October 21, 2019 − Destination Maternity Corporation and two affiliated Debtors (Nasdaq: “DEST,” “Destination Maternity” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-12256. The Debtors, a leading designer and retailer of maternity clothing in the United States, are represented by Adam G. Landis of Landis Rath & Cobb LLP. Further board-authorized engagements include (i) Kirkland & Ellis LLP, as general bankruptcy counsel, (ii) Greenhill & Co. as investment banker (iii) Berkeley Research Group as financial advisor, (iv) KPMG LLP as tax restructuring advisor, (v) Prime Clerk as claims agent (vi) Hilco Streambank LLC as intellectual property advisor and (h) Gordon Brothers Retail Partners, LLC, as store closing consultant.
The Debtors’ lead petition notes between 10,000 and 25,000 creditors, estimated assets of $260.2mnmn and estimated liabilities of $244.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Pan Pacific Co. ($3.8mn trade debt), (ii) United States Customs and Border Protection ($unknown customs and duties) and (iii) INT S.A. ($1.5mn trade debt).
In a press release announcing the filing, the Debtors stated that they had filed for Chapter 11 protection: “to facilitate and continue a marketing process begun in early September that has already yielded indications of interest from several credible bidders….
To help fund and protect its operations during the chapter 11 process, Destination Maternity obtained consent to use cash collateral from all of its prepetition secured lenders. The Company believes that this access to liquidity will be sufficient to pay suppliers and other business partners and vendors for authorized goods and services provided post-filing and during the chapter 11 process.”
Not noted in the press release, but discussed further below, is that the Debtors failed to pay October rent in respect of any of their 436 stores and have pre-petition “significantly curtailed payments to the vast majority of their vendors, suppliers, service providers, and other trade creditors," ie turned necessary business partners into unsecured general creditors.The Debtors also expect to begin store closings in respect of a further 148 stores this week and have signalled that they will be looking to renegotiate leases that they do not otherwise intend to reject.
The Gavales Declaration (defined below) [Docket No. 17] makes clear that (i) the Debtors intend the total of closed, closing and to be closed stores to exceed 170 and (ii) that landlords need to be worried. The Gavales Declaration states: “The Debtors believe a substantial number of their leases bear higher than-market rents compared to other retailers and would benefit from rent reductions. To that end, as discussed further below, the Debtors will continue the process of closing underperforming stores over the coming weeks [NB: bit of a disconnect between store closings and rent reductions, but we get the message].
On their own, the Debtors closed eleven stores prepetition in August and September, and are in the process of closing four additional stores this month. Following these closings, the Gordon Brothers’ process started in earnest on October 3, 2019, with the commencement of 12 “Phase 1” store closing sales. The Debtors have identified an additional 148 locations where they will commence store closing sales this week, subject to Court approval, and expect to complete such closings (and vacate such premises) by the end of this calendar year."
Pre-Petition Marketing Efforts
The Gavales Declaration states: "The Debtors, through their advisors, launched a robust but accelerated marketing process in early September that requested indications of interest by mid-October. In the ensuing weeks, the Debtors and their advisors provided substantial due diligence to, and participated in telephonic or in-person meetings with, parties that signed confidentiality agreements. The Debtors received non-binding written proposals for a going-concern sale of the Company’s businesses from several credible third parties, including proposals that contemplate a price that would provide a meaningful recovery to unsecured creditors among other constituencies. The Debtors intend to continue and complete the marketing process during these chapter 11 cases."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Gavales Declaration”), Lisa Gavales, the Chair of Debtors’ Office of the CEO, detailed the events leading to the Debtors’ Chapter 11 filing [NB Ms. Gavales, is no stranger to managing retail operations in their run-up towards bankruptcies, having served as CEO of Things Remembered and as a Director for Forever 21, Inc.]. The Gavales Declaration offers that “a multitude of factors led to the commencement of these chapter 11 cases” and that is most certainly true. Those factors, boring down from the macro top towards a very unfortunate micro bottom, include:
the general shift in retail consumer preferences away from brick-and-mortar stores,
industry specific factors—including increased competition in maternity apparel from already-established brands, ranging from high-end fashion to cost-cutting box stores; a decrease in birth rates; and internet specialist retailers,
a general shift towards looser fitting clothing which makes a special maternity wardrobe superfluous,
leadership turnover that occurred faster than most pregnancies (since 2014, “five separate management teams, each with a different business plan and execution strategy,” with this turnover ultimately leading to a proxy battle where the entire slate of directors was replaced (only one of the new directors now remains),
a $20.5mn drop in six month net sales ($199.6mn in 2018 to $179.1mn in 2019) leading to ABL facility lenders increasing discretionary reserves, further constraining already tightening liquidity,
a laundry list of needed operational improvements, including rightsizing the brick-and-mortar store footprint; tweaking customers’ online experience' and capitalizing on opportunities to streamline and consolidate the business,
a rent bill that the Debtors believe is considerably above market and
what the debtors call “landlord and vendor issues," namely being the response of (a) landlords to the Debtors' failure to pay October rent on any of their 436 stores (cure periods in respect of 152 stores already expired, so locks were about to go on) and (b) third party contractors when the Debtors “significantly curtailed payments to the vast majority of their vendors, suppliers, service providers, and other trade creditors.”
Key Equity Holders
Yeled Invest S.A.: 13.4%
Disciplined Growth Investors, Inc.: 8.9%
Nathan G. Miller: 6.6%
Royce and Associates, LP: 5.4%
Renaissance Technologies LLC: 5.1%
About the Debtors
The Debtors are "a leading designer and omni-channel retailer of maternity apparel in the United States, with the only nationwide chain of maternity apparel specialty stores, as well as a deep and expansive assortment available through multiple online distribution points, including our three brand-specific websites. As of February 2, 2019, we operate 1,012 retail locations, including 458 stores in the United States, Canada and Puerto Rico, and 554 leased departments located within department stores and baby specialty stores throughout the United States and in Puerto Rico. We also sell our merchandise on the Internet, primarily through our Motherhood.com, APeaInThePod.com and DestinationMaternity.com websites. We also sell our merchandise through our Canadian website, MotherhoodCanada.ca, through Amazon.com in the United States, and through websites of certain of our retail partners, including Macys.com. Our 458 stores operate under three retail nameplates: Motherhood Maternity®, A Pea in the Pod® and Destination Maternity®. We also operate 554 leased departments within leading retailers such as Macy’s®, buybuy BABY® and Boscov’s®. Generally, we are the exclusive maternity apparel provider in our leased department locations.
We maintain our leading position through our two key brands, which enable us to reach a broad range of maternity customers. Through our stores and certain of our leased departments, we offer maternity apparel under one or both of our two primary brands, Motherhood Maternity ('Motherhood' or 'Motherhood Maternity') at value prices and A Pea in the Pod ('Pea' or 'A Pea in the Pod') at both contemporary and premium prices. Our A Pea in the Pod Collection® (“Pea Collection”) is the distinctive premier maternity apparel line within the A Pea in the Pod brand, featuring exclusive designer label product at premium prices."
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