reduced funding to our suppliers, landlords and to our company,” Steve Shore and Barry Prevor, co-founders and co-CEOS, said. “It has become increasingly difficult for us to continue operating normally under these circumstances.”

They also noted that speculation in the marketplace about the company’s cash issues in recent weeks became “self-fulfilling prophesies.” They said that many suppliers cut off access to services and supplies. They said landlords stopped making “contractually owed payments for construction and store-opening work” the retailer performed.

“As a result of all of this, our loans have gone into default, and we have had no alternative but to file Chapter 11 to enable continued operations,” they said.

Even as its business imploded, it claimed annual sales of about $1.1 billion and sales gains of 20 percent in stores open one year or more. But the company’s strategy of operating on razor-thin margins and of adding stores in distressed locations with special payments from landlords became tenuous as the economy weakened.

Steve & Barry’s sudden fall presents another challenge for malls across the country, which are already reeling from announcements by retailers like Ann Taylor and Zales that they will close hundreds of stores, and the recent bankruptcies of Linens ‘n Things and Sharper Image.

Selling $10 fashions

Steve & Barry’s, founded in 1985, built its success on selling $10 fashions while keeping costs low by using virtually no advertising, manufacturing its own clothes and selling in large volume.

But the founders conceded that in this climate, marketing prowess and cheap prices just weren’t enough.

According to published reports, most of Steve & Barry’s earnings came from one-time, upfront payments from mall owners, who were using the incentives to lure the retailer to fill in vacancies at the mall. If that’s the case, then Steve & Barry’s earnings may have been generated from store openings instead of the sales of its products, according to Mintz Levin bankruptcy attorney Stuart Hirshfield.

Daniel Ansell, a partner at Greenberg Traurig and chairman of its real-estate operations division, said that the filing by Steve & Barry’s should serve as a lesson to mall owners.

“Mall owners need to think about how they are going to protect themselves” instead of focusing on incentives to try to bring in retailers that may ultimately prove to be unprofitable, he said.

Bailout speculation

The company opened more than 200 stores in the last four years.

The company’s management held discussions over the Fourth of July weekend with Sears about a possible bailout or an acquisition of some of its labels, according to people briefed on the talks.

TA Associates, a private equity firm, owns a minority share in the company.

Shore and Prevor had begun reinventing their business about two years ago, expanding from their roots selling cheap collegiate apparel by introducing celebrity brands and more fashionable items for women, at prices lower than Wal-Mart.

Marbury, a basketball star, lent his name to shoes initially priced at $14.98, which were marketed as an alternative to other players’ sneakers selling for more than $100. Last year, Parker’s Bitten collection was introduced, and the inexpensive jean jackets and batik-print cotton dresses were given up to half the floor space in Steve & Barry’s stores.

Operating margins

While the strategy brought hordes of customers, it also crimped operating margins, as the celebrities had to be paid a licensing fee or a portion of sales.

As the retail market softened and consumers reduced spending, the company took a risk by lowering prices further, to $8.98, from $14.98.

But the cost of maintaining stores was bound to rise because the landlords’ lease incentives were usually one-time payments.

“When you get a free lunch, normally you buy dinner,” said Howard Davidowitz, the chairman of Davidowitz & Associates, a retail-consulting and investment-banking firm.

“They were getting paid millions to take those spaces, but the problem with those payments is that they were not sustainable. They took stores that no one else wanted, and I don’t think that was necessarily a brilliant paradigm.”

Material from Seattle Times business staff and The Associated Press was used in this report.