Independent Pet Partners Holdings, LLC – Debtors Seek Court Authority to Engage Houlihan Likey, Quickly Liquidate 93 Natural Pawz and Loyal Companion Stores

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February 5, 2023 – The Debtors filed a motion requesting Court authority to: (i) assume a January 24, 2023 consultancy agreement with Houlihan Lokey Capital, Inc. ("Houlihan Lokey"), (ii) conduct store closing sales in respect of 93 stores operating under the Natural Pawz and Loyal Companion banners (thereby reducing the Debtors' pawprint from 13 to five states), (iii) implement store closing procedures and (iv) adopt a bonus plan for up to 100 employees engaged engaged in the store liquidation and closing process [Docket No. 13, with list of closing stores attached at schedule 2].

The Debtors, having had no luck in attracting viable going concern offers for the stores/banners that they are now looking to liquidate (the "Closing Stores"), are still nominally open to going concern offers. In light of $1.3mn per month leasing costs in respect of the Closing Stores, however (rent fully paid up for February), the Debtors are looking to "unequivocally surrender possession of the Closing Stores to subject landlord counterparties on or before February 28, 2023." 

The Houlihan Lokey consultancy agreement also reflects the apparent need for speed (and vacating premises), with the agreement set to terminate at the end of February. The agreement also does not appear to allow Houlihan Lokey to add "additional merchandise" to the liquidation process, a fairly normal liquidation practice adding an additional revenue stream for the consultant and often stretching a liquidation process (and bankruptcy) by many tedious months.

Case Status

On February 5, 2023, Independent Pet Partners Holdings, LLC and 12 affiliate debtors (“IPP“ or the “Debtors”) filed for Chapter 11 protection noting estimated assets of $182.0mn and estimated liabilities of $215.0mn. At filing, the Debtors, Woodbury, Minnesota-based operators of 159 premium pet food storesstores across 12 states and the District of Columbia*, cited the combined impact of an overly aggressive acquisition/growth strategy, COVID, an "unexplained rise in canine heart failure" (allegedly linked to the grain-free, high-protein dog food the Debtors specialize in) and inflation (which hit premium pet foods disproportionately as customers migrated to cheaper products) as pushing them into bankruptcy.

*IPP was formed in 2017 by private equity house TPG (who understandably decline to list the Debtors amongst "selected" portfolio companies) and, pursuing a strategy of consolidating independent pet retailers to create a premium segment within their sector, grew into a chain of more than 160 locations operating under several retail banners including Chuck and Don’s, Kriser’s Natural Pet, Loyal Companion, and Natural Pawz.

The Store Closing Motion

The motion [Docket No. 13] states, “In 2022, the Debtors, with the assistance of their advisors, started evaluating several strategic alternatives aimed at maximizing value for the company and its constituents. On or about September 9, 2022, the Debtors retained Houlihan Lokey Capital, Inc. ('Houlihan Lokey') to provide financial advisory and investment banking services in connection with potential merger, acquisition, refinancing, or other restructuring transactions. During the months prior to the Petition Date, Houlihan Lokey, on behalf of the Debtors, conducted a thorough and far-reaching prepetition marketing process to identify potentially interested parties. Despite these efforts, an acceptable, actionable third party transaction did not materialize.

Thereafter, the Debtors undertook immediate steps to effectuate a balance sheet restructuring and consolidate the company’s store footprint, which should result in a sustainable and profitable path forward. More specifically, the Lenders have offered to purchase 66 of the Debtors’ core, high-performing stores in Colorado, Kansas, Minnesota, Wisconsin, and Illinois as a going concern as part of a stalking horse credit bid under section 363 of the Bankruptcy Stores (the 'Stalking Horse Bid'). 

As part of their go-forward strategy, the Debtors and their advisors closely analyzed their real estate portfolio to determine the profitability and viability of each retail location on a store-by-store basis, taking into consideration the relationship between the Debtors’ individual brands and their brick and mortar footprint. As a result of that analysis, and an in exercise of their informed business judgment, the Debtors have made the difficult decision to close down and liquidate their remaining 93 Closing Stores, reducing the Debtors’ footprint from 13 to 5 states, the result of which will be the discontinuance of the Debtors’ Natural Pawz and Loyal Companion banners. While the Debtors remain open to acquisition proposals for the Closing Stores, to date, despite a lengthy prepetition marketing process, the Debtors have not received any executable third-party offers for the Closing Stores and the Stalking Horse Bid does not include any of the inventory maintained therein.

