TheChek News Flow

The multibrand retailer has a new owner, Regent L.P.

Under new owners Regent L.P., Intermix has been asking brands to take a steep cut in what they’re owed on current merchandise and future orders through the second quarter, wreaking havoc on some small brands that were expecting payments, WWD has learned.

Brands began complaining in November that Intermix had paused payments when the retailer was experiencing financial problems. Last week, WWD reported that Intermix was sold to private equity firm Regent L.P., and that 60 employees were let go, according to informed market sources.

WWD has now learned that Intermix has asked some brands for a 50 percent reduction on outstanding payables on current merchandise and a 50 percent discount on future orders for the first and second quarters. Intermix did not respond to a request for comment Friday.

Several brands contacted declined to discuss the offer on the record, but were clearly upset about the predicament. One brand owner said that Intermix isn’t even offering to give the merchandise back for their own direct-to-consumer channels and sold thousands of units on markdown.

That source said that Intermix is not taking care of its vendors, particularly small vendors that were expecting those funds from merchandise they shipped back in October, and the payment terms were clear. The brand owner feels this move will put a lot of brands in a bad financial position, and does not reflect a good partnership. “You don’t want to build a business in today’s culture if you’re putting people out of business. Pay the bills and cut the deals for the future,” said the vendor.

The source speculated Intermix is testing their loyalty, hoping that if they agree to the terms and business turns around by the third quarter next year, the vendor would be in good stead. However, if they refuse the offer, they might end up in court suing Intermix for what they’re owed, and then they will never be carried again.

Gary Wassner, chief executive officer of Hilldun Corp., the factoring firm, said he’s heard from several of his clients that Regent is asking for a 50 percent discount on payables currently owed, as well as future orders through the second quarter. “What I’m hearing is the response is ‘No.’ Those who have contacted me said it’s not feasible,” said Wassner.

Wassner said that Hilldun’s clients are covered, but others in the market, if they don’t have factor or credit insurance, have a decision to make. “It’s up to the brands to make their independent decisions,” said Wassner.

“It would be a shame for the company [Regent] not to move forward. My belief is we need stores like Intermix in the market. They have to come up with a viable plan in order to move forward,” Wassner said.

According to one financial source, the big problem Intermix had was massive corporate overhead, which they accumulated under Gap ownership. “There’s need for a store like Intermix. There’s no Barneys and we need a showcase store. Half of their business was online,” the source said.

Intermix carries brands such as L’Agence, A.L.C., Cinq a Sept, Altuzarra, Retrofete, Victoria Beard, Ronny Kobo, Farm Rio, LaQuan Smith, Frame, AGoldE, Jonathan Simkhai, Ulla Johnson, Sam, LoveShackFancy, Zimmermann, Jimmy Choo and more.

Jeff Rudes, chief executive officer of L’Agence, said his brand is a top-five brand at Intermix and his business is strong there. “Our finance team said we could be shipping them by the end of the year,” said Rudes. The company had stopped shipping Intermix in early November.

He said Intermix hasn’t come to his firm with the 50 percent offer. He said he believes that only those brands which are heavy with inventory and don’t have good margin results have been approached.

“It’s a reorganization. We have to work with the new organization so they could be profitable. If they have goods that aren’t turning, people have to be responsible for that,” he said.

He said Regent has to have a long-term plan and that he believes the firm is trying to turn all that inventory that’s not turning. For some brands, he said, it makes sense to take that offer because to sell the merchandise to a T.J. Maxx or another discounter and with all the paperwork and shipping costs is not worth it.

“People have a decision to make. It’s different for every vendor. This 50 percent is the worst,” he said. “This is one of those times that if Intermix has a good plan, they should get the support from everybody. Intermix has a lot of good history. Business is not that great. The top five are doing 75 percent of the business.”

He said a lot of the brands “are not carrying their weight in a bad market.”

He said he believes that if the retailer can come back and shrink the business, “Intermix is a powerhouse and will always be.”

