October 8, 2018
Herb Philipson’s Army and Navy Stores Inc., a New York-based outdoor apparel and sporting goods retailer since 1951, filed for bankruptcy in the Northern District of New York.
The company carries various brands like Carhartt, Columbia Sportswear, Levi, lee, Under Armour, Dickies, Timberland and The North Face in its stores (most of which are now the company’s largest unsecured creditors) and also serves as the exclusive retailer for the Utica Comets Hockey Team and the new Utica City Football Club. The company has 9 locations, none of which are in or on company-owned structures or real property. The company had revenues of $43.5mm and $39.8mm in 2016 and 2017, respectively. Through nine months of 2018, the company experienced a dramatic decline in business with revenues of just $15.6mm.
What caused such a stark decline in business? The company notes:
“The decline of the Debtor’s business is directly attributable to a confluence of operational and liquidity factors. Starting in 2015, the Company began to suffer from decreased sales — largely attributable to HP’s inventory mix failing to appeal to the tastes of the market and the rise of e-commerce, which allowed the Debtor’s customers to purchase from on-line retailers the same or similar good being offered by the Company.”
Moreover, the company lost access to its line of credit, necessitating sales of new inventory to finance operations and leaving the company unable to order fresh inventory in Q1 2018.
What followed is a textbook tale of a small brick-and-mortar business trying to make it in a world dominated by upstart DTC brands, Amazon, and bigbox retail. Renegotiations of leases. Headcount reductions. An intensified focus on inventory selection and management. A scramble for new credit which, here, new ownership was able to lock down.
Clearly, however, the terms of the new credit line were either too onerous or too unrealistic as, unfortunately for the company, the new credit facility merely helped expedite the company’s spiral into bankruptcy court. Indeed, roughly a month after entering into the new lending facility, the lender, Second Avenue Capital, notified the company that it was in default under the facility. The relief afforded the company by the cash infusion was, clearly, short-lived.
Consequently, the company filed for bankruptcy so that the “automatic stay” protections of the Bankruptcy Code (section 362) could be leveraged to prevent Second Avenue Capital from exercising its rights and remedies under the credit facility and provide the company with a “breathing spell” within which to attend to “properly restructure and reorganize its affairs and propose a chapter 11 plan that would provide…creditors with meaningful recoveries.”
October 12, 2018 Update:
As is often the case in bankruptcy, there are two sides to every story. In this case, the company’s secured lender, Second Avenue Capital, argues that the company “demonstrated a shocking inability to accurately project the operating performance of the business” leading to “material deviations” to the underwriting-dependent budget. Second Avenue argues, among other things, that (i) the debtor missed its own sales projections by 33.1%, (ii) comparable store sales are projected in the company’s latest budget to be negative 30% and 37% (vs. the underwritten projected positive 5% and 10%) for the months of November and December 2018; and (iii) the company has already missed its own inventory projection by approximately 17.9%. In other words, Second Avenue — while objecting to the company’s motion to use cash collateral — is asserting that they are undercollateralized and that the company is providing inadequate adequate protection.
Notably, Second Avenue doesn’t expressly say that the company was fraudulent in providing the budget upon which Second Avenue underwrote the loan; it does say, however, that “[a]s a consequence of the Debtor’s financial performance…and not any nefarious conduct by the Lender…the Debtor was in substantial and material default” under the credit agreement. Not exactly mincing words. Which only means one of three things: (1) the company was wildly inept in putting together its projections/budget; (2) the company was hopelessly optimistic and otherworldly unrealistic about its projections/budget; (3) the macro conditions for a small brick-and-mortar retailer in today’s day are coming at owners so fast and so furious that projections and budgets, more than usual, are anyone’s guess. We’ll leave it to a court to decide but it sure looks like there may be a contested fight here with the fate of the company in the balance.*
*The first day hearing was scheduled for October 15 but no orders have hit the docket.
Jurisdiction: N.D. of New York (Judge Davis)
Capital Structure: $2.05mm of secured debt (Second Avenue Capital), $1.5mm secured promissory notes
Legal: Griffin Hamersky LLP (Scott Griffin, Michael Hamersky, Sophia Hepheastou) & Cullen and Dykman LLP (Maureen Bass)
Financial Advisor & Investment Banker: Scouler Kirchhein LLC
Claims Agent: KCC (*click on company name above for free docket access)
Other Parties in Interest:
Senior Secured Lender: Second Avenue Capital LLC
Legal: Riemer & Braunstein LLP (Steven Fox)