It made its name selling $10 pairs of athletic shoes and $8 dresses, but it turns out Steve & Barry's wasn't making a profit.

The fast-growing New York retailer sought Chapter 11 bankruptcy protection yesterday as rumors swirled that Sears Holdings Corp. might be interested in a bailout or picking up some of its brands. The discount retailer had been in the headlines here in recent months when it opened a 24,000-square-foot store at Waikele Center and signed Maui big-wave rider Laird Hamilton to help design clothes.

A Sears spokesman declined comment on any potential interest, and investors were clearly put off by the prospect. Sears' shares lost almost 5 percent of their value yesterday, falling $3.53 to $72.54 a share, less than half its 52-week high of $162. But some retail experts said such an alliance could make sense for Sears Chairman Edward Lampert.

"Eddie Lampert's apparel is in chaos. Eddie Lampert needs traffic. Eddie Lampert needs a big idea. If that's what he needs, this is potentially a very big idea," said Howard Davidowitz, chairman of New York retail consulting firm Davidowitz & Associates.

Steve & Barry's mix of low prices and trendy looks has attracted hordes of shoppers who sometimes stand in line to gain entrance to its stores. The 276-store chain was started in 1985 by a pair of Long Island friends, Steve Shore and Barry Prevor, and in the early days, it focused on college-logo apparel at prices lower than university bookstores.

More recently, however, it got into the celebrity fashion game, signing licensing deals with Sarah Jessica Parker, Amanda Bynes, Venus Williams and Stephon Marbury. NBA star Marbury sells a line of $10 athletic shoes under the brand name Starbury at Steve & Barry's. Parker launched her Bitten apparel line in June 2007, an introduction that "transformed our stores overnight into a destination for women shoppers," the company said.

In April, Steve & Barry's opened its O'ahu store in a space formerly occupied by CompUSA at Waikele, and in May it debuted Hamilton's Wonderwall skate and surf clothing line, which is sold in stores nationwide.

APPAREL NOT PROFITING

Steve & Barry's stores have been a hit with bargain-minded shoppers. Average store sales increased 25 percent during the first five months of 2008. A better measure of success, sales at stores open at least a year, rose 15 percent. Such double-digit gains made Steve & Barry's a standout during a slow economy. But sales don't equal profits, retail experts said, and apparently the company was making more money from landlord incentives than it was from selling apparel.

Every time it opened a new store, the chain was receiving payments from landlords in the range of $2 million to $7 million, Davidowitz said.

Landlords were happy to pay such incentives to fill empty anchor spaces in malls left by the consolidation of the department store industry. But those spaces were three, four or five times larger than Steve & Barry's original format.

"A few years ago, they used to be running stores that were 20,000 square feet," said Neil Stern, a retail consultant with Chicago's McMillan/Doolittle. "Now they're running stores that are 150,000 square feet. They went from selling licensed collegiate T-shirts to being a full-fledged competitor to Old Navy."

With larger stores came higher rents and higher utility costs. Licensing fees to celebrities and athletes also reduced margins.

The company attributed its bankruptcy filing to poor economic conditions as well as a liquidity crunch. But the privately held company was opening new stores as recently as a few weeks ago, funded in part by a $197 million cash infusion in March from the finance arm of GE Corp.

CONSIDERING SELLING

In a statement yesterday, Steve & Barry's said it was exploring the potential sale of the company or its assets to repay outstanding debt. A spokesman for the company declined further comment about potential options and Sears in particular.

But Steve & Barry's trip through bankruptcy reorganization may make the company particularly appealing to Sears' Lampert. He picked up a bargain in the retail bankruptcy of Kmart, paying pennies on the dollar for the discount chain's debt. He then reorganized the company, exited bankruptcy, took Kmart public again in 2003 and engineered the $12 billion takeover of Sears, Roebuck and Co. in 2005.

Since then, Lampert has proved far less adept at running a retail operation. Both Kmart and Sears have been losing marketshare at precipitous rates as customers migrate to stores with better prices and more cachet.

An attempt by Hoffman Estates, Ill.-based Sears last year to acquire struggling home decor retailer Restoration Hardware went nowhere, as did an earlier plan to take Sears Canada private. In its first-quarter earnings release, Sears said it would be cutting its marketing expenditures for the rest of 2008 to cope with the sluggish economy.