Lucky Brand Dungarees, LLC – Premium Denim Manufacturer Succumbs to COVID-19 (and Pre-Existing Conditions); Executes Stalking Horse APA for Going Concern Sale with Entity Owned by Authentic Brand Group and Simon Property Group

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July 3, 2020 – Lucky Brand Dungarees, LLC and four affiliated Debtors (“Lucky Brand” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-11768 (Judge Sontchi). The Debtors, a fashion designer and premium denim manufacturer (112 specialty retail stores and 98 outlet stores in North America), are represented by Michael R. Nestor of Young, Conway, Stargatt & Taylor LLP. Further board-authorized engagements include (i) Latham & Watkins, LLP as general bankruptcy counsel, (ii) Berkeley Research Group as financial advisors, (iii) Houlihan Lokey Capital, Inc. as investment banker and (iv) Epiq Corporate Restructuring LLC as claims agent. 

The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn ($182.0mn of funded debt). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Red and Blue International Ltd ($13.4mn trade claim), (ii) Hirdaramani International Exports (pvt) Ltd ($5.9mn trade claim) and (iii) Orit Trading Lanka (pvt) Ltd  ($5.8mn trade claim). The Debtors have 26 rent and trade claims in excess of $1.0mn.

The Debtors are majority owned (89.9% of preferred units and 75% of each other equity class) by an affiliate of private equity group Leonard Green & Partners, L.P. ("LGP"). LGP is a minority equityholder in Authentic Brands Group LLC ("ABG"). ABG and Simon Property Group (the latter a key landlord of the Debtors) together own the stalking horse, SPARC Group LLC ("SPARC").

Highlights

  • Already weakened by retail apocalypse, shifting consumer preferences and debt burden, Debtors succumb to COVID-19 with $182.0mn of funded debt
  • Competitive pressures included shift to online channels and "shift in customer demand away from apparel to technology and personal experiences"
  • Vendor relationships frayed and access to new inventory dropped as liquidity tightened
  • SPARC agrees to serve as stalking horse in going concern asset sale with $140.1mn cash and $51.5mn credit bid
  • SPARC operates under the Aeropostale and Nautica brands and is owned by Authentic Brands Group LLC ("ABG") and Simon Property Group ("SPG")
  • ABG to serve as "back-up" stalking horse should SPARC stumble with financing, purchase IP assets for $90.0mn
  • Second Lien Lenders to provide $15.6mn of DIP financing to fund accelerated sale process
  • Store closings and lease negotiations continue, 12 leases (none with SPG) to be rejected and 13 stores closed…for starters
  • Debtors estimate annual lease expenses of $52.0mn (219 properties) and current trade debt of $79.0mn 

In a press release announcing the filing, the Debtors advised that it had: “entered into a stalking horse asset purchase agreement with SPARC Group LLC ('SPARC'), a leading global operator of lifestyle brands including Aéropostale and Nautica, for the sale of substantially all of the Company's operating assets. In connection with the transaction, ABG-Lucky LLC [the “IP Buyer”], a newly formed subsidiary of Authentic Brands Group LLC, a brand development, marketing, and entertainment company, which owns a global portfolio of entertainment, media, and lifestyle brands will acquire all the intellectual property assets of Lucky Brand. In addition to entering into the asset purchase agreement with SPARC, the Company and certain of its affiliates also entered into a 'back-up' asset purchase agreement for the sale of the Company's and such affiliates' intellectual property and certain other assets to ABG-Lucky LLC which will only come into effect if the asset purchase agreement with SPARC terminates under certain circumstances.

To facilitate the sale and reduce its debt burden caused by recent challenges, including the COVID-19 pandemic, Lucky Brand has initiated proceedings under Chapter 11 of the U.S. Bankruptcy Code in the District of Delaware. Lucky Brand has received new financing commitments from certain of its existing lenders that will provide sufficient liquidity to fund the business through the closing of the sale.”

The Debtors’ Interim CEO Matthew A. Kaness commented: "The COVID-19 pandemic has severely impacted sales across all channels. While we are optimistic about the reopening of stores and our customers' return, the business has yet to recover fully. We have made many difficult decisions to preserve the Company's viability during these unprecedented times. After considering all options, the Board has determined that a Chapter 11 filing is the best course of action to optimize the operations and secure the brand's long-term success. We remain committed to our Associates, vendors, and business partners and appreciate the continued support through this process." 

Proposed Sales and APA(s)

On June 9, 2020, the Debtors received a single non-binding LOI (the “Stalking Horse LOI”) from SPARC, ABG, each of the DIP Lenders, and the Second Lien Lenders (collectively, the “Stalking Horse Parties”). Each of the Stalking Horse Parties already had considerable experience with, and understanding of, the Debtors' businesses which the Debtors expect will allow for an accelerated sales process. That optimism is somewhat undercut by the apparent need for a "back-up" stalking horse should SPARC fail to come up with the necessary financing for its going concern purchase, leaving ABG to plow forward with a $90.0mn, IP only, bid.

