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Art Van Furniture, LLC – Furniture Retailer Files for Chapter 11 Protection Less than 3 Years after $612mn Acquisition by Private Equity Firm Thomas H. Lee Partners

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March , 2020 – Art Van Furniture, LLC and 12 affiliated Debtors (“Art Van" or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10553. The Debtors, a brick-and-mortar furniture and mattress retailer headquartered in Warren, Michigan, are represented by Michael J. Barrie of Benesch of Friedlander, Coplan & Aronoff LLP. Further board-authorized engagements include (i) Alvarez & Marsal North America, LLC (“A&M”) as financial advisors and (ii) KCC as claims agent. 

The Debtors’ lead petition notes between 50,000 and 100,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) The Sussman Agency ($7.8mn trade debt), (ii) La-Z-Boy Chair Company ($5.2mn trade debt) and (iii) Sealy Mattress Company ($4.1mn trade debt). 24 of the Debtors' top 30 unsecured creditors (all with trade debt claims) have claims in excess of $1.0mn.

In 2017, founder and sole owner Art Van Elslander sold the debtors and their owned real estate to Boston-based private equity firm Thomas H. Lee Partners, L.P. ("THL") for $612.5mn, with the purchase price funded by a sale-leaseback transaction further to which THL acquired the operating assets of the business and certain real estate investment trusts acquired the owned real estate portfolio.  

Goals of the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Ladd Declaration”), David Ladd the Debtors' Executive Vice President and Chief Financial Officer, states: "In the wake of extreme market conditions and faced with limited liquidity, the Company has commenced these chapter 11 cases to effectuate a going-concern sale of approximately 44 stores and two distribution centers operating under the Wolf and Levin banners and to wind down its remaining store locations and other operations through a going-out-of-business sales process."

Prepetition Debt

As of the Petition Date, the Debtors’ had outstanding funded-debt obligations of approximately $208.5mn. 

Funded Debt

Maturity

Principal Outstanding as of the Petition Date

Prepetition ABL Credit Facility

 March 1, 2022

 $33.5mn

Prepetition Term Loan

 March 1, 2024

 $175mn

Total Funded Debt

$208.5mn

Levin-Wolf Sale 

The Debtors have reached an agreement with Robert Levin, the former owner of Levin Furniture, regarding a going-concern sale of certain of the assets of Sam Levin, Inc. and LF Trucking, Inc. (the “Levin-Wolf Sale”). The key terms of the Levin-Wolf Sale are set forth in a letter of intent, dated as of March 4, 2020, which is attached to the Ladd Declaration at Exhibit B. The Levin-Wolf Sale is to occur via a section 363 private sale with the purchase price to be calculated based on 82.25% of the cost of inventory to the Debtors as adjusted, inter alia, by an additional $3.65mn for FFE and the exclusion of the inventory at eight Virginia and Maryland stores (estimated value $4.5mn).

Store Closings

The assets not included in the Levin-Wolf Sale will be subject to going-out-of-business sales conducted by a contractual joint venture (the “Consultant Agreement”) between Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC (together, the “Consultant”) To maximize recoveries and minimize administrative expenses, the Debtors announced and initiated a soft launch of the store closing sales on March 5, 2020 and will seek to expedite the remaining store closure sales in order to complete them within six to eight weeks.

Events Leading to the Chapter 11 Filing

The Ladd Declaration details events leading to the Debtors’ Chapter 11 filing, highlighting, in addition to "macro-related headwinds" now familiar to brick and mortar retailers, (i) failed efforts to expand into the Chicago market, (ii) revolving-door management, (iii) higher marketing costs as the Debtors attempted to counter declining sales, (iv) an inability to integrate stores acquired in a major acquisition and (v) failed strategies relating to inventory mix and showroom layout. The Ladd Declaration states: "Art Van’s declines in sales, profits, and cash flow were driven by a combination of several factors. 

First, the Company has faced significant macro-related revenue headwinds, as well as local microeconomic headwinds, that have led to sustained negative ‘same-store sales, a key measure of retail health, during every quarter since June 2016. These macro-related headwinds include broad-based declining retail foot traffic, market share losses of brick and mortar furniture outlets to online sellers such as Wayfair and Amazon.com, and increased fragmentation and intense competition in mattresses leading to decreased profitability. On a local level, Art Van has faced increased retail competition, as key competitors such as Ashley HomeStore, Bob’s Discount Furniture, and Mattress Firm opened at least 30 stores in Michigan and Illinois over the last three years 

Second, while Art Van revenues have declined approximately 27% cumulatively on a same-store basis since fiscal year 2016 through January 2020, expenses have increased significantly due to, among other things, over $8 million in tariff costs in fiscal year 2019 (which continued and escalated in fiscal year 2020) and an increase in marketing expenses intended to stem same-store sales declines. 