…in addition to seeking higher and better offers for the Go-Forward Business, Houlihan Lokey is marketing the Closing Stores to determine if offers exist that would return greater value relative to the liquidation process. While the Debtors are hopeful the marketing process will result in actionable proposals, including for the Closing Stores, the Debtors also recognize the challenges of selling the Closing Stores to one or more going-concern buyers, particularly given the outcome of the prepetition marketing process. Thus, in order to avoid further losses and administrative costs in these bankruptcy cases, including continuing to pay rent for these Closing Stores, which could amount to $1.3 million for March 2023 alone, the Debtors seek to proceed with the liquidation process in order to allow the Debtors to unequivocally surrender possession of the Closing Stores to subject landlord counterparties on or before February 28, 2023.

Prior to the Petition date, the Debtors satisfied their February 2023 rent obligations for both the Closing Stores and the Go-Forward Stores."

Compensation for Consultant

The motion provides that "the Merchant shall pay Consultant a 'Base Fee' equal to 1.5% of Gross Proceeds of Merchandise. In addition to the Base Fee, the Consultant may also earn an “Incentive Fee” for the sale of Merchandise equal to the aggregate sum of the percentages shown in the following table, based upon the following thresholds of Gross Cost Recovery Percentage (e.g., in each case, as calculated back to first dollar): 

In respect of Furniture, Fixtures and Equipment ("FF&E"), the Consultant is entitled to a 15% cut of sales.

Store Closing Bonus Plan

Te motion continues: "…the Debtors also request authority, but not the obligation, to pay Store Closing Bonuses (the 'Store Closing Bonus Plan') upon entry of the Final Order to store-level, non-insider employees, who remain in the employ of the Debtors during Store Closing Sales, and who will work with the Consultant and its representative during the Store Closing Sales. The Debtors believe that the Store Closing Bonus Plan will motivate employees during Store Closing Sales and will enable the Debtors to retain those employees necessary to successfully complete Store Closing Sales.

Payments under the Store Closing Bonus Plan are made exclusively to non-insiders on the condition of employment through the date on which the respective employee’s store closes. The Debtors anticipate that approximately 100 non-insider employees would be eligible for Store Closing Bonuses. The total aggregate cost of the Store Closing Bonus Plan will not exceed $300,000, with the final amount dependent on, among other things, whether eligible employees remain employed for the duration of the Closing Sales. The Debtors do not anticipate paying any individual more than $3,000 on account of a Store Closing Bonus."

About the Debtors

The Coulombe Declaration provides: "As of the Petition Date, the Debtors, headquartered in Woodbury, Minnesota, operated 159 pet stores across 12 states and the District of Columbia, under four unique banners— Chuck and Don’s, Kriser’s Natural Pet, Loyal Companion, and Natural Pawz. In addition to high- quality pet food and other pet toys and accessories, the Debtors offer a wide range of pet services including grooming, self-wash, pet parent education, and veterinary services, all in the same store for a one-stop pet experience.

IPP was formed in 2017 to meet the burgeoning demand for pet services and based on the belief that pet parents want an easier way to support the holistic wellness of their pets. By consolidating independent pet retailers, IPP grew into a coast-to-coast chain of more than 160 locations operating under several retail banners. The Debtors do not own any real property. The Debtors lease their stores from more than 100 different landlords nationwide. Today, IPP’s locations offer a one-stop pet experience with healthy, high-quality food products and treats and a range of pet services, including grooming, self-wash, pet parent education, and veterinary services. The Debtors also sell goods through their e-commerce platform with each of the Debtors’ banners having its own standalone website.

….as of the Petition Date, the Debtors employed approximately 1,300 individuals (the “Employees”), approximately 850 full-time and 450 part-time. Also, approximately 400 Employees were salaried and approximately 900 were hourly or commission-based."

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