The Wet Seal Inc. plans an exit from bankruptcy as a reorganized chain of just 173 stores and an Internet business that includes a 1.4 million active subscriber base.
The Foothill Ranch, Calif.-based retailer filed a voluntary petition for Chapter 11 bankruptcy court protection in Delaware late last week and is the latest financial blow to the troubled teen sector.
The company inked a $20 million debtor-in-possession financing facility with B. Riley Financial Inc. As part of its contemplated plan of reorganization, the $20 million gets converted into newly issued common stock of the restructured firm. B. Riley would then hold an 80 percent stake in the reorganized firm, with the 20 percent balance of the equity to be given to certain creditors who hold “general allowed unsecured claims” unsatisfied in the bankruptcy proceeding.
B. Riley’s $20 million investment in the DIP facility and its conversion to an equity stake in the reorganized company are both subject to bankruptcy court approval, as well as better offers that might be submitted from interested buyers at a court-approved auction.
Thomas R. Hillebrandt, chief financial officer, said in a court affidavit that the “continuing shift in consumer behavior from traditional mall shopping toward online-only stores” and increased competition has created a difficult operating environment. He added that unprofitable business ventures contributed to the financial pressures.
The company shut down its Arden B. business, as well as Wet Seal Plus, a foray into the teen plus-size category.
While lackluster sales added to the financial pressures, the pullback by factors on credit terms kicked the liquidity issue into crisis mode. The cfo said that factors late in 2014 had reduced credit limits to its clients — Wet Seal’s vendors — and required the retailer to post standby letters of credit before approving orders. Some vendors ultimately demanded cash on delivery before they would ship goods, Hillebrandt said. The cfo cited three factors — CIT, Rosenthal & Rosenthal and Milberg Factors — as having impact on 60 percent of the chain’s factored merchandise.
Founded in 1962, the company completed an initial public offering in July 1990. Hillebrandt said it has 2.5 million Facebook followers, and 2.6 million e-mail addresses on file, of which 1.4 million are active subscribers. The management team, including Hillebrandt, has a merchandising plan in place, but didn’t have time to fully execute on it due to the liquidity crisis. Part of that plan includes growing its active online subscriber base. From January through November of last year, 6.5 percent of total sales, or $26.5 million, was from its e-commerce channel.
Among its top unsecured creditors, Hudson Bay Master Fund, holder of senior convertible notes, is owed $28.9 million. Wells Fargo and Milberg Factors, holders of trade debt, are owed $362,085 and $322,637, respectively. Also on the list are Simon Property and General Growth Properties, landlords for different store locations. The amounts vary as each is listed multiple times for each mall location that is owed rent.
Ed Thomas, chief executive officer of Wet Seal, said on Friday, “Overall, we continue to believe in The Wet Seal and remain committed to executing on the strategic steps that we already started.”
The bankruptcy filing wasn’t unexpected as the company had already warned in a regulatory filing with the Securities and Exchange Commission last year that it was in discussions for new financing to alleviate its liquidity constraints. The teen chain earlier this month shuttered 338 doors and handed out 3,695 pink slips to full- and part-time employees in the process. Those stores represented 48 percent of the retailer’s net sales for the nine months ended Nov. 1.
The chain was at its peak in the late Nineties and early Aughts, operating 575 stores, with about 375 of those being Wet Seal stores. Other nameplates were 85 Contempo Casuals, which it acquired and ultimately converted to Wet Seal stores. The company also operated Arden B. stores, which was discontinued in mid-2014 and converted to Wet Seal Plus, a concept for teen plus-size customers.
The latest teen retail bankruptcy follows those of Deb Shops and Delia’s Inc., both of which are in the process of liquidating. With B. Riley’s financial investment in place, Wet Seal is poised to avoid the same fate.
Separately, Body Central Corp. shuttered its 265 doors earlier this month through a state process called ABC, bypassing a bankruptcy filing in federal court. Based in Jacksonville, Fla., the chain elected to close its doors after Crystal Financial pulled its $17 million revolving credit line.