updated 7/29/2008 6:39:17 PM ET 2008-07-29T22:39:17

Department store chain Mervyns LLC filed for bankruptcy protection on Tuesday, the latest in a series of merchants stumbling in the harsh retail environment and another blow to the nation’s struggling malls.

The company, which had been languishing for several years, said that all of its 175 stores will remain open and business will continue as it reorganizes. Privately held Mervyns operates mainly in California, and has seen its sales drop further as the state is among the hardest hit by the real estate slump.

“Mervyns needs to reorganize its finances and operations due to the state of the economy and difficult operating environment for our industry,” Chief Executive John Goodman said in a statement.

The Hayward, Calif.-based chain, along with some affiliates, filed for Chapter 11 protection from its creditors in U.S. bankruptcy court for the District of Delaware. According to court documents, Mervyns listed liabilities and assets of $500 million to a $1 billion each, with Levi Strauss & Co. as its largest unsecured creditor.

Company spokesman James Golden said it was premature to discuss layoffs or store closings.

Tuesday’s announcement follows a slew of bankruptcy filings from retailers in recent months and marks the latest challenge to the nation’s malls, which are seeing increasing vacancy rates. Earlier this month, Steve & Barry’s LLC, once a growing force in low-priced fashion, filed for Chapter 11. The list also includes home furnishings chain Linen ’n Things Inc., catalog retailer Lillian Vernon Corp. and specialty retailer Sharper Image Corp.

On Tuesday, the Bennigan’s and Steak & Ale restaurants owned by Metromedia Restaurant Group, which operates in many mall locations, filed for Chapter 7 bankruptcy protection. Meanwhile, Reading, Pa.-based regional department store chain Boscov’s Inc., which operates about 50 stores, has seen vendors hold off shipping to the merchant as it heads into the important back-to-school period.

Mervyns’ filing didn’t come as a surprise to the industry, as a growing number of vendors were delaying shipments to the company’s stores and key lenders that provide finance and credit to apparel makers stopped approving orders in recent weeks.

The 59-year-old chain was squeezed between high-end department stores and discounters like Wal-Mart Stores Inc. It has been shuttering stores and leaving states such as Oregon and Washington since 2005, after a consortium of private equity players including Sun Capital Partners Inc. bought Mervyns from Target Corp. for $1.2 billion.

In April, Mervyns appointed Goodman, who had been president and general manager of the Dockers brand — a key supplier to Mervyns — as president and chief executive. The company announced the next month that it had hired a real estate advisory firm to sell five to 10 underperforming stores that also had high real estate value. Mervyns said then that the move was expected to generate $25 million to $50 million in cash to fund operations and new growth.

But the chain’s heavy concentration in California has made a turnaround harder, Sun Capital acknowledged in a statement on Tuesday.

Sun Capital said it was clear when the private equity firm acquired Mervyns that it was a “high-risk turnaround” but it blamed the sustained economic downturn in California for making it “impossible.”

In conjunction with its filing, Mervyns said it has received a commitment for $465 million in financing from a group led by Wachovia Capital Finance Corp. Upon bankruptcy approval, that financing, combined with operating cash flow, will be used to fund the company’s operations, Mervyns said.

Jeff Knopman, principal at Profit Solutions Group Inc. which works with vendors in recouping illegal or unauthorized chargebacks, said that the latest filing creates more woes for suppliers, who have fewer stores to sell to. The consolidation of the retail industry means more power to the handful of department store retailers, which can increase financial demands.

“Every filing creates more leverage for the retailer,” said Knopman. “It’s not good for anyone — not good for consumers, the employees and the vendors.”

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