January 27, 2020 − Lucky's Market Parent Company, LLC and 21 affiliated Debtors (“Lucky's Market” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10166. The Debtors, operators of 39 organic grocery stores, are represented by Christopher A. Ward of Polsinelli PC. Further board-authorized engagements include (i) Alvarez & Marsal as financial advisors, (ii) PJ Solomon as investment bankers and (iii) Omni Agent Solutions as claims agent.
The Debtors’ lead petition notes between 10,000 and 25,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bn. The Debtors further disclose that as at the Petition date "assets consisted of approximately $425.0mn on an aggregate basis [and] aggregate liabilities as of the Petition Date are approximately $600.0mn." Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) UNFI ($13.3mn trade debt), (ii) BBIF Subsidiary Cde 3, LLC ($5.9mn Prepetition New Markets Tax Credits Loan) and (iii) Sherwood Food Distributors ($2.1mn trade debt).
Ironically for the Debtors, it was a shift away from organic growth and the adoption of an aggressive debt-funded expansion program that proved fatal. The transplanting of a crunchy, socially aware Colorado business to the competitive hothouse of Florida leading to unsustainable losses, including an approximately $100.0mn net loss in 2019.
Pre-Petition Marketing Efforts
The Debtors Declaration (defined below) states: "Prior to the Petition Date, the Debtors engaged PJ Solomon as their investment banker to conduct a prepetition marketing process for substantially all of the Debtors’ assets. As a result of the prepetition marketing process, the Debtors, in consultation with their advisors, have identified several potential purchasers. Each of the potential purchasers has indicated interest in different assets of the Debtors. Prior to the Petition Date, the Debtors entered into an Asset Purchase Agreement with Aldi to purchase certain store leases. The Debtors are also finalizing the terms of a sale of the 7 operating stores in addition to a separate sale for other store locations. Each sale will be subject to a separate bidding procedures motion to be filed and subject to approval by this Court. The Debtors will also file a motion to shorten notice related to the bidding procedures motion in order to run an expedited and cost-efficient post-petition sale process given the extensive prepetition marketing efforts."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Declaration”), Andrew T. Pillari, the Debtors' Chief Financial Officer, detailed the events leading to Lucky Market's Chapter 11 filing. The Declaration states: "Beginning in 2015, the Company developed and sought to execute on a strategic growth plan, which included accelerated growth in new and existing markets, with a focus on developing stores in Florida.
The Company’s strategic growth plan required, among other things, significant upfront investment….The Company expanded in Florida in 2016, and had eleven stores in the state by the end of 2017. As a result of the expansion, between fiscal year end 2016 and 2017, the Company’s sales grew. However, the Company’s expansion in Florida coincided with, among other things, increased competition in the grocery industry, including expansions from competing chains such as Sprouts Farmers Market, Fresh Thyme Farmers Market and Earth Fare. As a result, notwithstanding the growth in sales, the portfolio of Company stores was unable to achieve sustainable four-wall profitability.
Most recently, fiscal year-to-date through January 4, 2020, the Company had approximately $22 million of store operating losses and approximately $100 million net loss. Additionally, fiscal year-to-date through the week ended January 18, 2020, the Company had a 10.6% reduction in comparable store sales versus the prior year-to-date period.
Based on performance of the Company’s business, the Company’s management determined that it would require approximately $100 million in incremental funding to continue operations until the Company would be cash flow positive. Management determined that it would be unable to secure new sources of sufficient funding outside of these chapter 11 cases."
Although the Declaration makes no specific reference to the December 2019 decision of the The Kroger Co. ("Kroger's") to divest its interest in the Debtors, or perhaps more importantly as a driver of the Florida expansion, that clearly was an important factor. Kroger's, which still holds a 55% equity stake in the Debtors, invested in the Debtors' business in 2016 and oversaw the Florida expansion which saw the Debtors expand from 17 stores at the time of the Kroger’s investment to 39 stores. In its December announcement, Kroger's said it would take a $238.0mn charge on its investment.
About the Debtors
The Debtors' business focuses on affordable organic and locally-grown fruits and vegetables, top-quality, naturally raised meats and seafood, and fresh, daily prepared foods. The Company’s emphasis is on carrying the highest-quality products at the lowest prices, with the mission of providing “Organic for the 99%”. The Company’s stores offer a broad range of grocery items through the Company’s “L” private label at great value that have no artificial colors, flavors or preservatives. Ten percent of profits from the Company’s private label are reinvested in the communities it serves.
The Company leases 37 of its 39 stores. The two owned stores are located in Florida, one in Oakland Park and the other in Panama City. The Company has approximately 3,100 employees, all of which are non-union.
As of the Petition Date, the Debtors had approximately $15 million of cash and cash equivalents and their assets consisted of approximately $425.0mn on an aggregate basis. The Debtors’ aggregate liabilities as of the Petition Date are approximately $600.0mn.
Corporate Structure Chart
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The post Lucky’s Market Parent Company, LLC – Over-Expansion in Competitive Florida Market Proves Unlucky for Organic Grocers Who Will Close or Sell Their 39 Stores appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.