Hilo Hattie's planned store in Waikiki is envisioned as a new flagship location for the kama'aina retailer. But it's also the linchpin for the financially troubled company to pull out of bankruptcy.

In fact, creditors of Hilo Hattie collectively owed roughly $12 million should be paid in full over time if the 29,000-square-foot store opens as planned in July 2009 at Royal Hawaiian Center.

The company's management team and bankruptcy attorney shared the vision for the retailer's survival at a recent meeting with creditors held under oath before the Office of the U.S. Trustee overseeing bankruptcy cases in Honolulu.

"The key to this company emerging successfully really is Royal Hawaiian," said Jim Wagner, a local bankruptcy attorney representing Hilo Hattie.

Mark Storfer, a former Liberty House executive consulting with Hilo Hattie as a director and treasurer, said the retailer's longtime flagship model of busing tourists to its main Nimitz Highway store in the largely industrial area of Iwilei isn't viable.

"We need to be where our customer is," he said. "That is critical to our strategy moving forward. We believe the model used at Nimitz over the decades has been obsolete."

Hilo Hattie announced last month that it had successfully renegotiated a lease with the owner of Waikiki's largest shopping center in a deal that got the stalled store plan moving forward again after "contentious" dealings between Hilo Hattie's former owner and Royal Hawaiian Center.

However, Storfer said designing and building the store will cost $6 million, most of which the company will have to raise in a financial market with extremely tight and expensive credit.

Under an interim $1 million line of credit provided by a firm affiliated with Hilo Hattie's owners, up to $500,000 may be spent on advancing the Waikiki store project. Another $4 million in pledged credit to help Hilo Hattie operate is still subject to court approval, though Storfer said most of the estimated $6 million Waikiki store cost will have to be raised from investors or lenders.

If the financing is obtained, the Nimitz store would be closed to eliminate expenses such as customer transportation, and the Waikiki store is conservatively projected to produce close to $5 million more in annual sales than the Nimitz store.

At least one creditor at the meeting, Doug Harris of advertising firm The Harris Agency, was skeptical of the turnaround vision. But there doesn't appear to be a more appealing alternative to save the company.

Wagner said there would be very little return for creditors if Hilo Hattie is liquidated.

Hilo Hattie, nicknamed the "Store of Hawai'i," is one of Hawai'i's most well-known retailers. Established in 1963 by Jim Romig, the company grew and largely did well over its first few decades under Romig's leadership, but got into major trouble following an aggressive Mainland expansion in the last decade in which big stores in cities such as Nashville, Tenn., Tempe, Ariz., and Orlando, Fla., didn't do well. Of seven Mainland stores, all but one were closed, and at significant cost.

In an ill-fated effort to reverse losses, Hilo Hattie two years ago ceased apparel manufacturing and began importing cheaper merchandise that ended up hurting the retailer's reputation and sales, the company said in bankruptcy filings.

Sales fell from $69 million in the 2006 fiscal year to $56 million last year and about $42 million in the most recent fiscal year ended Oct. 1.

The company earned a $500,000 profit in 2006, lost $4.6 million in 2007, and recorded an unspecified "large" loss in the most recent fiscal year.

Romig in July sold the ailing company for an undisclosed price to a California investor group led by Ted Nelson, who through another company owns franchise rights to Fantastic Sams salons in Hawai'i and California.

Nelson's group brought in Storfer and appointed John Scott, a former Hilo Hattie official, as company president.

Storfer said Nelson's group essentially bought an insolvent company with the aim to turn it around. The effort made some progress by returning to higher-quality merchandise and arranging to pay off $6.5 million in vendor debt over one to four years.

But unanticipated events in recent months, including double-digit visitor arrival declines and energy price spikes, forced the company to file Chapter 11 on Oct. 2.

Since then, Hilo Hattie has stemmed the decline in sales and cut back some expenses, including the matching contribution to employee 401(k) plans and some office cleaning. The company also closed its store in San Diego.

Storfer said the company doesn't anticipate closing any of the remaining eight stores except for the Nimitz store if the Waikiki store plan is realized.