Apparel Retail’s Year in Bankruptcy Court
The first year of the ongoing COVID-19 pandemic has seen dozens of major retailers file for Chapter 11 protection as they sought to use the process to slash debt and renegotiate leases.
Retailers have come out of the proceedings with new owners including landlords and pre-bankruptcy lenders, reduced footprints and workforces, and commitments to strengthen their e-commerce side of the business.
In December, J.C. Penney’s retail business emerged from Chapter 11 in Texas with new owners, the landlords Simon Property Group and Brookfield Asset Management Inc., while its real estate business, spoken for by a group of its top secured lenders, continued to work through the bankruptcy court process. Some others continued to face challenges during the prolonging public health and economic crises, with Men’s Wearhouse parent Tailored Brands informing the bankruptcy court in February that it needed an additional $75 million in financing, after coming out of Chapter 11 in December.
A few retailers including Belk, Furla USA and Francesca’s worked out quick exits from the process, capitalizing on aspects of the bankruptcy code that help fast-track often costly proceedings. The pace of new Chapter 11 filings in the first quarter of 2021 has been relatively slow compared to the summer rush of filings after the first round of temporary lockdowns last year, but retailers continue to face challenges with their supply chains, inventory levels, and overall finances, retail experts said.
“Restructurings put a severe emphasis on liquidity management,” said Joe Sciametta, managing director with Alvarez & Marsal’s North American commercial restructuring group. “When it comes to apparel restructurings from 2020, people won’t fully breathe a sigh of relief until January 2022, after they get through the season.
“Supply chain issues can cause havoc on inventory levels, which in turn impact a company’s ability to borrow, putting additional pressure on liquidity,” he added.
That a number of retailers have weathered the pandemic and bankruptcy process by cutting staff and answering to new investors and owners may also mean that they are now beholden to new expectations around their model and profitability, Sciametta said.
“While these were emergency measures, and not fully sustainable, as things return to ‘normal’ there will continue to be pressure to maintain some of these efficiencies,” he said.
“From a restructuring perspective, when you couple this with assets that may have been sold, or owners that may have changed, you have new stakeholders who are looking for a return on their capital,” he said.
The impact of retail bankruptcies on their landlords is also still unfolding, with mall operators CBL and Pennsylvania REIT filing for bankruptcy last fall. “Malls have been the most impacted retail property type, given their exposure to discretionary and experiential retail,” according to a December report by real estate firm Jones Lang LaSalle IP, Inc.
“Bankruptcy is [usually] not really a lights-out situation, it’s really a financial restructuring,” said Edward Webb, leader of the corporate finance consulting group at accounting and consulting firm BPM.
“For retailers with stores that had a significant commitment to real estate, and perhaps they had already been teetering, their operations were already somewhat more vulnerable even before the pandemic,” he said. “They found themselves in a place where they couldn’t negotiate their way out, and had to use bankruptcy as a mechanism to deal with all those leases.”
During the pandemic, bankruptcy courts allowed retail debtors to delay rent payments as they dealt with the loss of revenue during temporary lockdowns. The bankruptcy process, which allows debtors to walk away from contracts, including leases, for significantly lower damages costs, also allowed retailers to drop leases and renegotiate terms on stores they would keep open after the bankruptcy, experts said.
“Another interesting aspect of the pandemic is the extent to which landlords and lessors are being squeezed at both ends, and how that is going to almost cycle through the system,” said Justin Bernbrock, partner at Sheppard Mullin’s finance and bankruptcy practice group.
“I think a lot of retailers, aside from funded debt loads, [they] would say their next highest spending is on occupancy costs,” he said. “One of the effects of the pandemic I think, we’re seeing this on a pretty widespread basis, is the effect on REITS and commercial real estate generally.”