The Renzi Declaration (defined below) states: "As a result of the active engagement by both ABG and SPARC in the November 2019 Refinancing transaction and the 2019 Marketing Process and these parties’ considerable retail market and industry knowledge, these parties, working with the Second Lien Lenders, were in a position to move quickly to provide a stalking horse bid that will set the baseline for an expedited sale process. The Company, with the assistance of Houlihan, continued to work closely with potential bidders to explore and address transaction structure, timing, and process considerations but the Debtors ultimately did not receive any other LOI or IOI.

On July 3, 2020, the Debtors entered into the Stalking Horse Purchase Agreements which contemplate a going concern purchase by with a "back-up" sale of IP assets should SPARC not be able to access the financing necessary to purchase inventory. The Renzi Declaration continues: "Based on the information available, the All Assets Bid includes cash in the amount of $140,100,000, the Specified Trade Receivables Adjustment, an aggregate credit bid equivalent to approximately $51,500,000, plus other consideration

The All Assets Purchase Agreement preserves the Company’s business as a going concern, including (i) preserving much or all of the Debtors’ current store footprint, (ii) contemplating the employment of many of the Company’s store and other employees, (iii) continuing to source merchandise from the Company’s vendor base, (iv) maintaining ongoing relationships with many of the Company’s other contract counterparties and assuming certain liabilities related thereto, and (v) providing cash consideration sufficient to repay or satisfy all amounts due to the Debtors’ First Lien Lenders, and provide certain wind down costs in accordance with an approved budget to facilitate the orderly winding up of the estate and confirmation of a chapter 11 liquidating plan; provided, however, that the funding of such wind-down costs shall not guarantee or otherwise ensure that such funds will prove to be sufficient for the Debtors to fund and confirm a chapter 11 plan.

Pursuant to the All Assets Purchase Agreement, the All Assets Bid is contingent on SPARC’s ability to obtain financing for the purchase of inventory

In the event that prior to 11:59 p.m. Pacific Time on July 27, 2020, SPARC does not obtain financing (or waive) its financing contingency, then the sale will 'toggle' to a sale of the Debtors’ intellectual property and certain other of the Acquired Assets (the 'IP Bid' and together with the All Assets Bid, the 'Stalking Horse Bid') to the IP Buyer as specified in the All Assets Purchase Agreement (the 'Toggle'); in such event, the Company will sell and/or liquidate its remaining assets in the manner that best maximizes value to the Debtors’ estates under the circumstances.

Based on the information available, the IP Bid has a purchase price of $90,000,000, plus the option to purchase inventory related to the e-commerce and wholesale business (with retail inventory, accounts receivable, and other remaining assets to be sold or otherwise liquidated)."

DIP Financing

The Debtors have received commitments for $15.6mn of debtor-in-possession ("DIP") financing to be provided by the Debtors' second lien lenders.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Renzi Declaration”), Mark A Renzi, the Debtors’ Chief Restructuring Officer, detailed the events leading to Lucky Brand's Chapter 11 filing. The Renzi Declaration provides: “Notwithstanding its core operating strengths, the Company has been burdened by its substantial debt load and has faced many of the same pressures affecting U.S. retailers more generally, especially in light of the COVID-19 pandemic. As of the Petition Date, the Debtors’ capital structure includes approximately $181.97 million in funded debt. Prior to the COVID-19 pandemic, the Company had been focused on operational and strategic alternatives aimed at restructuring its retail operations and store profile and extending the Company’s maturity runway while allowing it to service interest payments on its funded debt. 

Despite the Company’s best efforts and support of its economic stakeholders, the Company’s restructuring efforts were derailed by a combination of the economic impact of the global COVID-19 pandemic, which resulted in extended closures of its retail stores, and limited liquidity, which diminished access to new inventory from its vendors. The temporary closure of all of the Company’s retail stores in the months of March, April, and May, and the disruption to the Debtors’ customer base and supply chain have only exacerbated the Company’s issues related to its substantial funded debt obligations, significant lease obligations, and trade indebtedness. As a result, the Company was forced to explore restructuring alternatives to maximize the value of its business and restructure its debt."

The Renzi Declaration continues: "The Debtors’ operations have generally been profitable during the past thirty years; however, a confluence of factors contributed to the Debtors’ need to commence these Chapter 11 Cases. These factors include the general shift away from brick-and-mortar stores to online channels and the accompanying departure of anchor mall tenants, a highly promotional and competitive retail environment, and a shift in customer demand away from apparel to technology and personal experiences. In addition, the COVID-19 pandemic, which has resulted in unprecedented challenges for the retail industry, caused a month-over-month decline in revenues of approximately 50%. 

