John Varvatos was supposed to be celebrating his 20th anniversary as a fashion brand this year. Instead, he became the latest victim of the coronavirus as the company he founded was forced to file bankruptcy.
On Wednesday, John Varvatos Enterprises said it filed for Chapter 11 in the United States Bankruptcy Court for the District of Delaware.
The company cited falling sales and online revenues since 2015 that the men’s wear brand said came to a head amid the COVID-19 crisis that shuttered its stores around the world. As a result of the pandemic-related temporary stores closures since March, the company also had to furlough some 226 full-time and part-time employees, who account for more than three-quarters of its workforce, Varvatos said in its filings in Delaware bankruptcy court.
“The unprecedented, exponential spread of the coronavirus disease COVID-19 throughout the United States…along with the resulting, state-imposed limitations and prohibitions on nonessential retail operations, destroyed the debtors’ blossoming success, having a debilitating effect on the debtors’ business and employees,” the company’s chief financial officer Joseph Zorda wrote in a declaration filed in the case.
The company appears to have walked into its bankruptcy with plans for a going concern asset sale deal with Lion/Hendrix Cayman Ltd., which is owned by affiliates of Lion Capital Fund III Partnerships, according to court documents. Lion Capital LLP is the majority owner of the brand, according to the company. The John Varvatos debtor companies have also negotiated a $20.5 million debtor-in-possession facility with Lion/Hendrix Cayman Ltd., according to court filings, which, combined with the company’s projected cash flow, “is expected to support its operations during a restructuring process,” the company said in a statement.
“The agreements with Lion represent a critical step in our process to transform our business to drive long-term, sustainable growth,” Varvatos said. “We have taken decisive action to respond to the challenges that all retailers face in the present environment and we remain extremely confident that our brand, celebrating its 20th year in business, will emerge even stronger. We have a passionate team, a fierce global consumer following and a commitment to our customers, whom we expect to serve for many years to come.”
Varvatos was unavailable for further comment on Wednesday, saying he had back-to-back meetings with “our teams and partners around the world.”
The sale to Lion will be subject to court approval and may include a court-supervised auction.
The company’s secured debt includes $94.8 million in pre-petition notes and $19.5 million under pre-petition credit agreements. It said it also owes more than $26 million in unsecured debt, mainly to vendors and under lease agreements.
The largest claim among its top unsecured creditors is a roughly $3.5 million judgment for class-action claimants, referring to the outcome of a gender-discrimination suit by its female sales staff that went to trial in March.
That suit, filed by Tessa Knox, who sought to represent other female sales staff at the company, had targeted an alleged policy at John Varvatos to purportedly give male staff $12,000 in annual store credit but offer female staff a 50 percent discount on products at its sister store, according an amended complaint filed by Knox in August 2017. On Wednesday, John Varvatos had filed a notice of an automatic stay, or pause, in the Knox proceedings in light of its Chapter 11 filing.
The company also listed vendors and landlords among its other creditors, including World Textile Sourcing, which it owes more than $1.3 million, and Vornado 40 East 66th Street LLC, to which it owes more than $1.1 million.
Among other creditors that it owes smaller amounts, it also listed Century City Mall LLC in California, and Bal Harbour Shops in Miami Beach, Fla.
The company owes $6.8 million to its third-party trade creditors, and it also has leases for its corporate headquarters and 27 brick-and-mortar retail stores, according to the declaration by Zorda.
Although not surprised by the news of a bankruptcy filing, industry sources were surprised at the terms of the deal with Lion. “It reads like a manipulation play not to pay creditors,” said one source. “This doesn’t pass the smell test and it’s a little too cute for me,” said another. “They’ll restructure the debt, get rid of the bad leases, keep it and license it out, or sell it. It’s hard to understand what they’re thinking.”
Lyndon Lea, a founder of Lion Capital and overseer of the brand at the company, did not return a call for further comment and clarification.
The Varvatos brand has reportedly been on the sales block for some time. Authentic Brands Group, which also counts Lion Capital as an investor, was apparently close to a deal as far back as 2017 to buy the business, but the designer was believed to nix the deal because it would have centered around a licensing-only model, sources said at the time. Varvatos still owns a minority stake in the business and had the right of first approval.
After that deal fell through, Lion switched gears and decided to keep the brand and position it for growth. In an interview with WWD in 2018, Mark Brashear, who was chief executive officer at that time, said: “In 2016, Lion seriously considered selling the company. They did their due diligence, but by the end of that process, Lion and John decided to hold onto the brand. We created a three-year strategic plan, presented it to Lion and laid out what we planned to do.”
Lion gave the thumbs-up to the plan, which included a 22 percent reduction in the workforce and a downsized office space in conjunction with the addition of a number of new product categories, an expansion of its retail presence around the world and the revamping its Star USA lower-priced line.
Since January, the brand has been run by industry veteran Paul Raffin, who had been with Express, The Frye Co. and Li & Fung USA, who serves as president and ceo, according to his LinkedIn page. He did not return calls for comment on Wednesday. Raffin took over for Brashear who left last May after a four-year stint.
Over the past two decades, Varvatos has experienced a number of ups and downs that included several ownership changes. The brand was created in 1999 and for the first few years was associated with Nautica Enterpises. When VF Corp. bought Nautica in 2003, Varvatos was part of the purchase. The brand was largely ignored under VF and in March 2012, VF sold a majority stake in the business to Lion Capital for an undisclosed sum.
In 2018, the brand was believed to have sales of around $325 million and an operating loss of about $15 million.
Although the company has made a number of management changes during the past several years, Varvatos remains the chief creative officer and continues to be heavily involved in the business. It is his rock-‘n’-roll-skewed aesthetic that has come to define the brand over the years.
Most of the sales derive from the higher-priced John Varvatos Collection with the remainder coming from Star USA, which is targeted to department stores such as Bloomingdale’s, Nordstrom and Neiman Marcus. Star was given a refresh and elevated a couple of years ago to compete more effectively with contemporary sportswear brands such as Rag & Bone, Theory, Vince and All Saints. The company also offers suits through a licensing deal with China’s Dayang Group.
In addition, after a longtime collaboration with Converse ended, the company brought the footwear business in-house under the Bootleg by John Varvatos moniker.
The John Varvatos Collection is carried almost exclusively in the company’s own fleet of retail stores and is seen as the halo offering for the brand, which includes stores in North America, Europe, Asia and the Middle East.
The majority of Varvatos’ business comes through its own stores with only about one-third through wholesale channels. It also operates a number of outlet stores.
Varvatos, a Detroit native, started his fashion career working in a local men’s store. He eventually opened his own store in Grand Rapids, Mich., where he received a call from Ralph Lauren who offered him a job in sales and then eventually design.
He worked for Lauren for several years before joining Calvin Klein, where he is credited with creating the jersey boxer brief for the brand.
He left to create his own label in 1999 and the next year received the Council of Fashion Designers of America’s Perry Ellis Award for New Menswear Designer. He received the award in 2001 as well, the same year he is credited with spearheading one of the first collaborations with Converse.
Varvatos’ longtime love of music has also become part of his brand DNA. In addition to the collection’s rock aesthetic, he has hired rock stars to be featured in his ad campaigns, started his own record label and took over the former CBGB nightclub for a John Varvatos store.
Read more from WWD:
WATCH: What It’s Like Making Coronavirus Face Shields