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April 27, 2023 – The Court hearing the ESCO, Ltd. cases issued a final order authorizing the Debtors to: (i) assume a consultancy agreement with Gordon Brothers Retail Partners, LLC (the ‘Store Closing Consultant’), (ii) conduct store closing sales in respect of 39 stores operating under the Shoe City banners and (iii) implement store closing procedures [Docket No. 170]. A consulting agreement and a list of closing stores is attached to the Interim Order [Docket No. 72] at Schedule 1-A and Exhibit A, respectively.
On April 5th, the Court entered interim store closing order [Docket No. 72] with this final order largely tracking the interim except as to some changes to the Gordon Brothers' now reduced compensation (eg, reduced incentive fees and FFE commission, see below).
On March 31, 2023, ESCO, Ltd. (dba as “Shoe City,” “ESCO” or the “Debtor”) filed for Chapter 11 protection noting estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn. At filing, the Debtor, a Baltimore, MD-based shoe and trending apparel retailer operating 39 retail locations across Maryland, DC and Virginia, cited the termination of a proposed May 2022 acquisition of their stores by the Arklyz Group (the parent of The Athlete’s Foot) and increasing difficulties with trade vendors…as eventually leading to a default of their prepetition credit facility with Truist (see “Events,” below).
On April 5th and 27th, the Court hearing the ESCO case issued a pair of interim DIP orders authorizing the Debtor to access up to $1.5mn (of what is in total a $4.1mn) of debtor-in-possession (“DIP”) financing to be provided by prepetition lender Truist Bank (“Truist” or the “DIP Lender”) and use cash collateral. The interim DIP order also approved the roll-up of amounts owed Truist under a prepetition credit agreement, i.e., @$3.2mn.
The Store Closing Motion
The motion [Docket No. 24] states, “The Debtor has faced unprecedented challenges, including underperforming sales at its 39 retail locations (the ‘Stores’). As a result, certain key vendors stopped shipping new product to the Debtor prior to the Petition Date. The lack of popular newly released shoes in the Debtor’s Stores only exacerbated its financial problems. To address these challenges, the Debtor’s management team, in an exercise of its fiduciary duty to maximize value for all creditor constituencies, hired restructuring professionals to evaluate all available options. As a result of this analysis, and in the exercise of their sound business judgment, in consultation with their restructuring advisors and Truist Bank, the Debtor’s secured pre-petition lender and proposed postpetition lender, the Debtor ultimately determined that immediate liquidation of the Debtor’s assets by a professional liquidation advisor under the supervision of the Court is the best strategy to maximize value for the benefit of all creditors. As such, the Debtor has determined, in its business judgment, that it is in the best interests of its estate, creditors, and all parties-in-interests to seek authority to close and wind down, or conduct similar themed sales (the ‘Sales’), to liquidate its store assets and close all of its Stores (the ‘Store Closings’).
In conjunction with its analysis of Store performance, the Debtor, with the assistance of the Store Closing Consultant, also conducted a review and analysis of the Debtor’s inventory levels at the Stores. Such inventory will be included in and sold as part of the Sales (collectively, the ‘Merchandise’). The Debtor expects that the bulk of the Sales and Store Closings will take approximately 6-8 weeks to complete.
To effectuate the Store Closings, the Debtor explored the possibility of hiring the Store Closing Consultant to conduct the Sales and Store Closings. After determining that the Store Closing Consultant was well qualified and negotiating the terms of the engagement at arms’ length with the assistance of its advisors, the Debtor selected and engaged the Store Closing Consultant to manage the Store Closings as well as to sell its furniture, fixtures, and equipment (the ‘FF&E’ and, together with the Merchandise, the ‘Store Closure Assets’) located in Stores, at the Debtor’s distribution center and corporate offices, and otherwise prepare those Stores for turnover to the applicable landlords on the terms set forth in the Store Closing Consulting Agreement, unless a potential purchaser of such non-residential lease comes forward. The Debtor has signed the Store Closing Consulting Agreement and the Store Closing Consultant began working on site at the Stores on March 23, 2023.
By this Motion, the Debtor seeks to assume the Consulting Agreements so that the Consultants may continue the Sales and determine what market, if any, exists to monetize the Debtor’s unexpired commercial leases. The Debtor has determined, in an exercise of its business judgment, that (a) the services of the Consultants are necessary for a seamless and efficient execution of the Store Closings and Sales, as is contemplated by this Motion, and to maximize the value of the assets being sold, and (b) the Consultants can perform the required tasks on favorable financial terms.
Further, the Store Closings are a critical component of the Debtor’s bankruptcy strategy, and assumption of the Store Consulting Agreement will allow the Debtor to conduct the Store Closings in a cost-effective, controlled manner that will maximize value for the Debtor’s estate. The relief requested in this Motion is integral to maximizing the value of the Debtor’s estate, as it will permit the Debtor to commence the Store Closings as quicky and efficiently as possible as contemplated by this Motion and will establish fair and uniform sale guidelines to assist the Debtor and its creditors through the Debtor’s liquidation.”
