UPDATE 2-Crabtree & Evelyn unit in US files for bankruptcy

(Recasts, adds company comment, previous NEW YORK dateline)

SAN FRANCISCO, July 1 (Reuters) - Crabtree & Evelyn Ltd filed for Chapter 11 bankruptcy protection in the United States on Wednesday as the purveyor of specialty soaps, fragrances and lotions became the latest retailer to fall victim to the economic downtown.

The Woodstock, Connecticut-based company, which is owned by Kuala Lumpur Kepong Berhad KLKK.KLand is a unit of Britain's Crabtree & Evelyn Holdings Ltd, said it would continue to operate its stores and, honor gift cards and returns as reorganizes its business under bankruptcy protection.

But with sales in its retail channel forecast to fall 24.4 percent this year, the company said it will close some stores and try to renegotiate leases for others. It currently operates 126 stores in 34 U.S. states and employs about 950 people.

Many retailers have filed for bankruptcy protection since the U.S. recession began in late 2007, including Fortunoff, Steve & Barry's, Boscov's and Gottschalks GOTTQ.PK.

In a court filing, Crabtree & Evelyn Acting President Stephen Bestwick said a decline in the housing market and tightening of credit markets have reduced consumer discretionary spending, especially in shopping malls where many of its stores are located.

While it tried to renegotiate or terminate leases ahead of the bankruptcy filing, Crabtree & Evelyn said that “given the current retail environment and sheer magnitude of vacancies absorbed by landlords around the country,” it was unable to achieve the level of rent concessions it required.

Bestwick also said management changes at the company resulted in strategy shifts, including lower sales to wholesale accounts, and a “disconnect” between executive pay and performance.

“These challenges, combined with its recent declining revenues and operating losses, have severely impacted the debtor’s ability to operate successfully,” he said.

The retailer expects to lose $13.3 million on revenue of about $100 million in the current fiscal year, compared with a loss of $8 million on revenue of $107.5 million in the year ended Sept 30, 2008.

Crabtree & Evelyn has between $10 million and $50 million of both assets and debts, a court filing shows, and it has received a commitment for a $40 million debtor-in-possession financing facility from Kuala Lumpur Kepong Berhad.

Crabtree & Evelyn companies outside of the United States are not affected by the Chapter 11 filing, and the company said its UK business “continues to succeed and expand, with two new store openings planned in the coming months.” (Reporting by Jonathan Stempel and Nicole Maestri; editing by John Wallace, Leslie Gevirtz)