Tully's files for bankruptcy, closes nine locations

Tully’s Coffee chain closed nine underperforming locations on Sunday following the Chapter 11 bankruptcy filing last week by parent company TC Global Inc.

Seattle-based TC Global is a specialty gourmet coffee retailer that sells premium coffee in grocery and retail stores, as well as operating a chain of 48 company-owned and 83 licensed or franchised coffeehouses under the Tully’s brand.

In the bankruptcy filing Oct. 10 in the U.S. Bankruptcy Court for Western Washington, the company identified 19 locations for lease rejection. Ten have closed over the past two months, and the final nine closed on Sunday. No more closures are planned at this point.

Court documents, however, also indicated the company has been considering a possible sale of assets and/or a search for a candidate that may provide debtor-in-possession financing. TC Global recently hired Deloitte Corporate Restructuring Group to explore strategic options.

After struggling for years with sinking sales, Tully’s blamed rapid growth and the economic downturn, saying the bankruptcy filing would allow for a reorganization of business operations and the closure of underperforming locations, while continuing to operate “those that make financial sense for the future of our business,” according to a statement.

“In filing, we can lower operating expenses by relieving legacy costs as well as effectuate a restructuring of the balance sheet by securing working capital,” the company said. “With this plan, we anticipate emerging from Chapter 11 sometime in 2013.”

Between 1992 and 2001, Tully’s grew to 114 company-operated stores, along the way acquiring the Spinelli Coffee brand in Northern California for $6.9 million, and Coffee Station in Southern California for $2.7 million, according to court documents.

In 2002, the company aggressively launched a wholesale coffee business to drive top-line revenue and profit. However, the company said cash generated from operations was insufficient to fully fund operations and expansion. The economic downturn also took a toll.

The company had plans to file an initial public offering in 2008 that was reportedly put on hold due to market conditions.

The company raised capital by selling rights to the brand in Asia and Japan, and then in 2009 sold all assets associated with the wholesale business to Green Mountain Coffee Roasters Inc. — generating about $40 million — retaining rights to the Tully’s name, though Green Mountain became the brand’s supplier.

During 2010 and 2011, the company initiated various cost-cutting measures, including closing underperforming locations. Deloitte was brought in to look at various options, including a possible sale of assets, identifying an entity to provide debtor-in-possession financing, or both, court documents said.

Bankruptcy was the next step as the company looks to downsize.

In September, Deloitte began collecting candidates for providing either post-bankruptcy financing and/or to purchase the company. Officials said they are continuing to explore all options.

The company, which has about 610 employees, began 2012 with 71 company-operated stores and 105 licensed or franchised locations in Washington, California, Arizona, Colorado, Idaho, Oregon, Montana and Wyoming.

For the third quarter ended Jan. 1, 2012, the most recent period the company reported, Tully’s recorded a net loss of $573,000, compared with a net loss of nearly $1 million in the prior year.

However, Scott Pearson, TC Global’s president and chief executive, said same-store sales had increased 4.1 percent during the quarter. “Our focus continues on sales growth, expense management, EBITDA growth and operational effectiveness,” he said in a statement in February.

Contact Lisa Jennings at lisa.jennings@penton.com.
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