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Payless Holdings LLC – Emerging Wrongfooted from its First Chapter 11, “Ill-Equipped” Shoe Retailer Files for Bankruptcy for the Second Time in 18 Months

February 17, 2019 – Payless Holdings LLC and 25 affiliated Debtors (“Payless” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Eastern District of Missouri, lead case number 19-40833. The Company, an American footwear retailer selling quality shoes at affordable prices in a self-select environment, is represented by Richard W. Engel Jr. of Armstrong Teasdale, LLP. Further board-authorized engagements include Akin Gump Strauss Hauer & Feld as counsel, (ii) Cassels Brock & Blackwell as counsel, (iii) Seward & Kissel LLP as counsel acting at the direction of to the independent managers of the Board, (iv) Ankura Consulting Group (“Ankura”) as restructuring advisor (v) PJ Solomon, L.P. as financial  advisor and investment banker, (vi) Prime Clerk as claims agent, (vii) Reevemark, LLC  as communications consultant and (viii) Malfitano Advisors LLC as liquidation advisors.
The Company’s petition notes between 50,000 and 100,000 creditors; estimated assets between $500mn and $1bn; and estimated liabilities between $500mn and $1bn. Documents filed with the Court list the Company’s three largest unsecured creditors as (i) MODA ($9.0mn trade debt), (ii) Performance Team Freight Systems ($5.5mn trade debt) and (iii) Panhong Footwear Co. Ltd ($4.2mn trade debt). Perhaps of greater interest than a lengthy list of unsecured creditors (there are 29 on the hook for more than $1mn), is the list of equity holders; the top three of whom are: Alden Global Capital (66.5%), (ii) Invesco Senior Secured Management (7.7%) and (iii) York Capital Management Global Advisors (6.3%).

Certain Payless Canadian subsidiaries (“Payless Canada”) will also be seeking protection pursuant to the Companies’ Creditors Arrangement Act (“CCAA”) in the Ontario Superior Court of Justice (Commercial List).

In a press release announcing the filing, Payless noted that “Payless intends to use these proceedings to facilitate a wind-down of its approximately 2,500 store locations in North America and its e-commerce operations. The Company expects that Payless store closings will begin at the end of March and many stores will remain open through the end of May, as it conducts liquidation sales in the U.S. and Canada. Payless has also wound down its e-commerce operations. 

Stephen Marotta, appointed in January 2019 to serve as Chief Restructuring Officer of Payless, commented further, “We have worked diligently with our suppliers and other partners to best position Payless for the future amidst significant structural, operational, and market challenges. Despite these efforts, we now must wind down our North American retail operations under Chapter 11 and the CCAA. However, Payless’ profitable stores throughout Latin America, which are not part of today’s filing, and our international franchisees’ stores will continue to operate business as usual in every respect. As we move through the process, we will work to minimize the impact on our employees, customers, vendors and other stakeholders. 
“The challenges facing retailers today are well documented, and unfortunately Payless emerged from its prior reorganization ill-equipped to survive in today’s retail environment. The prior proceedings left the Company with too much remaining debt, too large a store footprint and a yet-to-be realized systems and corporate overhead structure consolidation. As a consequence, despite our substantial efforts, we were ultimately unable to operate the North American retail and e-commerce operations on a sustainable basis.”

Events Leading to the Chapter 11 Filing

On August 10, 2017, Payless emerged from its earlier bankruptcy having (i) eliminated approximately $435mn in funded debt, (ii) closed approximately 675 underperforming brick and mortar stores and (iii) achieved approximately $50mn in annual expenditure savings through landlord concessions and modification of existing leases.

In a declaration in support of the Chapter 11 filing (the “Marotta Declaration”), Stephen Marotta, a Senior Managing Director at Ankura and concurrently the Company’s Chief Restructuring Officer, detailed the events leading to the Company’s Chapter 11 filing, citing, in addition generally challenging market conditions, (i) inventory flow disruption during the 2017 holiday season, (ii) unanticipated delays from key supplier factories, (iii) a computer systems breakdown in the summer of 2018 and (iv) an oversupply of inventory in the fall of 2018 leading into the winter of 2019 (the latter leading  to steep markdowns a period during which “customers filled their closets with these deeply discounted products”
The Marotta Declaration states, “Upon emergence from the Prior Cases, the Debtors sought to capitalize on the deleveraging of their balance sheet with additional cost-reduction measures, including reviewing marketing expenses, downsizing their corporate office, reevaluating the budget for every department, and reducing their capital expenditures plan. Notwithstanding these measures, the Debtors have continued to experience a top-line sales decline driven primarily by inventory flow disruption during the 2017 holiday season, same store sales declines resulting in excess inventory, and challenging retail market conditions. 
In the year following the Prior Debtors’ emergence from chapter 11, the Debtors faced unanticipated delays from key supplier factories. Given the significant volume of made-to- order shoes, the Debtors depended heavily on receiving regular shipments of product from their existing vendors. Due to interruptions in production during the Prior Cases, the Debtors’ key supplier factories took longer than expected to procure the raw materials and workers required for the Debtors to deliver their products in a timely manner. The delayed production caused a major inventory flow disruption during the 2017 Holiday season and a computer systems breakdown in the summer of 2018 significantly affected the back to school season, leading to diminished sales and same store sales declines.
The Debtors also faced an oversupply of inventory in the fall of 2018 leading into the winter of 2019. As a result, the Debtors were forced to sell merchandise at steep markdowns, which depressed margins and drained liquidity. Customers filled their closets with these deeply discounted products, which served to reduce customer demand for new product. In total, millions of pairs of shoes were sold at below market prices in order to realign inventory and product mix. These challenges and the general trend toward online shopping, contributed to a decline in EBITDA for Payless’ North America brick and mortar stores for 2018 at negative $66 million compared to negative $11 million in 2017 and $51 million in 2016.
Moreover, Payless was unable to fulfill its plan for omni-channel development and implementation, i.e., the integration of physical store presence with online digital presence to create a seamless, fully integrated shopping experience for customers. As of the Petition Date, the completion of this unified customer experience has been limited to approximately two hundred stores. Without a robust omni-channel offering, Payless has been unable to keep up with the shift in customer demand and preference for online shopping versus the traditional brick-and-mortar environment. In addition, the Debtors’ liquidity constraints prevented the Debtors from investing in their store portfolio to open, relocate, or remodel targeted stores to keep up with competitors. All of the foregoing pressures prevented the Payless’ North America business from achieving profitability in the last eighteen months.”
About Payless

Founded in 1956 in Topeka, Kansas, Payless is an iconic American footwear retailer selling quality shoes at affordable prices in a self-select environment. With approximately 3,400 stores in more than 40 countries across the world, Payless is globally recognized and is the largest specialty footwear retailer in the Western hemisphere. Payless operates through its three business segments (North America, Latin America, and franchise stores), producing approximately 110 million pairs of shoes per year across the world. Payless also operates an e-commerce business through which it sells goods online at www.payless.com and Amazon.

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