September 9, 2019 − Publicly traded Fred's, Inc. and seven affiliated Debtors (Nasdaq: FRED, “Fred's” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11984. The Debtors, the operator of discount general merchandise stores in fifteen states in the Southeastern United States (many of which have full service pharmacies), are represented by Derek C. Abbot of Morris, Nichols, Arsht & Tunnell LLP. Further board-authorized engagements include (i) Kasowitz Benson Torres LLP as general restructuring counsel, (ii) Akin Gump as tax and litigation counsel, (iii) Berkeley Research Group, LLC as financial and restructuring advisor (and also furnishing Mark Renzi as Chief Restructuring Officer) and (iv) Epiq Bankruptcy Solutions LLC as claims agent.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors, estimated assets of $474.8mn and estimated liabilities of $380.2mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Richard H Sain ($6.6mn trade debt), (ii) Bradley Woolridge ($6.6mn trade debt) and (iii) PPS Data LLC ($1.2mn trade debt).
In a press release announcing the filing (see also 8-K), the Debtors advised that: "The Company is committed to ensuring an orderly wind-down of its operations, and has commenced liquidation sales at all retail locations, which are expected to close over the next 60 days. The Company expects to continue fulfilling pharmacy prescriptions at most of its pharmacy locations, while it continues to pursue the sale of its pharmacies as part of the court supervised proceedings.
Joe Anto, Chief Executive Officer at Fred’s, commented, “Despite our team’s best efforts, we were not able to avoid this outcome. I want to thank all of our employees for their hard work and continued support of the Company as we wind-down our operations.”
Store Closings and Suppliers
The Debtors have commenced going out of business sales at all retail locations, which are expected to close over the next 60 days. The Debtors are requesting authority to engage SB360 Capital Partners, LLC to manage the closings of its approximately 80 remaining stores. The Debtors expect to continue fulfilling pharmacy prescriptions at most of its pharmacy locations, while it continues to pursue the sale of its remaining pharmacy assets as part of the section 363 auction/sale process. During the Chapter 11 Cases, the Company intends to pay suppliers in full for all goods and services provided.
Prior to the filing of these Chapter 11 cases, the Debtors engaged in a number of strategic store closings which dramatically reduced their store totals from 556 in May of 2019 (169 with full-service pharmacies), including:
- On April 11, 2019, the Company announced that the Board had approved a plan to close 159 underperforming stores. The Company completed the closure of these stores by June 1, 2019.
- On May 16, 2019, the Company announced that the Board had approved a plan to close an additional 104 underperforming stores. The Company completed the closure of these stores by June 30, 2019.
- On July 5, 2019, the Company announced that the Board had approved a plan to close 5 an additional 49 underperforming stores. The Company completed the closure of these stores by August 17, 2019.
- On July 12, 2019, the Company announced that the Board had approved a plan to close an additional 129 underperforming stores. The Company completed the closure of these stores by August 27, 2019.
The Debtors’ efforts also included completing a sale within the last month of 38 of its retail pharmacy stores to a subsidiary of CVS for a cash purchase price of $11.7mn, plus $3.5mn for inventory. Additionally, the Debtors completed a sale of certain prescription files and the related data and records, retail pharmaceutical inventory, and certain other assets from 179 of the Company’s retail pharmacy stores to Walgreen Co. for a cash purchase price of approximately $176.7mn during the fourth quarter of fiscal 2018.
DIP Financing
The Company has filed a motion seeking interim and final approval for debtor-in-possession (“DIP”) financing to be provided by certain of the Company’s pre-petition lenders (Regions Bank and Bank of America, N.A.), which would provide for up to $35.0mn in new funding on an interim basis [Docket No. 16]. Borrowings under the DIP facility will bear interest at a rate per annum equal to (i) the greater of (a) the prime lending rate, (b) the federal funds rate and (c) LIBOR plus 1.00%, plus (ii) 3.25%, and upon an event of default, an additional 2.00% shall be added to the interest rate.
Pre-petition Capital Structure
On April 9, 2015, the Company entered into a Revolving Loan and Credit Agreement (the “Prepetition Credit Facility”) with Regions Bank and Bank of America, N.A. As of the Petition Date, borrowings under the Prepetition Credit Facility were approximately $15.1mn, with approximately $8.8mn of letters of credit outstanding, These blances had already been significantly reduced by the Debtors using proceeds of store closures and assets sales referenced above. The proposed DIP facility will include the roll-up of outstanding balances owed to Regions Bank and Bank of America under the Prepetition Credit Facility.
About the Debtors
Fred’s, Inc. was founded in 1947. Fred’s stores generally serve low, middle- and fixed-income families located in small- to medium-sized towns (populations of 15,000 or less). Its customers tend to be value-oriented and budget-conscious, and often live in rural areas without easy access to large discount retailers. Fred’s describes its mission as “to improve the lives of customers by selling products that deliver value and convenience to the communities we serve.” Fred’s stores stock over 14,000 items that address the everyday needs of its customers, including nationally recognized brand-name products, proprietary “Fred’s” label products, and lower priced off-brand products. Fred’s management believes its customers shop at Fred’s stores as a result of their convenient locations, products at everyday low prices, pharmacy department and healthcare services, regularly advertised departmental promotions and seasonal specials.
As of February 2, 2019, the Company had 2,642 full-time and 3,930 part-time employees, the majority of which were store employees.
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