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Mervyns, the ailing Hayward-based department store chain, abandoned efforts to emerge from bankruptcy Friday and announced plans to shut down all of its stores after the holidays.

The 59-year-old retailer will liquidate its remaining inventory at discount sales over the next two months and then shutter its remaining 149 stores, including those in Santa Rosa and Petaluma.

"We are disappointed with this outcome, but the company's declining liquidity position and the extremely challenging retail environment, together with the fact that we have exhausted all other possibilities, requires that we take this action," Mervyns CEO John Goodman said in a statement.

Mervyns becomes the biggest retail name in California to fall victim to a slowing economy and severe credit crunch. A growing number of retailers are trying to restructure in bankruptcy or calling it quits.

Earlier this week, specialty retailer Linens 'n Things announced it will begin liquidation sales at its stores after failing to find a buyer that wanted to operate the company.

Other prominent retailers to file for bankruptcy over the past year include Sharper Image, Shoe Pavilion, Steve & Barry's, The Bombay Co. and Levitz Furniture.

Even retailers that can avoid bankruptcy are shutting down stores to preserve cash. Ann Taylor, Foot Locker and the jeweler Zales have all announced plans to close hundreds of stores this year.

Outside the Santa Rosa store Friday, longtime Mervyns customer Maria Reyes of Santa Rosa said she was saddened by the company's decision to close.

"It's one less store to choose from," said Reyes, a mother of three. "I like the prices. I always come back for something. They always have something for sale."

Founded in 1949 in San Lorenzo, Mervyns grew into a regional department store chain with outlets in seven states. Most of its stores are in California, one of the epicenters of a housing slump that has spread throughout the economy.

Mervyns entered Sonoma County in 1972, opening a store in Petaluma. Four years later, it opened a store in Santa Rosa at Montgomery Village. That store was moved downtown in 1982 with the opening of the Santa Rosa Plaza shopping center.

Caught in the middle

But Mervyns found itself squeezed between high-end department stores and discounters like Wal-Mart and Target.

Jennifer Austin, a Santa Rosa mother of three, said she shops around for the best deals and isn't loyal to particular retailers.

"We're all ingrained with looking for discounts," she said Friday outside the Santa Rosa store. "You try to get the cheapest stuff because I have to make my money go far."

Mervyns 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.

Filed bankruptcy

Mervyns tried to restructure its debt in July, seeking protection from its creditors by filing Chapter 11 in U.S. Bankruptcy Court in Delaware. At that time, the company said it would keep its stores open while it tried to develop a turnaround plan.

Last month, Mervyns sued the private equity firms involved in the leveraged buyout from Target, alleging the deal stripped the retailer of its real estate assets, forcing it into bankruptcy.

In the suit, Mervyns said the investment group acquired its real estate and leased it back to the company at substantially increased rates. Mervyns says the increased rent was used to finance the buyout.

On Friday, Goodman said the company had determined that survival was no longer the best option.

"Although we took a number of steps to improve our financial performance, we were unable to return the company to profitability," Goodman said.

Mervyns considered a variety of alternatives, including a sale of the company, before determining that liquidating its inventory over the holidays was the best way to maximize value for its creditors.

The company will auction off the leases for its stores, creating opportunities for other retailers to fill the breach -- or leaving large empty spaces inside shopping centers.

Potential replacement

One potential replacement could be Forever 21 Inc., a Los Angeles retail chain known for its trendy yet affordable fashions. Earlier this month, the company told the Los Angeles Times that it had submitted a bid to acquire Mervyns' remaining stores.

Mervyns did not specify when its stores would close, and the company did not return telephone calls seeking comment.

It plans to pursue the liquidation under the Chapter 11 bankruptcy code, a move that typically allows a company to retain more control as it sells off its assets. In a Chapter 7 filing, the court would immediately appoint a trustee to take over the case.

The effect of Mervyns' liquidation "could be significant" for mall landlords, said Richard Hastings, a consumer strategist with Global Hunter Securities. However, he doesn't believe that Mervyns' liquidation sales would be a huge blow to rival retailers because bankrupt stores undergoing organized liquidation sales usually sell the best brands to discounters and closeout chains.

Anchor store

Business appeared normal Friday at the Mervyns in Santa Rosa. Customers were scattered about the store, many checking racks touting 75 percent off. A sign at the mall entrance to the store promoted that Mervyns was hiring.

The closure will be a blow to the Santa Rosa Plaza, which is anchored by Mervyns, Macy's and Sears.

"Mervyns is definitely a larger presence. It has the large merchandise lines, and they bring in a lot of people," said Kim Hall, spokeswoman for Simon Property Group, which owns Santa Rosa Plaza.

This story includes information from Associated Press. You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.

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