Taken together, these factors have tightened the Debtors’ liquidity, with year-to- date comparable store sales declining over 50% percent and a negative year-end EBITDA of $28 million, and have complicated the Debtors’ relationship with their vendors and suppliers. And, ultimately, the COVID-19 pandemic lead to diminished liquidity as the Debtors faced dwindling cash flows, inaccessible inventory, tightening trade credit, and the inability to access incremental liquidity.”

Prepetition Indebtedness

The Debtors have outstanding funded debt obligations consisting of approximately $181.97mn. As of the Petition Date, approximately $49.27mn is outstanding under the First Lien Term Loan Facility (inclusive of principal, interest, fees, and expenses). Approximately $61.31mn is outstanding under the First Lien Revolving Facility (inclusive of principal, interest, fees, and expenses), including issued letters of credit with an aggregate face amount of approximately $9.69mn. Approximately $54.58mn (inclusive of principal, interest, fees, and expenses) is outstanding under the Second Lien Term A Loan and approximately $16.81mn (inclusive of principal, interest, fees, and expenses) is outstanding under the Second Lien Term B Loan. The following table summarizing the Debtors’ outstanding funded debt obligations as of the Petition date:

Funded Debt

Maturity

Approximate Principal Amount Outstanding

First Lien Term Loan Facility

November 2024

$49.27 million

First Lien Revolving Facility

November 2024

$61.31 million (including Letters of Credit in the amount of $9.69 million)

Second Lien Term A Loan

February 2025

$54.58 million

Second Lien Term B Loan

February 2025

$16.81 million

Total Funded Debt

$181.97 million

In addition, as of the Petition date, the Debtors estimate that approximately $79.0mn of merchandise trade debt is due and outstanding.

The Debtors operate exclusively in leased facilities and maintain over 219 real property leases. The Debtors estimate that they will accrue approximately $52.0mn in lease and occupancy related expenses in fiscal year 2020 (approximately $4.3mn).

Lease Negotiations and Store Closings 

As noted above, the Debtors lease all of their retail store locations and have lease and occupancy obligations of approximately $4.3mn a month. Beginning in early 2020, the Debtors undertook efforts to obtain lease concessions and rent abatements from their landlords and subsequently determined that they had “12 burdensome, unexpired leases” which they intend to reject (for starters) as part of the Chapter 11 process. The Debtors have not provided any indication of how many leases they have with SPG, something that will be of interest to many third-party lessors as they have their own arrangements scrutinized and menaced with Chapter 11 rejection.

The Debtors have decided to close 13 unprofitable brick and mortar store locations (the “Initial Closing Stores and will close additional stores ( the “Supplemental Closing Stores”) “based upon continued evaluation of performance and whether the Debtors are able to negotiate rent concessions.”

About the Debtors

Founded in Los Angeles, California in 1990, Lucky Brand is an apparel lifestyle brand that designs, markets, sells, distributes, and licenses a collection of contemporary premium fashion apparel under the “Lucky Brand” name. The Company’s products, designed for women, men, and children, include denim jeans, pants, woven and knit tops, outerwear, and accessories. 

The Renzi Declaration adds: "Lucky Brand is globally recognized for innovative, trendsetting denim jeans and apparel. Lucky Brand sells directly to consumers in the United States in Company-owned Lucky Brand stores, to a network of wholesale accounts that include department stores, selected specialty retailers and boutiques, and through the Company’s e-commerce site, www.luckybrand.com.As of May 2020, the Company operated 112 specialty retail stores and 98 outlet stores in North America. In addition, Lucky Brand selectively provides licenses to third parties to use the Company’s various trademarks in connection with the manufacture and sale of designated products in specified geographical areas for specified periods."

About SPARC

SPARC is a leading apparel company operating under the Aeropostale and Nautica brands owned by ABG and Simon Property Group, which is one of the Company’s key landlords. The press release declines to point out those rather key facts, preferring: "SPARC is a leading apparel company operating under the Aeropostale and Nautica brands owned byABG andSimon Property Group, which is one of the Company’s key landlords SPARC is a global enterprise which designs, sources, manufactures, distributes, and markets women's, men's, and kids' apparel and accessories. A full-service retail operator, SPARC delivers product and commerce innovation through a multi-brand platform which supports 2,600-plus retail doors and shop-in-shops, robust eCommerce, and leading wholesale accounts in North America, South America, Europe, and Asia Pacific. As the dedicated operating partner for the Aéropostale and Nautica brands, SPARC supports over $2.7 billion in global retail sales annually."

About Authentic Brands Group 

Authentic Brands Group ("ABG") is a brand development, marketing, and entertainment company, which owns a portfolio of global media, entertainment, and lifestyle brands. Headquartered in New York City, ABG elevates and builds the long-term value of more than 50 consumer brands and properties by partnering with best-in-class manufacturers, wholesalers and retailers. Its brands have a global retail footprint in more than 100,000 points of sale across the luxury, specialty, department store, mid-tier, mass, and e-commerce channels, and more than 5,500 freestanding stores and shop-in-shops around the world.

Corporate Structure Chart

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