January 6, 2019
A second beauty bankruptcy in three weeks. We previously noted:
On December 19, 2018, a week after Glossier CEO Emily Weiss revealed that the direct-to-consumer beauty brand hit $100mm in sales, Glansaol, a platform company that acquires, integrates and cultivates a portfolio of prestige beauty brands — including a direct-to-consumer brand — filed for bankruptcy in the Southern District of New York.
Now, a Kansas City-based brick-and-mortar beauty retailer with 58 stores in 12 states, Beauty Brands LLC, filed for bankruptcy over the weekend in the District of Delaware. Though we’ve never heard of it, it is no small shop: the company generated $125mm of net sales for fiscal year ended February 3, 2018. 70% of its revenue came from retail products and 30% from salon and spa services. The company had an e-commerce platform that accounted for 6.2% of net sales. It does not own any real property, leasing each of its stores.
In December, the company’s lender, PNC Bank NA, declared a default on the company’s credit facility. Why? Per the Company:
Beauty Brands’ liquidity and financial position has been adversely affected by declining sales and rising costs associated with doing business as a predominantly “brick and mortar” retailer. These factors have adversely impacted the Debtors’ profitability and its liquidity, which in turn has made it increasingly difficult to source replenishment inventory, which in turn contributes to further declines in the Company’s sales.
Well, that certainly paints a nice picture of how trouble can spiral out of control. Compounding matters is the fact that the company decided to expand in the face of a changing brick-and-mortar retail environment…
From 2014 through 2016, Beauty Brands unsuccessfully attempted to reposition its brand identity and store model by opening 11 new format store locations, which required significant capital expenditures, deferral of other investment opportunities, and management’s focus on the new format stores to the detriment of its existing store locations. These new format store locations, which remain operational, have underperformed Beauty Brands’ expectations and contributed to operating losses incurred by the Debtors.
Despite pre-petition efforts to sell the company as a going concern, no buyers were forthcoming. Therefore, the company hired Hilco Merchant Resources LLC to commence a firm-wide liquidation. Nevertheless, the company holds out hope — given some 11th hour interest by two potential buyers — that it can auction approximately 33 of its stores (“Core Stores”). In the meantime, Hilco is pursuing “GOB” sales of the 23 remaining stores (“Closing Stores”)(PETITION Note: the company’s papers say there are 58 stores, and yet only 56 stores are accounted for in the company’s description of Core Stores and Closing Stores, though there is mention of one “Dark Store”). Hilco will also serve as the Stalking Horse Bidder for the Core Stores.
The company will pursue a short post-petition marketing and sale process with an aim towards an early February 2019 sale. The company will use a committed $9mm DIP from pre-petition agent, PNC Bank NA, to fund the process.
Jurisdiction: D. of Delaware (Judge Sontchi)
Capital Structure: $17.5mm ($6.9mm funded, including fees + interest)
Legal: Ashby & Geddes P.A. (Gregory Taylor, Stacy Newman, Katharina Earle, David Cook)
Financial Advisor/CRO: RAS Management Advisors LLC (Timothy Boates, Michael Rizzo)
Investment Banker: Lazard Middle Markets LLC (Dermott O’Flanagan)
Liquidator: Hilco Merchant Resources LLC
Claims Agent: Donlin Recano & Company Inc.
Other Parties in Interest:
DIP Agent: PNC Bank NA
Legal: Blank Rome LLP (Gregory Vizza, John Lucian)
Replacement Stalking Horse Bidder: Absolute Beauty LLC
Legal: Kirkland & Ellis LLP (Joshua Sussberg, Gene Goldmintz, Joshua Greenblatt) & (local) Klehr Harrison Harvey Branzburg LLP (Dominic Pacitti)
Official Committee of Unsecured Creditors (TIGI Linea Corp., Deva Concepts LLC, L’Oreal USA S/D Inc.)
Legal: Kelley Drye & Warren LLP (Eric Wilson, Jason Adams, Lauren Schlussel) & (local) Saul Ewing Arnstein & Lehr LLP
Financial Advisor: Province Inc. (Carol Cabello)