The off-price retailer and owner of Filene’s Basement on Wednesday filed a voluntary Chapter 11 petition for bankruptcy court protection in Delaware, with the intention to liquidate. It will be the third time Filene’s has been in bankruptcy.
The liquidation will see two of retailing’s once high-flying nameplates in the off-price arena disappear from the landscape. Syms Corp. was founded in 1959 by Sy Syms and grew in the Northeast on the motto of “an educated consumer is our best customer.” Filene’s Basement, which was founded in Boston in 1909 by William Filene, is the oldest off-price retailer in the U.S. Syms’ daughter, Marcy, succeeded him as chief executive officer in 1998 and became chairman upon his death in 2009. She and affiliated entities control 55.1 percent of the company’s stock.
The financial debacle reflects the increasing competition Syms faced from everything from department stores to flash-sale Internet sites that often deal in similar merchandise and similar prices; better inventory control by brands that meant less merchandise, and financial missteps, including the acquisition of Filene’s in June 2009.
Marcy Syms said Wednesday that, “We have been faced with increased competition from large department stores that now offer the same brands as our stores at similar discounts; a proliferation of private label discount chains; a decline in buying opportunities as brand name labels have reduced overruns by improving their supply chain management — all combined with the worst economic downturn in our lifetimes.”
Syms added that the firm’s board has assessed all strategic options and concluded that a “bankruptcy filing and liquidation is the best way of maximizing value for all stakeholders.”
Going-out-of-business sales at the company’s 46 locations are expected to run through January. Hilco Merchant Resources and Gordon Brothers Retail Partners have been hired to conduct the sales, pending bankruptcy court approval, according to court records.
According to Bob Carbonell, executive vice president and chief credit officer for Bernard Sands, “The filing surprised a lot of people. We expected a major sale of the real estate in the next 60 days, followed by an orderly liquidation [outside of the bankruptcy process]. The unsecured creditors should be fine. Generally, we are assuming that the real estate is sellable.”
For the past week or two, Syms has been dogged by liquidation rumblings. Rothschild Inc., its financial adviser, has reached out to liquidators in recent weeks with a target date of Dec. 31. At first, some thought it was due to expirations on recent sale-and-leaseback transactions that were set to expire on Dec. 31. One such store that was sold and leased back is in Tampa, Fla., which netted Syms $3.8 million, according to its second-quarter filing, or Form 10-Q, in October with the Securities and Exchange Commission. Earlier this week, those rumblings centered on the Filene’s Basement business, which financial sources felt needed to be liquidated so Syms could focus on its core Syms operation.
Many felt that Syms didn’t need to file a Chapter 11 since there were no rumblings about the company being insolvent.
Things suddenly changed on Tuesday, according to financial sources. What pushed Syms into a bankruptcy filing was that its banks refused to allow the firm to cut checks to vendors, these sources said.
In a court filing, Gary Binkoski, interim chief financial officer of Syms and senior director of Alvarez & Marsal Holdings, said that Syms’ “trade vendors and factors have restricted trade credit over the last several months.” He added that factors have stopped their support and ceased extensions of credit.
Binkoski also noted that, based on continued foreseeable losses and tightened credit terms from factors and trade vendors, the company projected its liquidity would “run out as early as mid-November.” Waiting to delay the winding-down of operations until after the holiday season was projected to result in a decrease on the recoveries on inventory of 10 to 20 percent, he noted in the filing.
For the second quarter ended Aug. 27, the loss for the Syms and Filene’s Basement operations widened to $11.5 million, or 80 cents a share, from $10.9 million, or 76 cents, in the year-ago quarter. Sales fell 15.4 percent to $86.3 million from $102.1 million, while same-store sales dropped 13 percent.
According to one credit source, even though Filene’s is known for higher-end branded product, customers at the co-branded Syms/Filene’s locations “couldn’t find the core Syms offerings and got annoyed because everything was mixed up.”
In addition, one financial source said that as Syms’ ability to access inventory decreased, the merchandise it did have on the floors “looked like leftovers,” suggesting that the better offerings were going to competitors such as The TJX Cos. Inc.
Another criticism arose earlier this year when the off-pricer said in late May that it hired Rothschild to explore options, including the sale of the company. The criticism centered on how it was having difficulty competing with the flash-sale sites that have become the trendy go-to resource for younger consumers wanting high-end fashion at value prices.
Fashionable merchandise wasn’t Syms’ only problem. The Secaucus, N.J.-based off-pricer acquired Filene’s Basement out of bankruptcy for $65 million. Excluding the contribution from Vornado Realty Trust — it paid $16.8 million to terminate the existing Downtown Crossing Filene’s Basement lease in Boston and $8.2 million to amend the lease at the Union Square store in Manhattan — Syms paid out $40 million for the 23 locations it acquired. While the transaction was thought to be a good move, merging the two operations wasn’t a smooth transition.
On top of that, Syms was paying over $35 million a year in minimum rents for 30 leased sites for the two nameplates, according to its annual report, Form 10-K, filed in May with the SEC. That’s excluding contingent rents based upon a percentage of sales in excess of certain thresholds, a clause in the leases of most of its rented stores, the annual report said.
In addition, Syms signed a lease last year for a splashy Midtown presence at 530 Fifth Avenue, at 44th Street, which was supposed to have opened by the summer. One source at the site told WWD that around February all construction for a build-out stopped, leaving just one spotlight in the back showing the cavernous empty space when one looked through a slit in the glass doors. The plan was for a retail space comprised three floors.
In the past year, shareholders have pushed for Syms to sell some of its real estate. Given Syms’ real estate holdings — it owns over 15 locations — many shareholders felt that the value of its owned sites was worth more than its retail operations.
One site that has received considerable attention is at 42 Trinity Place in downtown Manhattan. That’s the one that Syms recently purchased air rights to that would allow for expansion, and has a value of at least $100 million, according to one financial source. Other sites mentioned as having potential high resale values are the firm’s headquarters at 1 Syms Way in Secaucus, and a store site at 695 Merrick Avenue in Westbury, N.Y.
As for the leased sites, the retailers mentioned as possible acquirers for those locations include TJX, Burlington Coat Factory and Gordmans.
According to the petition filed with the Delaware bankruptcy court, the firm estimated the number of creditors as between 5,000 to 10,000. According to Binkoski, assets as of September 2011 were $236 million, with liabilities at $94 million.
Amont the top unsecured creditors were: Peerless Clothing, Montreal, $2.9 million; Dawson Forte Cashmere, Hawick, Scotland, $763,941; factoring firm Rosenthal & Rosenthal, New York, $738,907; Milberg Factors Inc., New York, $417,375; Hart Schaffner Marx, New York, $323,200; Warnaco/CK Underwear, New York, $227,011; Hickey Freeman, New York, $220,220; Phillips-Van Heusen, New York, $206,226; Sterling Factors, New York, $185,475; VF Sportswear Inc., Greensboro, N.C., $177,630, and Jones Apparel Group, New York, $173,338.
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