Third, the business suffered numerous operational challenges…These operational challenges included, among other things: 

  • Expansion. The Company began an expansion into Chicago in fiscal year 2013 that continued through fiscal year 2018, which ultimately led to market oversaturation as new stores cannibalized revenues from preexisting locations. 
  • Leadership Turnover. The Company lost eight of its top nine executive leaders in fiscal years 2017 and 2018 through unplanned and, in many cases, voluntary departures.
  • Required Changes to Marketing Strategies. In June 2017, the Company ceased certain of its historically successful marketing practices after becoming aware they violated the Telephone Consumer Protection Act (‘TCPA’), and in early 2018, the Company settled a class-action lawsuit on account of an alleged violation of the TCPA.
  • St. Louis Franchise Acquisition. In fiscal year 2018, the Company entered into an operating agreement with its largest franchisee, based in St. Louis, Missouri, due to financial distress being experienced by the franchisee….Art Van was unable to stabilize the revenues of the St. Louis stores or generate a profit in the market after such acquisition. 
  • Levin/Wolf Integration. In fiscal year 2019, the Company’s management attempted to integrate the operations of Wolf Furniture into Levin Furniture…These actions…created significant strain on the Wolf business, which led to same-store sales declines of approximately 22% in Wolf in the second half of fiscal year 2019, as well as meaningful turnover of tenured sales staff. 
  • Changes to Inventory Mix and Showroom Layout. In the same year, the Company turned over approximately 60% of its furniture assortment and reorganized many of its flagship showroom floors by 'lifestyle' instead of by category of product, which negatively impacted sales and led to increased markdowns from product that was not easily saleable. As a result of these challenges, the Company’s Adjusted EBITDA decreased significantly in each fiscal year since 2016 and dropped to negative for the twelve months ended December 31, 2019.

In late January, 2020, the Company unexpectedly faced further liquidity constraints due to a reduction in the Company’s 'borrowing base,' which is required collateral support for borrowing under the ABL facility. At the same time, certain financial partners of the Company began to demand additional collateral and tightened access to credit as a result of the Company’s weak financial results. These financial partners included credit card processing companies, including Bank of America Merchant Services and PNC Merchant Services—who are critical to the Company’s ability to accept credit cards in stores and on-line for customer purchases—as well as providers of consumer credit. In total, this group demanded approximately $33 million in collateral through holdbacks to fund reserves and letters of credit. 

As a result of the impending liquidity crisis created by the shrinking borrowing base, poor operating cash flow, and the collateral demands, the Company was unable to issue “clean” audited financial statements (i.e., without a potential “going concern” qualification), which led to a default under the Company’s ABL facility, as well as various other contractual arrangements, including certain leases. Art Van’s declines in sales, profits, and cash flow were driven by a combination of several factors. " 

About the Debtors

Art Van is a brick-and-mortar furniture and mattress retailer headquartered in Warren, Michigan. The Company operates 169 locations, including 92 furniture and mattress showrooms and 77 freestanding mattress and specialty locations. The Company does business under brand names, including Art Van Furniture, Pure Sleep, Scott Shuptrine Interiors, Levin Furniture, Levin Mattress, and Wolf Furniture. The Company was founded in 1959 and was owned by its founder, Art Van Elslander, until it was sold to funds affiliated with Thomas H. Lee Partners, L.P. (“THL”) in March 2017. As part of this transaction, THL acquired the operating assets of the Company and certain real estate investment trusts, who closed the transaction alongside THL, acquired the owned real estate portfolio of the Company, and entered into long-term leases with Art Van. The proceeds from the sale-leaseback transaction were used to fund the purchase price paid to the selling shareholders. Pennsylvania-based Levin Furniture and Wolf Furniture were acquired by Art Van in November 2017 through similar transaction structures. As of the Petition Date, the Company operates stores throughout Michigan, Indiana, Ohio, Illinois, Pennsylvania, Maryland, Missouri, and Virginia.

Corporate Structure Chart

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The post Art Van Furniture, LLC – Furniture Retailer Files for Chapter 11 Protection Less than 3 Years after $612mn Acquisition by Private Equity Firm Thomas H. Lee Partners appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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