Compensation for Consultant
As noted above, the final order makes amendments to the Consultant's compensation, providing now as follows:
"The Consulting Agreements, copies of which are attached to the Interim Order as Schedule 1-A and 1-B, respectively, are hereby assumed pursuant to Bankruptcy Code § 365 on a final basis, with the modifications below:
a. The Incentive Fee described in Paragraph 4(B) of the Store Closing Consultant Agreement shall be calculated as follows:
b. The FF&E commission in Paragraph 6(B) of the Store Closing Consulting Agreement shall be 15% [was 20%].
c. The Additional Consultant Goods Fee in Paragraph 7(B) of the Store Closing Consulting Agreement shall be 6.0% [was 5%].
d. The Assignment Fee, the Designation Rights Fee, and the Terminated Lease Fee in Paragraphs 5(a)(ii), (iv), and (xi) of the Lease Consultant Agreement, respectively, are each 4.0%. [they were previously each 6%]"
For reference purposes, the motion provided, “In consideration of Consultant’s services under the Consulting Agreement, Merchant shall pay Consultant a fee equal to 2.0% of the Gross Proceeds of Merchandise sold at the Stores during the Sale Term (the ‘Base Fee’). In addition to the Base Fee, Merchant shall pay Consultant from Gross Proceeds an additional fee based upon the applicable Gross Recovery Percentage set forth below (calculated back to the first dollar) (the ‘Incentive Fee’ and together with the Base fee, the ‘Merchandise Fee’):
For purposes of calculating Gross Proceeds and the Merchandise Fee, the Parties shall use the ‘Gross Rings’ method, wherein Consultant and Merchant shall jointly keep (i) a strict count of gross register receipts less applicable sales taxes, and (ii) cash reports of sales within each Store. Register receipts shall show for each item sold the Cost Value and Retail Price (as reflected on Merchant’s books and records) for such item, and the markdown or other discount granted in connection with such sale.”
In respect of Furniture, Fixtures and Equipment (“FF&E”), the Consultant is entitled to a 20% cut of sales.
Events Leading to the Chapter 11 Filings
The Debtor's declaration in support of first day motions [Docket no. 35] provides: "In May 2022, The Athlete’s Foot parent, the Arklyz Group, executed a deal to acquire the Debtor in an effort to expand on Arklyz’s North American presence. By all measures, the proposed deal was full of synergies between two companies committed to their respective communities, loyal customers, and philanthropic initiatives. Unfortunately, Arklyz did not close on the deal. As a result, the Debtor was never able to regain profitability.
Starting in fiscal year 2020, certain key vendors to the Debtor’s business started to change the allocation of goods provided to the Debtor. The Debtor failed to receive certain highend goods and new sneaker releases at the levels from previous years that are critical to this industry. In fiscal year 2022, comparable-store sales decreased by approximately $8.5 million from the prior years. During the current fiscal year, sales continued to decrease by almost $5 million through January 2023 when compared to the prior fiscal year, placing increased pressure on the Debtor’s liquidity position as none of the Company’s efforts to improve its cash position came to fruition….As a result of the poor financial performance, the Debtor has not been in compliance with certain covenants under the Pre-Petition Credit Agreement, which constituted events of default under the Pre-Petition Credit Facility."
About the Debtor
According to the Debtor: “From our start in 1949 as a single location in Baltimore, Maryland, 'Your City, My City' (YCMC) has evolved to become a go-to destination for the industry’s latest sneaker releases and trending apparel. Over the past seven decades, our family business has grown and expanded, now offering 40 retail locations branded as Shoe City across Maryland, DC and Virginia.
Our success over the past seven decades is attributed not only to our commitment to offering the quality in fashion our customers expect, but it's also attributed to our family spirit throughout the organization that keeps us focused on people first. Our community activations center on supporting efforts to improve community-life. YCMC has sponsored community programs including recreational sports leagues, playgrounds, college scholarships, clothing drives and food drives."
The Debtor's declaration in support of first day motions [Docket No. 35] adds: "Headquartered in Baltimore, the Company was formed in 1949 as Eileen Shoes.
The Company rebranded its stores as Shoe City in 1980. Today, the Company is an urban-inspired footwear, apparel, and accessories retailer offering men’s, women’s, and children’s products from consumer brands such as Nike, Adidas, and Puma.
As of the Petition Date, the Debtor operates 39 stores in Maryland, Virginia, and the District of Columbia. The Debtor employs approximately 161 full-time employees and 233 part-time employees, with approximately 61 employees working at its corporate office and warehouse locations or as regional managers, and approximately 333 employees working at its store locations. The number of part-time employees has historically fluctuated depending on the Debtor’s seasonal needs. None of the Debtor’s employees are represented by a labor union. The Debtor remains a family-owned business to this day as the equity of the Debtor is owned by family members and family trusts of the founders. Unfortunately, after 74 years in business, the Shoe City legacy has come to an end."
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