Here are some of the major apparel retail bankruptcies during the pandemic:
True Religion
The denim brand filed for Chapter 11 in April 2020, making it one of the earliest retailers to do so after non-essential retailers were first directed to temporarily close stores to slow the spread of the virus. True Religion’s successful effort to delay rent payments during the early months of its bankruptcy would be a sign of the unusual leeway that bankruptcy courts would grant retail debtors in light of the substantial decline of in-person shopping during the pandemic. The retailer emerged from its restructuring process in October.
J.C. Penney filed for Chapter 11 in May, and its retail business officially stepped out of the process as a going concern under the ownership of landlords Simon and Brookfield. The retailer’s complicated restructuring involved breaking up the business into an operating company operated by Simon and Brookfield, and a property business overseen by a group of secured lenders.
Neiman Marcus, which also filed for bankruptcy in May, used its restructuring process to eliminate some $4 billion in debt. The luxe retailer emerged from Chapter 11 in September with a group of new owners including investment firms Pimco, Davidson Kempner Capital Management, and Sixth Street. On Sunday, WWD reported that Neiman’s executed a refinancing of $1.1 billion in debt, in light of the significant interest payments it still has to make on it.
J. Crew Group
J. Crew Group, which similarly used its Chapter 11 process to shed $1.6 billion in debt, filed for Chapter 11 in May and came out of the process in September.
Brooks Brothers
The more than 200-year-old retailer had a quick trip in bankruptcy court, beginning its proceedings in July, and having its $325 million sale approved in August to SPARC Group, the joint venture between Simon Property and licensing company Authentic Brands Group.
Tailored Brands also went through a fast-paced bankruptcy process, filing for Chapter 11 in August and emerging in December. But this year, the retailer noted its need for an additional $75 million in financing after indicating it didn’t meet projections over the holidays. Chapter 11 plans are typically based on revenue projections for the reorganized business.
The men’s designer brand, which had filed for Chapter 11 in May, sold its assets in August to an affiliate of Lion Capital, one of its existing lenders.
Le Tote and Lord & Taylor
Le Tote, and the Lord & Taylor business it had acquired only in 2019, filed for bankruptcy last August. The companies were acquired just two months later by the investment company Saadia Group. Lord & Taylor, which closed all its stores, will live on as a website.
RTW Retailwinds
The New York & Co. parent company filed for bankruptcy in July, and sold its online business to Saadia Group in October.
Furla USA
The Italian leather brand’s U.S. unit has gone through an expedited bankruptcy process under Subchapter V of the bankruptcy code, which allows smaller retailers with lower debt loads to restructure quickly. Furla USA filed for bankruptcy in November and had its Chapter 11 plan approved in January.
Centric Brands
The apparel producer and licensee, which makes products for dozens of brands including Michael Kors and Kate Spade, moved out of the bankruptcy process in October after filing for Chapter 11 in May.
Belk
The North Carolina-based retail chain executed a quick restructuring in February through a pre-packaged plan that would slash $450 million in debt and keep the reins with private equity firm Sycamore Partners.
Christopher & Banks
The retailer filed for bankruptcy in January, saying at the time that it was closing some 449 stores around the country. Earlier this month, iMedia Brands said it teamed up with a unit of financial services firm Hilco Global Co. to buy the company.
Ascena Retail Group
Ascena, which filed for bankruptcy in July, sold to Sycamore Partners its brands including Ann Taylor, Loft, Lou & Grey, and Lane Bryant.
Lucky Brand Dungarees
SPARC group, the Simon Property and ABG tie-up, cleared its acquisition of Lucky Brand in August, after the denim company filed for Chapter 11 in July, along with G-Star Raw Retail Inc.
J. Hilburn
The men’s wear brand filed for bankruptcy in May, and got its Chapter 11 plan confirmed in July.
Francesca’s
The retailer entered bankruptcy in December and was approved in January for a sale through the process to an affiliate of TerraMar Capital LLC and Tiger Capital LLC.
L’Occitane U.S.
The beauty brand filed for bankruptcy in January, aiming to shrink its physical presence amid difficult discussions with landlords, according to filings in its ongoing bankruptcy proceedings.
