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August 16, 2019 − Privately held Avenue Stores, LLC and three affiliated Debtors (“Avenue” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11842. The Debtors, a national specialty fashion retailer of women’s plus-sized apparel, are represented by Andrew L. Magaziner of Young Conaway Stargatt & Taylor, LLP. Further board-authorized engagements include (i) Berkeley Research Group, LLC (“BRG”) as financial advisor (with BRG's Robert J. Duffy, fresh off of a stint as CRO for Things Remembered, to serve as Chief Restructuring Officer), (ii) Configure Partners, LLC as investment banker and (iii) Prime Clerk as claims agent. The Debtors are owned by Versa Capital Management, LLC ("Versa"), a Philadelphia-based private equity firm with $1.25 billion of committed capital under management. Versa purchase the Debtors' assets out of bankruptcy in 2012 for approximately $26.0mn (see Disclosure Statement and memorandum in support of confirmation respect of the 2012 bankruptcy, each attached below).
In February 2019, plus-sized retailer FULLBEAUTY Brands Holdings Corp. set Chapter 11 speed records, emerging from a prepackaged Chapter 11 in a single day having shed almost $900.0mn in debt. Avenue Stores will not fare well, shuttering altogether its retail operations, and much time will undoubtedly be spent trying to figure out why the outcomes have been so different, including at plus-sized giant Lane Bryant which continues to operate over 800 retail stores. In the short-term, one might imagine a big plus given the reduction in mall-based competition, but long-term remaining competitors will face the same competitive concerns cited by both FULLBEAUTY and Avenue, the increasing presence of mass-market retailers (eg Walmart and Target) and the decision of fashion retail brands to expand their range of size offerings into the plus-size range. One notable mea culpa noted in a Court filing that may help differentiate FULLBEAUTY and Avenue was Avenue's concession that it "ultimately placed too much emphasis on fashion basics." It appears that simply recognizing the existence of the plus-sized market may no longer be enough; and that successful competitors will have to be able to nail fashion and trends as well.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) FB Flurry LLC ($1.6mn trade debt), (ii) Land N' Sea ($784K trade debt) and (III) Valentine USA Inc. ($678 trade debt).
Chapter 11 Objectives
The Debtors have already begun liquidating their brick-and-mortar retail stores but intend to pursue a section 363 sale process in respect of other assets, namely the Debtors’ e-commerce business. The Rhoads Declaration (defined below) states: “Prior to the Petition Date, Avenue’s Board of Directors (the 'Board') established an independent restructuring committee (the 'Restructuring Committee') …[which]…ultimately determined that it was appropriate to wind down the Debtors’ brick-and-mortar operations prior to, and during, these Chapter 11 Cases.
The Board further determined to focus on sustaining the Debtors’ E-Commerce Business as an independent going concern to maximize the value of the Debtors’ estates given the relative strength of the E-Commerce Business compared to the Debtors’ brick-and-mortar operations and transformations in the retail industry.
As of the Petition Date, Configure has contacted more than 70 parties, has entered into approximately 20 confidentiality agreements (and is actively negotiating such agreements with a number of additional interested parties)…After evaluating interest expressed by potential purchasers, the Debtors intend to commence a bidding and sale process (the 'Going Concern Sale Process') for, among other things, their E-Commerce Business, inventory stored in the Texas Distribution Center, and their intellectual property (collectively, the 'Going Concern Assets'). Despite the interest to date expressed in the Going Concern Assets, a stalking horse purchaser has not yet emerged.
Store Closings and Appointment of Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC Joint Venture
The Debtors have appointed Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC (collectively, the “Consultant”) to conduct going out of business sales at the Company’s 222 retail stores. In an August 14, 2019 press release, the Consultant stated: “Avenue Stores, LLC, a women's clothing retailer that keeps up with the latest fashion trends, has made the decision to close all their retail stores. The women's plus size clothing retailer is now offering compelling discounts at 222 closing stores in 33 states.”
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Rhoads Declaration”) [Docket No. 14], David Rhoads, the Debtors' President and CFO, detailed the events leading to the Avenue’s Chapter 11 filing. The Rhoads Declaration states: "The Debtors operate in an extremely competitive retail environment, facing competition from other specialty-retail stores, including Lane Bryant, Ashley Stewart, and Torrid, and mass-market retailers such as Walmart and Target, many of which are located in close proximity to Avenue stores. In addition to long-standing, traditional competitors within the plus-size segment, there has been a recent influx of many other iconic fashion retail brands expanding their range of size offerings into the plus-size range, as well as a proliferation of new entrants targeting this same plus-size fashion market. Due to increased competition, the Debtors have faced significant pressure to maintain market share, which has directly and negatively affected their profitability.