Karen Katz stepped down as interim chief executive officer of Intermix last month, and was replaced with James Rushing as interim CEO.

Reports were circulating in the market last week that Altamont Capital Partners had sold Intermix to Regent L.P. A spokeswoman for Intermix said Dec. 3 that a formal announcement to the press wouldn’t be coming out about the sale. But informed sources have confirmed it’s a done deal.

Chairman and CEO Diego Della Valle said the family is taking the market’s message “carefully and as an incentive to pursue our plans.”

MILAN — Plans to delist the Tod’s Group have come to a halt.

The luxury group will remain a public company for the time being as the Della Valle family said late Friday that its plan to delist through a merger of Tod’s SpA and DeVa Finance, the latter entirely held by DI.VI. Finanziaria di Diego Della Valle & C., is no longer in the cards.

“The price of 40 euros per share offered to the market was the result of a careful analysis carried out with correctness and transparency. However, we noted that some of our shareholders believed the value of the Tod’s group to be significantly higher than our valuation and preferred to remain in possession of their shares,” said Diego Della Valle, sole director of DeVa Finance as well as chairman, chief executive officer and controlling shareholder of Tod’s.

As reported in August, the Della Valle family said it was planning to launch a tender offer to delist the group from the Italian Stock Exchange after 22 years. The owners launched a tender offer to acquire 25.55 percent of the company’s shares at 40 euros per share, with the goal to reach a 90 percent stake for a total of more than 338 million euros.

The move was geared at investing in each brand it controls — Tod’s, Roger Vivier, Hogan and Fay — in the medium and long term without having to report quarterly results.

However, the public offer in October did not fulfill the 90 percent threshold.

During a conference call with analysts to present figures for the first nine months of the year last month, chief financial officer Emilio Macellari noted that although the family had not made a final decision yet, “the transaction is not market-friendly and their attitude is to remain friendly and keep a fair behavior as 54 percent of the market preferred to keep their shares and see what’s next and what kind of value [the Della Valle family could bring to the table].”

In the statement released Friday, Della Valle echoed that sentiment.

“We are taking this message carefully and as an incentive to pursue our plans, which go through the development of the individual brands and their capital enhancement, which we believe have huge growth potential in the medium term,” he said.

As reported, the Italian luxury company posted a 16.4 percent increase in revenues to 724.9 million euros in the first nine months of the year, putting it on track to meet the top-line consensus of a turnover of 974 million euros to 975 million euros in 2022.

In the 12 months ended Dec. 31, group revenues amounted to 883.8 million euros, up 38.7 percent versus 2020.

The fast-growing company founded in China has also begun diversifying its supply chain to Europe, according to memo to investors

SINGAPORE—Shein, one of world’s largest online fashion retailers, is exploring moving beyond its conventional business of selling its own brand apparel into a marketplace platform that will enable other merchants to sell directly to customers, according to a memo to investors viewed by The Wall Street Journal.

The fast-growing company, now based in Singapore, is also diversifying its supply chain away from China, where Shein was founded. It has started manufacturing in Turkey since midsummer, and has leased and operated warehouses in Poland to store merchandise and ship to customers in Western Europe, according to the memo.

The company’s supply chain is largely rooted in China’s southern Guangdong province, the country’s major manufacturing hub where it has a network of more than 3,000 suppliers.

“The marketplace platform makes available a range of additional merchandise and shipping options, and we expect it to result in increased customer engagement and satisfaction,” the memo said.

Shein has grown rapidly into one of the world’s top online retailers based on a business model offering a large assortment of apparel at ultralow prices tracking quickly shifting fashion trends. Valued at more than $100 billion and backed by big-name investors such as Sequoia Capital China and General Atlantic, the company is on track to generate revenue of $24 billion this year.

Creating a marketplace would put Shein in more direct competition with e-commerce giants such as Alibaba Group Holding Ltd. ’s international shopping site AliExpress and Amazon.com Inc., at a time when retailers globally are seeing growth slow amid economic uncertainty and consumer spending is weakening in some markets.

