Lucky is using the Chapter 11 process to hopefully restart a stalled sale process that’s seen it reach out to dozens of suitors but find no savior, while G-Star let its troubled retail subsidiary sink into insolvency as its parent company and web business carry on.
Both denim businesses have been hit hard by the COVID-19 pandemic, but did not have the scale or cash reserves needed to float them through the unprecedented retail shutdown that pushed sales off a cliff. They join a host of other companies forced to go to court to try to walk away from their debts, including Neiman Marcus Group, J. Crew, J.C. Penney, True Religion, John Varvatos and the U.K. arms of AllSaints and Victoria’s Secret.
Los Angeles-based Lucky Brand went to court with a stalking horse asset purchase agreement that would see its operating assets sold to SPARC Group, which operates lifestyle brands, including Aéropostale and Nautica. In connection with that transaction, Authentic Brands Group, would acquire the intellectual property of Lucky Brand. Lucky Brand also signed a backup agreement with Authentic for the intellectual property should the deal with SPARC not go through.
“To facilitate the sale and reduce its debt burden caused by recent challenges, including the COVID-19 pandemic, Lucky Brand has initiated proceedings under Chapter 11,” said the company, which filed for bankruptcy in Delaware.
Matthew Kaness, who was named interim chief executive officer in September and executive chairman in January, said: “The COVID-19 pandemic has severely impacted sales across all channels. While we are optimistic about the reopening of stores and our customers’ return, the business has yet to recover fully. We have made many difficult decisions to preserve the company’s viability during these unprecedented times. After considering all options, the board has determined that a Chapter 11 filing is the best course of action to optimize the operations and secure the brand’s long-term success.”
The company went into bankruptcy with 112 specialty stores and 98 outlets in North America and $182 million in funded debt. Lucky stock was controlled by Clover Holdings, which owned a 75 percent stake, and former ceo Carlos Alberini, with a 13.5 percent stake.
Mark Renzi, chief restructuring officer of Lucky, said in court filings that the company had been looking at strategic alternatives to restructure its retail operations before the pandemic and worked with investment bank Houlihan Lokey, which reached out to 24 potential buyers last year, ultimately engaging with 16 parties that took a closer look at operations.
No buyer was found then and the company went back to the market in late May, starting by reaching out to nine potentially interested parties, signing nondisclosure agreements with seven to continue conversations. Lucky subsequently reached out to another 70 parties, signing nondisclosure agreements with 20, before filing Friday.
“While several parties expressed interest in acquiring the company as a going concern, the aforementioned difficulties [of the COVID-19 pandemic] have compounded the company’s limited liquidity and substantial lease and trade related obligations, and have negatively impacted the company’s ability to effectuate an out-of-court transaction that would address its liquidity challenges and position the company for long-term success,” Renzi said. “Many of these parties nonetheless remain interested in Lucky Brand, and the debtors intend to continue exploring potential transactions with such parties on a postpetition basis to maximize value for the benefit of all stakeholders.”
So far this year, the company saw comparable store sales fall by more than 50 percent and it wracked up $28 million in losses before interest, taxes, depreciation and amortization. The company has monthly lease obligations of $4.3 million and came into bankruptcy with plans to close 13 unprofitable stores.
With rent payments coming due, a long stretch with no business and now a slow and tentative reopening, many companies are finding their retail footprint problematic.
G-Star, which is based in the Netherlands and has a strong sustainability hook including having Pharrell Williams as a co-owner, elected to put its U.S. retail business into Chapter 11 while the parent company and its web subsidiary, G-Star Raw eStore Inc., carry on.
The brand went into bankruptcy with 31 stores in the U.S.
Nicole Clayton, ceo of the G-Star retail business, said in court filings: “G-Star Retail is in the process of reopening certain retail stores where it is financially and physically possible to do so. That has proved an arduous process and, as set forth more fully below, the current intention is to reduce the retail footprint to around seven stores, though this number could change slightly in the event certain landlords are willing to make significant concessions. While the debtors have been concerned with the profitability of many of G-Star Retail’s brick-and-mortar retail locations for some time, the onset of the COVID-19 global pandemic has accelerated the need for a ‘right-sizing’ of G-Star Retail, and it has no choice but to close its unprofitable locations and reject the associated leases immediately as part of these restructuring proceedings.”
G-Star’s retail business listed its sales last year at $68 million with a $2 million profit. The largest creditor listed in its bankruptcy is its landlord at 475 Fifth Avenue in New York, owed $426,007.