🎸New Chapter 11 Bankruptcy Filing - John Varvatos Enterprises Inc.🎸

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John Varvatos Enterprises Inc.

May 6, 2020

“The rebel spirit inherent in the brand imbues confidence in the man who wears it.”

You know what doesn’t imbue confidence? Chapter 11 bankruptcy. Alas, John Varvatos Enterprises Inc. and two affiliates (the “debtors”) filed for bankruptcy in the District of Delaware. Rock on!! 🤘

Everyone knows the John Varvatos brand. Think Led Zeppelin. Think you’re suddenly single uncle who, after two decades of marital imprisonment and anguish, suddenly discovered this technology called “online dating.” Think Bloomingdale’s. Think over-priced tailored clothing that doesn’t last more than a few months due to its shoddy “craftsmanship.” Think over-paying for a brand name. Iconic!

The debtors generally have four revenue streams: (a) their 27 brick-and-mortar locations + department store and specialty wholesale distribution; (b) e-commerce; (c) licensed product; and (d) foreign licensing in Canada and Mexico. It may have been too much. The debtors note:

…the Debtors have historically pursued many business streams at the same time, including wholesale, full price retail, outlet retail, ecommerce, international distribution and licensing. Even though the company attains healthy revenue streams, the overhead required to manage these initiatives, coupled with retail stores’ declining performance and increasing rental costs, caused the business to sustain continued losses.

But that’s not all. It turns out the debtors have had issues since 2015. It acknowledges “cost cutting measures” which, to our point above about quality, may have something to do with diminished performance. It also apparently alienated loyal customers who were turned off by the brand’s attempts to go mass consumption. Mass market does not equal rock n’ roll. Duh. Partners noticed: Nordstrom relaxed its relationship with the debtors which translated into a $4.6mm sales and $2.6mm gross profit decline from ‘18 to ‘19.

Pre-COVID, things appeared to be turning around. New management? Check! Revitalized product? Check. Reduced overhead? Check. The debtors “…experienced near double digit sales increases in its full price retail stores and through its ecommerce business as the Debtors’ new apparel collections were extremely well-received by the Debtors’ customers.” Rockin. And rollin.

Like a drunken fan who stumbles into the sound system, COVID-19 came roaring through and crashed the party. Since then, the debtors have had to rely exclusively on e-commerce. That, however, wasn’t enough considering the debtors’ extensive obligations — including $2.1mm a month on rent and at least $6.8mm owned to third-party trade creditors. By necessity, the debtors pivoted to a marketing process with the hope of securing a sale that would maximize value.

This is where a familiar friend stepped up to the plate. Lion/Hendrix Cayman Limited, the debtors’ pre-petition equityholder and pre-petition lender to the tune of $94.8mm (placed recently in February), stepped up to the plate as both DIP lender and stalking horse purchaser of the assets (PETITION Note: A quick digression. Lion/Hendrix Cayman Limited is owned by Lion Capital Fund III, the third of private equity firm Lion Capital’s four funds. That fund apparently raised 1.5b Euro and invested in 12 companies. This is the second one to file for bankruptcy in the last six months. See also Bumble Bee Parent Inc.).

The terms of the purchase include a $76mm credit bid, $19.45mm to paydown Wells Fargo Bank NA, and wind-down expenses. Lion/Hendrix will also have a deficiency claim equal to $76mm-$19.45mm that will share pro rata with general unsecured creditors but for a token $250k “minimum GUC recovery amount” (which, depending upon the monetization of any excluded sale assets, Lion/Hendrix would be on the hook to fund). The DIP commitment is for $20.5mm of which approximately $13.6mm is rollup of the secured notes.

  • Jurisdiction: D. of Delaware (Judge Walrath)

  • Capital Structure: $19.45mm RCF, $94.8mm secured notes (Lion/Hendrix Cayman Limited)

  • Professionals:

    • Legal: Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Matthew Talmo, Andrew Workman)

    • Financial Advisor: Clear Thinking Group

    • Investment Banker: MMG Advisors Inc.

    • Claims Agent: Omni (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Pre-petition RCF Agent: Wells Fargo Bank NA

      • Legal: Riemer & Braunstein LLP (Donald Rothman, Brendan Recupero, Paul Bekkar) & Burr & Forman LLP (J. Cory Falgowski)

    • Stalking Horse Purchaser & DIP Lender ($20.5mm): Lion/Hendrix Cayman Limited

      • Legal: Sullivan & Cromwell LLP (James Bromley, David Zylberberg) & Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Sean Greecher)