Shein didn’t immediately respond to a request for comment.

Shein, founded in Nanjing in China’s Jiangsu province in 2012, moved into its new global headquarters at Marina Bay Financial Centre in Singapore in February 2021. Since then its head count has increased from five people to about 100, including senior executives taking global and regional roles, the memo said.

Shein currently sells and ships products to more than 150 countries and carries pricier clothes such as evening gowns as well as household goods. It has become a major rival to European fast-fashion giants including Inditex SA’s Zara and H&M Hennes & Mauritz AB, which sell apparel and accessories in stores and online. Shein differentiated itself from its competitors with an “on demand” manufacturing model that uses proprietary software to track production in real time and gauges customer preferences and demand using algorithms that incorporate sales, browsing behavior on its app and other data.

Given its heavy reliance on Chinese suppliers, Shein has also faced increasing questions in the U.S. over its use of cotton from China’s far-western region of Xinjiang, where authorities are accused of suppressing the Uyghur Muslim population.

A new U.S. rule took effect this year called the Uyghur Forced Labor Prevention Act that allows American customs officers to seize shipments of any goods that are made in Xinjiang unless companies can prove their supply chains aren’t tainted with forced labor.

In its memo, the company told investors that Shein doesn’t have any suppliers located in the Xinjiang region, and it is company policy not to work with any of the entities identified on the act’s Entity List. The company regularly checks that its suppliers meet the requirements, it said. China has denied forced labor and suppression of the Uyghurs.

British Gas owner says contentious deal may lead to test of Northern Ireland protocol

The government’s sale of nationalised energy supplier Bulb may be in breach of EU state aid rules in Northern Ireland, Centrica has said, risking one of the UK’s first significant showdowns with the bloc since Brexit.

Companies challenging the sale to Octopus Energy have focused on the government’s alleged provision of state funds to smooth the sales process, which they warned may lead to a test of the so-called Northern Ireland protocol, given Bulb’s operations in the region.

The sale of Bulb, which received the biggest state bailout since the financial crisis, has become increasingly contentious as rival energy suppliers led by British Gas owner Centrica have moved to block the sale in court.

The companies claim the deal, which would create one of the largest retail energy suppliers in the UK, could distort competition in the UK energy market and cost taxpayers and households more than if a transparent sales process had been followed.

In court documents filed last week Centrica cited “serious public interest issues” regarding the deal including “the UK’s compliance with its international obligations under the UK/EU Trade and Cooperation Agreement” and the “Ireland/Northern Ireland protocol”.

“This is one of the most politically sensitive subsidy cases to have emerged since Brexit and the Northern Ireland aspect of the claim compounds that,” said Ben Rayment, competition expert at Monckton Chambers. “It’s interesting to see the Northern Ireland/EU dimension being used tactically to exert more pressure.”

The question of whether an unlawful subsidy has been granted under post-Brexit UK legislation will be decided in the domestic courts but if EU state aid rules also applied, the bloc’s approval would be needed, said Rayment.

While the EU has not intervened in the case, legal experts and academics said the chance of the European Commission doing so was growing. 

“In a time where national measures to support energy companies are causing so many concerns in the EU, this is going to be a case closely monitored in Brussels as well,” said Andrea Biondi, director of the Centre of European Law at King’s College London.

In its post-Brexit deal with the EU, the UK agreed to introduce domestic rules that regulate subsidies that have, or could have, an effect on trade with the EU.

Under the separate Northern Ireland protocol to the Withdrawal Agreement, EU state aid rules could also continue to apply if a UK subsidy affects trade in goods or wholesale electricity between Northern Ireland and the continental bloc. 

Centrica has alleged in court documents that the EU regime applies in addition to the domestic rules as Octopus owns a company that manufactures heat pumps in Northern Ireland, and the subsidy to Octopus could affect rival suppliers that trade with the EU. 

