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June 9, 2020 – The Court hearing the Tuesday Morning Corporation cases issued a final order allowing the Debtors to (i) “immediately continue” their store closing process and (ii) assume a prepetition Consulting Agreement with Great American Group, LLC (the “Consultant”) to manage the store closing process [Docket No. 197]. On May 29th, the Court issued a substantially identical interim order [Docket No. 109] with one notable exception now popping up at the end of the final order, an amendment to the Consulting Agreement increasing the Consultant's compensation ("Base Rate" going from 1.5% to 1.75%) should the Debtors embark on a "chainwide" liquidation process.
The amendment to include fees for a chainwide liquidation process (an important compensation term excluded from earlier iterations of the agreement, if only to avoid the obvious inference that such an outcome was being contemplated) may well be a harbinger of things to come.
The Debtors are now in the "first wave" of store closings which includes the liquidation of 133 stores. The Consulting Agreement notes that the closing sales began on June 1st and are set to conclude no later than August 7th.
In their May 27th requesting motion [Docket No. 18], the Debtors underscored the relationship between possible further store closings and lease renegotiations. It was evident that they intended to remind their landlords that a failure to provide improved terms now could very easily lead to a more onerous treatment as part of the bankruptcy process. This ‘carrot and stick’ approach (albeit a rather meager carrot) is always a tension in the early days of a retailer bankruptcy, but rarely are debtors so frank about the trade-off – they used both the Petition date press release and this motion to hammer home the point.
The implied threat is evident across the Debtors’ full portfolio of leases, even though an extensive prepetition assessment of store health resulted in the identification of only about a third of the 687 stores as meriting closure. The Debtors have also delayed the commencement of the store closing process until June 8th; an unusual two week gap between Petition filing and commencement of a store closing process – significant especially given that the Consultant already been engaged for three weeks. This gap should give the Debtors’ lease renegotiation specialist A&G Realty Partners, LLC some breathing space to sell the landlords on the benefits of sharing the Debtors’ COVID-19 pain.
The motion states, “Due to the COVID-19 pandemic, the Debtors have faced unprecedented challenges including rapidly declining sales at their retail locations. To address those challenges the Debtors’ management team…ultimately determined that it is appropriate to close and wind down certain store locations (the ‘Closing Stores’) to increase liquidity, maximize cost savings, and strengthen the Company’s overall financial position. There are 133 Stores expected to be closed beginning June 1, 2020 (the ‘Wave 1 Closing Stores’). Further, the Debtors’ management team and advisors continue to evaluate whether certain of the Closing Stores should instead remain open and whether additional stores beyond the Closing Stores should be closed. The determination of the final number of stores to close will depend on, among other considerations, whether the Debtors are able to negotiate more favorable lease terms and rent reductions for certain stores with their landlords (the ‘Lease Negotiations’). The Debtors have retained A&G Realty Partners, LLC (‘A&G’) to assist with the ongoing Lease Negotiations. The Debtors reserve the right to add or remove stores from that list in the exercise of their reasonable business judgment and depending on the outcome of the Lease Negotiations, subject to entry of the Interim Order or the Final Order, as applicable.
In formulating the list of Closing Stores, the Debtors considered, among other factors, historical store profitability, recent sales trends, the geographic market in which the store is located, the potential to realize negotiated rent reductions with applicable landlords, and specific circumstances related to a store’s performance. In identifying the Closing Stores, the Debtors also considered individual store performance as well as geographic considerations by comparing relative performance of applicable stores against the Debtors’ remaining portfolio and analyzing the relative sales trends in its various geographic markets. In order to maximize the value of their estates, the Debtors may need to close additional stores during the Chapter 11 Cases not identified in the Consulting Agreement (such stores, the ‘Additional Closing Stores,’ and together with the Closing Stores, the ‘Stores’). In conjunction with their analysis of store performance, the Debtors also conducted a review and analysis of their inventory levels at the Closing Stores. Such inventory will be included in and sold as part of the Sales (collectively, the ‘Merchandise’). The Debtors expect that the bulk of the Sales and Store Closings will take approximately 10 weeks to complete.
By this Motion, the Debtors seek to assume the Consulting Agreement so that the Consultant may continue its preparation for the Store Closings on a post-petition basis without interruption….Further, the Store Closings are a critical component of the Debtors’ go-forward business plan, and assumption of the Consulting Agreement will allow the Debtors to conduct the Store Closings in an efficient, controlled manner that will maximize value for the Debtors’ estate. The relief requested in this Motion is integral to maximizing the value of the Debtors’ estate. It will permit the Debtors to commence the Store Closings in a timely manner as contemplated by this Motion and will establish fair and uniform sale guidelines to assist the Debtors and their creditors through the Debtors’ transition to a smaller, more profitable enterprise.”
While the Debtors initially referenced a June 1, 2020 commencement date for the requested store closing sales , a subsequent Notice of Correction [Docket No.43] notified the Court that neither the Debtors or the proposed Consultant plan to commence the store closing Sales until on or about June 8, 2020.
The motion provides the following as to compensation: "(i) 'Gross Proceeds' means the sum of all gross proceeds thereof (including, as a result of the redemption of any gift card or credit or wholesale sales to third parties); (ii) 'Merchandise means all first quality goods, saleable in the ordinary course, located in the Stores on the Sale Commencement Date or delivered thereto after the Sale Commencement Date pursuant to the terms of this Agreement; (iii) 'Base Fee' means (a) one and one-half of one percent (1.5%) of all Gross Proceeds of Merchandise, calculated from the first dollar recovered, plus (b) fifteen percent (15.0%) of all Gross Proceeds of FF&E. The Base Fee will rise to 1.75% in the event that the Debtors embark on a chainwide liquidation process (see amendment to the Consulting Agreement attached to the final order).
About the Debtors
Tuesday Morning Corporation (NASDAQ: TUES) is one of the original off-price retailers specializing in name-brand, high-quality products for the home, including upscale home textiles, home furnishings, housewares, gourmet food, toys and seasonal décor, at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers. Based in Dallas, Texas, the Company opened its first store in 1974 and currently operates 687 stores in 39 states.
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