At the same time, the retail industry, in general, has struggled as consumers have shifted away from brick-and-mortar stores to online retail channels in recent years. Retail companies that have a significant brick-and-mortar presence, like Avenue, bear higher expenses than web-based retailers and are heavily dependent on store traffic, which has decreased significantly as consumers increasingly shop online. Other macro-economic factors have further compounded the problems plaguing retailers. For instance, changes in consumer spending habits have necessitated many retailers to increase promotional activities and discounting, leading to thinner profit margins. Onerous brick-and-mortar lease terms and increased operating costs, during a period of downturn in the retail sector and deep discounting, have intensified retail losses. Indeed, these macro-economic challenges have compelled numerous national retailers to file chapter 11 cases over the past year, including Charming Charlie, FULLBEAUTY, Charlotte Russe, Shopko, Gymboree, Things Remembered, Payless ShoeSource, and Diesel USA, among others.
Unfortunately, the Debtors, like many other retailers, have not been able to overcome the retail challenges discussed above and have recently suffered operational losses stemming from, among other things, onerous lease obligations, underperforming retail locations, and the continued growth of online competitors and decline of in-store shoppers. In addition, although Avenue benefits from a consistent and loyal customer base, a review of historic customer data indicates that Avenue customers are shopping less frequently than they once were, and sales during Avenue’s busiest periods of the year—leading up to Easter and Mother’s Day—did not meet projected forecasts, leading to a reduction in liquidity. Shifts in consumer preferences in the women’s apparel retail segment and, in the plus-size market specifically, have contributed to sales misses as well, with the Debtors ultimately placing too much emphasis on fashion basics."
Pre-Petition Capital Structure
The Debtors’ pre-petition debt structure consists principally of (i) the Pre- Petition ABL Facility; (ii) the Pre-Petition Subordinated Note; and (iii) other unsecured debt consisting of, among other things, employee-related liabilities and trade debt, including amounts owed to landlords in connection with certain leases of nonresidential real property.
- The Pre-Petition ABL Facility. The Debtors are party to an April 2019 revolving credit and security agreement (the “Pre-Petition ABL Credit Agreement”) with PNC Bank, National Association (“PNC”) as lender and agent, which permits borrowings of up to $45.0mn, including a first-in, last-out loan tranche (the “FILO Loan”) of $6.0mn, which can increase by an additional $4.0mn during the period commencing on December 1 of each year and ending on the last day of February of the following year. As at the Petition date, the Debtors owed $15.3mn under the Pre-Petition ABL Facility. On July 22, 2019, PNC issued the Debtors with a notice of default in respect of this facility.
- Pre-Petition Subordinated Note. In April 2019, Debtor Ornatus Holdings issued a Master Subordinated Note (the “Pre-Petition Subordinated Note”) in favor of Ornatus URG Funding, LLC (the “Pre-Petition Subordinated Lender”), an affiliate of the Debtors’ equity holders, which secures a loan in the principal amount of approximately $38,394,840 plus additional amounts advanced by the Pre- Petition Subordinated Lender, the Sponsor [ie Versa Capital Management, LLC], or any of such parties’ affiliates from time to time (the “Pre-Petition Subordinated Note”). The Pre-Petition Subordinated Note is guaranteed by Debtors Avenue, Ornatus GC, and Ornatus RE and is collateralized by a security interest in the Collateral, which, under the terms of the Pre-Petition Subordinated Note, is subordinate to the obligations under the Pre-Petition ABL Facility. As at the Petition Date, $37.8mn was due under the Pre-Petition Subordinated Note.
- Other Unsecured Debt. As at the Petition date, the Debtors’ owed in excess of $25.0mn in respect of unsecured debt, including amounts owed to the Debtors’ landlords for past-due rent.
About the Debtors
Avenue is a national specialty fashion retailer of women’s plus-sized apparel, intimates, footwear, and accessories that is dedicated to providing real-sized women with modern and fashionable clothes at affordable prices. Avenue’s product line almost exclusively features a marketplace sourced and procured assortment of branded merchandise. Headquartered in Rochelle Park, New Jersey, the Debtors have two primary units: the retail store business and an e-commerce business. Through their retail business, the Debtors operate 255 leased stores in 35 states, which are primarily located in suburban areas and in malls or shopping centers. In addition to their retail operations, the Debtors sell and distribute merchandise through the Avenue.com and Loralette.com websites (the “E-Commerce Business”).
For the period from January through May of 2019, the Debtors generated approximately $75.3 million in sales and had negative EBITDA of approximately $886,000. Retail store sales accounted for approximately 64% of the Debtors’ total annual sales, while the Debtors’ E-Commerce Business generated approximately 36% in sales. As of the Petition Date, the Debtors employed, in the aggregate, approximately 2,000 employees; with approximately 790 employees of those on a full-time basis, while the remainder work on a part-time basis.
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