State aid — or government financial help for a business — is normally prohibited if it threatens to distort competition between companies unless there is a public interest justification.

The government has not revealed the terms of the deal but the three companies challenging the sale believe Octopus may be receiving about £1bn from taxpayers to cover the cost of buying power for Bulb’s 1.5mn customers. The transfer of Bulb’s customers is due on December 20, but a hearing to review the process is expected in February.

The Office for Budget Responsibility has estimated that the cost to consumers of the Bulb bailout could rise to £6.5bn or roughly £200 per household. Although the expense is currently being paid for by taxpayers, the Treasury is intending to pass the costs on to households via their energy bills next year.

Centrica and Octopus declined to comment.

The $80tn “hidden debt” and what it really means

BISantine accounting

Dan Davies is a managing director at Frontline Analysts, and the author of Lying for Money, and co-author of The Brompton.

Every publication of financial statistics ought to have the same picture on the cover — Goya’s “The Sleep Of Reason Produces Monsters”. It would help to deter the tidy-minded truth seekers who are reliably driven mad by the crazy world of financial accounting.

People, for example, like Harvey Jones of the Daily Express, who reacted to the recent BIS Quarterly Review article on off-balance sheet FX forwards by concluding that “the world faces financial meltdown, with losses potentially exceeding the total number of US dollars in circulation”. That’s not true, by the way.

It’s an understandable shock reaction, though. For a normal person or company, finding out that you’ve got more debt than you thought you had is a horrible thing — quite apart from anything else, it raises the immediate question of how you’re going to pay it. If the global financial system really was running on a macro-scale version of Sam Bankman-Fried’s sloppy spreadsheets, that would be a reason to panic.

But the BIS doesn’t claim this; there’s no suggestion that anyone has been failing to record actual transactions. Their research is composed of an argument that some financial instruments should be classified as debt, and some clever work interpreting the gaps between different data sets to estimate how much difference it would make to global balance sheets if they were.

That means that the joke once attributed to Abraham Lincoln is relevant. “If you call a tail a leg, how many legs does a dog have? Four, because calling a tail a leg doesn’t mean it is one”. The state of the world is what it is; if we were to decide to increase our estimate of the amount of debt in it by $80tn, then we would need to make an exactly offsetting adjustment in the extent to which every trillion dollars of global debt worried us.

Accounting is, unfortunately, a business of compromise. There are two things you want to get from an accounting system:

1) Accurate reflection of the underlying economics.

2) Consistency across different economic entities.

Brief consideration of these two principles immediately leads to the conclusion that in any even moderately complicated system, you can’t get all that you want. So any accounting system is a trade-off — it’s a choice that you make, reflecting how much consistency you need and how much inaccuracy you’re prepared to tolerate. Which in turn is going to be driven by the purpose that you’re going to use the numbers for.

The BIS’ estimate that there is about $80tn worth of off-balance sheet “debt” is fundamentally a consequence of the fact that the BIS doesn’t choose the accounting standards, and consequently the accounting standards are designed for purposes other than theirs.

As Richard Comotto put it (back in 2017, when this debate first went round, and when the missing “debt” was only $17tn), the core argument of the BIS is that if you have domestic cash and want to buy a foreign currency asset but hedge the currency risk, you have two ways of doing that:

1) Exchange your domestic cash for forex in the spot market, buy the asset and sell an equivalent amount of forex for domestic cash in the forward market.

2) Keep your domestic cash, and use the foreign repo market to fund the purchase of the asset.

(there is another way, using a currency swap, but for the purposes of this argument, it’s the same as the first. In fact, there are dozens and dozens of ways of achieving the same financial goal and some of them don’t create the kinds of exposures we’re talking about here, but these are the ones big enough to worry the BIS).

Option 2 feels like it’s obviously debt. You’ve got the asset, you’ve got an obligation to repay your repo counterparty, and you’ve still got your original cash. You’ve increased your leverage.

