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Aeropostale Files Chapter 11: Latest Retail Bankruptcy After American Apparel, Cache, Wet Seal And Quiksilver

Teen retailer Aeropostale, a company once seen as a competitor to Abercrombie & Fitch, filed for Chapter 11 bankruptcy, listing assets of $354 million and liabilities of $390 million. The company experienced an atrocious fiscal 2015, reporting a net loss of $136.9 million in a year in which sales declined 18%.

Soon after reporting full year results, the company had its stock delisted from the NYSE, and overnight filed for bankruptcy in order to "optimize its store footprint, access additional tools to shed or renegotiate burdensome contracts, resolve its ongoing disputes with Sycamore partners, and achieve long-term financial stability."

The retailer has secured a $160 million commitment from Crystal Financial, LLC to provide DIP financing, and has an initial plan to close 154 out of roughly 800 stores.

 

The decline was swift. The brand was established in 1987, went public in 2002, and by 2010 it had a market cap of nearly $3 billion. However, by January 2015 the company of 21,000 employees had posted losses in its last three fiscal years, and with 2015 being the fourth consecutive year of losses, its market cap imploded to just $2.9 million.

Two issues that accelerated the bankruptcy filing involve clothing supplier MGF Sourcing. MGF tightened payment terms earlier this year, moving to pre-pay instead of N60, squeezing the cash flow of the firm. Aeropostale also accuses MGF of limiting the availability of its merchandise, thus entering into a breach of contract dispute with a key supplier.

MGF is owned by Sycamore partners, who is also an Aeropostale lender. As part of the terms of a $150 million loan deal with Sycamore, Aeropostale signed a 10-year supply agreement with MGF in 2014.

Aeropostale's filing marks yet another mall-based retailer who has had to file for bankruptcy recently. The WSJ reports that 55% of U.S. retailers who filed for bankruptcy since 2005 ended up liquidating and permanently going completely out of business, versus just 5% in other industries.

This is how the company's CFO justified the reason for the filing in the just filed affidavit in support of the bankruptcy motion:

The Debtors’ operations have generally been profitable during the past thirty years; however, declining mall traffic, a highly promotional and competitive teen retail environment, and a shift in customer demand away from apparel to technology and personal experiences all contributed to the Debtors’ declining financial performance. These pressures were not unique to the Debtors; a number of other retailers, including competitors such as American Apparel, Caché, Wet Seal, Quiksilver, and Pacific Sun, have all recently filed for bankruptcy after facing similar market conditions.

 

In response to their declining revenues and continued financial difficulties, the Debtors embarked on a series of initiatives to restructure and streamline their businesses. Since early 2014, the Debtors have engaged in a comprehensive effort to restructure the P.S. from Aéropostale  business, closing 126 P.S. from Aéropostale stores primarily located in shopping malls, to focus on P.S. from Aéropostale stores in off-mall locations. In an effort to right-size the Debtors’ Aéropostale store base and optimize their real estate portfolio, the Debtors embarked on a review of their lease terms and retained a real estate consulting firm to investigate the economics of accelerated lease buyouts, as well as to identify opportunities for negotiating more competitive rents across the Debtors’ real estate portfolio.

 

The Debtors closed 122 Aéropostale stores in the United States and Canada during fiscal year 2014. The Debtors closed an additional 50 stores in fiscal year 2015.  Another initiative on which the Debtors embarked in 2016 was the creation of a two-store format, splitting the Debtors’ stores between a factory format and a traditional mall format. The factory stores are geographically positioned to capture broader and growing demographics and appeal to the Debtors’ most loyal customer base. They are located primarily at outlet malls and more value focused B and C mall locations and predominately offer the Debtors’ core merchandise, including logo-bearing merchandise. The mall format stores are located primarily in higher-end, or A and B, malls and are focused on more updated, classic merchandise with fewer logo-bearing products. The mall stores will serve as a showcase for the Debtors’ brands and products and will serve as a feeder of merchandise for the factory stores and the Debtors’ online retail operation. The Debtors have implemented the factory store model in 460 stores and have experienced strong initial results, while trends in the mall format stores have also improved as a result of the repositioned merchandise assortment. Additionally, the Debtors have developed additional brands for the 2016 back-to-school season that they anticipate will perform strongly in the mall stores. The Debtors have also reduced corporate headcount and taken various other strategic actions geared toward improving profitability, generating approximately $35 million to $40 million in estimated annualized pre-tax savings for fiscal 2016. 

 

In February 2016, Sycamore Partners stepped up its efforts that seem designed to orchestrate a precipitous chapter 11 filing. On February 5, 2016, Sycamore’s representative on the Debtors’ Board of Directors, Kent Kleeberger resigned from the board. Additionally, Lemur LLC (“Lemur”) another affiliate of Sycamore, which had acquired approximately eight (8) percent of the Debtors’ common equity in the summer/fall of 2013, sold its equity stake in early 2016.

And regarding the tainted MGF relationship:

On March 18, 2016, MGF delivered a purported notice of default under the Sourcing Agreement to the Debtors asserting that the Debtors’ refusal to accept delivery or pay for orders under the terms unilaterally set forth in MGF’s previous letters constituted a material breach of the terms and conditions of the Sourcing Agreement. MGF reserved its right to terminate the Sourcing Agreement following the fifteenth business day after the delivery of the notice of default. Although the Debtors dispute the allegations contained in the notice of default as well as MGF’s right to terminate the Sourcing Agreement based on those allegations, the notice was another act that hastened the commencement of these cases by the Debtors.

 

Between April 1, 2016 and April 8, 2016, due to an immediate need for inventory, the Debtors made preferential payments to MGF of approximately $15.8 million in order to induce MGF to ship goods that were past due. MGF delivered some, but not all, of the outstanding inventory of the Debtors.

 

The Debtors engaged in settlement discussions with Sycamore and MGF on April 8, 2016. Subsequently, on April 20, 2016, MGF delivered a second notice of default under the Sourcing Agreement to the Debtors again asserting that the Debtors’ refusal to accept delivery or pay for orders under the terms set forth in MGF’s previous communications constituted a material breach of the terms and conditions of the Sourcing Agreement. Under extreme duress due to their critical needs for inventory, on April 22, 2016, the Debtors made an additional preferential payment to MGF of approximately $10.1 million and MGF delivered additional merchandise.

 

The significant delays by MGF and L&F in shipping product to the
Debtors resulted in less product being available in the Debtors’ stores for the peak spring break
and Easter break sales period. The actions of MGF caused a disruption in the Debtors’ supply
chain and a corresponding negative impact on the Debtors’ liquidity. I would estimate, based on
historical performance, that the Debtors’ lost in excess of $5 million in sales due to these delays. If MGF continues to delay delivery of product to the Debtors, the Debtors may suffer further
losses in sales.

 

MGF’s actions placed the Debtors at risk of violating the $70 million minimum liquidity covenant in the Prepetition Term Loan Agreement, which was provided by a different affiliate of Sycamore. A default under the Prepetition Term Loan Agreement would have triggered a cross-default under the Prepetition ABL Agreement, and defaults under both agreements would have jeopardized the Debtors’ ability to obtain inventory for their stores and otherwise operate their businesses. To restore access to inventory, which is the lifeblood of any retail business, and to otherwise maintain the ability to operate their businesses, the Debtors commenced the Chapter 11 Cases.

But of course the simplest explanation is that this is merely the latest retail bankruptcy for just one reason: the US middle class can no longer afford to splurge on clothing as much as it did in the past.

The full filing (pdf)

http://www.scribd.com/embeds/311472784/content