Option 1 doesn’t feel so much like debt. You’ve bought your asset, and you’ve entered into a contract which affects the returns on that asset. On the day you do the transaction, the value of that contract is zero — it might turn into an obligation or benefit in the future, but it’s not obvious that you should record something on your balance sheet today.

And that is, more or less, how the relevant financial accounting standards tell you to record things. But the BIS sees it differently. Back in 2017, they printed some stylised balance sheets to explain what they mean.

What this table is meant to illustrate is that the FX forward case is not quite as clear cut as it seems. Most derivatives are settled on a net basis: on the settlement date, the “winner” of the trade receives a payment from the “loser” reflecting the P&L. That’s the basis on which they’re recorded in the balance sheet.

Forwards, on the other hand, are settled gross, with an exchange of principal amounts. On the last day of the contract you send over the relevant amount of FX that you had sold forward, and receive the corresponding amount of domestic currency. That’s the significance of the second line in the “Gross basis” table.

The BIS argument is that this obligation for gross settlement looks a bit debt-ish. If something stops you from delivering the FX, then you’re in default.

Who’s right and who’s wrong?

The introductory section here should hopefully have made clear that the answer is going to be “it depends”.

If you’re putting together a set of financial accounts that are meant to reflect the risks and rewards of ownership, then an FX forward looks very like a derivative. Those risks and rewards are mainly driven by the P&L on the forex trade, which is something that is going to happen in the future rather than an obligation which exists on the balance sheet date.

Because it’s a forward rather than a derivative, there is an obligation, but it’s not much of a risk; if the counterparty doesn’t deliver their domestic currency, then you don’t deliver your forex, and your exposure to loss is determined by how much it costs you to get your books squared up again.

The gross settlement obligation only becomes a significant factor in an odd and bizarre situation, when for some reason one of the parties has delivered their side of the bargain, but then the other party doesn’t.

That can happen from time to time, because the bankers’ right to set off payments owed against payments owing isn’t always legally perfect, and because the two sides of the forward settlement aren’t always executed simultaneously. In fact, they might be executed several hours apart, particularly when the counterparties are in different time zones.

Which is the point at issue. The kinds of situations in which the settlement risk might manifest itself are exactly the sorts of things that it’s the job of the BIS to care about. The failure of Bankhaus Herstatt in 1974, while owing a lot of money in this manner, was one of the big reasons why the BIS collects these sorts of statistics today.

And when you take into consideration that we’re talking about unusual risks, it actually seems quite legitimate for the BIS to be worrying — the accounting issue is one for debates over coffee and beer, but the fact that the estimate has more than quadrupled in five years does feel like someone ought to be keeping an eye on it.

It’s not just a matter of settlement risk at the level of individual firms. The BIS team found that there are big national imbalances, which could mean that if one national market lost access to dollar funding, this could result in very large waves of default.

This isn’t just a theoretical possibility, either. The international central bank swap lines, dating back to the global financial crisis of 2008, are there precisely to manage this sort of risk; that of basically solvent counterparties being forced into default because they aren’t able to make payments and their domestic central bank can’t supply the kind of liquidity they need.

The availability of those swap lines (particularly those by which the Fed supports the international market in US dollars) means that the accountants are broadly right to treat FX forwards in the way they do.

Accounts are meant to give a true and fair view of the risks and rewards, and a figure which is made by adding up normal borrowings, repo, and the full gross settlement exposure of derivatives — that’s just not a useful number. Calling it “debt” doesn’t make it debt any more than calling a tail a leg makes it one.

But if we don’t get hung up on the d-word, then the BIS analysis is valuable too.

What it really describes is the extent to which the global role of the US dollar is dependent on the Fed being willing to act as the lender of last resort to the international market as well as the domestic one.

And the fact that this role — and the consequent international liability — has not only grown so fast, but done so in a way that’s heavily underestimated by the statistics, seems like it’s something worth knowing.