Barneys Searches for the Magic Number
The valuation of Barneys New York will start to come into focus as the company's tour through bankruptcy continues.
Barneys New York is working its way through bankruptcy, and chief executive officer Daniella Vitale is racing to find a buyer, but the key question in both cases is: How much is Barneys worth?
So far, the answer has been elusive as the company was unable to find a buyer before filing for Chapter 11 bankruptcy protection last month.
Now the court will help find that magic number by an Oct. 24 deadline. And, if it can’t find a buyer, the company faces liquidation, where its assets would be sold to pay back lenders.
A baseline for a valuation is starting to come into focus, though. Under an incentive plan proposed this month by Barneys, its top executives Vitale and Sandro Risi, chief financial officer, would split a roughly $1 million bonus if they cut a deal that gives the retailer an enterprise value higher than its debtor-in-position facility and administrative and priority claims.
While Barneys’ chief restructuring officer Mohsin Meghji has referred in court documents to a “floor value” of $200 million, the company’s DIP loan is $217 million, so the figure appears to be approximate, but somewhere in the ballpark.
The actual floor value and targets aren’t set yet. U.S. bankruptcy judge Cecelia Morris will consider the incentive proposal during a hearing scheduled for Wednesday in Poughkeepsie, N.Y. So far, the U.S. Trustee has objected to the proposal, arguing that the retailer hasn’t shown enough evidence that the incentives to the executives would really help the luxury retailer garner the best price.
But the ultimate floor value set on the company should help illustrate just how tough the last decade or so has been for Barneys, which Jones Apparel Group sold to Istithmar World for $942.3 million in 2007 only to see Richard Perry’s Perry Capital take control just a few years later in a debt-for-equity swap.
Perry — whose wife is designer Lisa Perry — was seen as having an affinity for the business, and he supported it for a long time. But ultimately the economics after a big hike to the company’s rent, particularly at the Barneys Madison Avenue flagship, were the final straw. That led to a whirlwind — a rush to sell the business, to bring in consultants to help and finally, to file for bankruptcy. The resulting flurry of court filings over the past month sketch out what that scramble to save Barneys entailed, and when the pressure ultimately became too much to bear.
Barneys’ slide into bankruptcy was characterized by declining sales and rent payments that rose by $12 million, and also added $6 million in credit support obligations.
The company, which logged revenues of $800 million last year — about 30 percent of that online — saw sales slow in 2019 and it struggled to reverse the trend. For the February-to-June period, sales fell by $34 million compared with a year earlier, according to court filings.
Recognizing the rapid decline, Barneys took some drastic steps to try to address it.
Meghji wrote in a declaration filed in the case that the retailer marked down merchandise by about $70 million, but this markdown rate of 76 percent generated just $6 million in incremental sales for an increase of just 2 percent from a year earlier.
And it didn’t help that many of Barneys’ doors were losing money.
The 15 stores that the retailer is closing as part of the bankruptcy have “historically” run losses, and together accounted for roughly $14.2 million in losses for fiscal year 2018, according to court documents. That accounts for nearly all of the retailer’s losses from “stores with negative contribution margin,” Meghji wrote.
Those broader trends — tough sales, money-losing stores — collided with sky-high rents that ultimately left Barneys with debts that were too much to manage.
Nor was it a new problem for the company.
As far back as in 2012, the now-shuttered Perry Capital entered into a deal with the retailer that helped slash its $590 million in debt to about $50 million and ultimately transferred control of the company to Perry.
Still, the retailer had to keep borrowing to operate.
In April of this year, Barneys secured a $50 million term loan facility with Wells Fargo and TPG Specialty Lending Inc. But that wasn’t enough to sustain it through the summer, when vendors began holding back on shipping merchandise and insisting on cash on delivery, according to court documents.
The crunch had Barneys bringing in outside help. The company had already engaged Kirkland in January, and has paid it more than $2.8 million in advance payment retainer costs, according to a court filing.
Meanwhile, Barneys’ secured debt grew to roughly $192 million, and it had trouble locking down a potential buyer over the summer, which stacked some tough odds against it when it filed for bankruptcy protection on Aug. 6.
At the time, the retailer found itself caught between its drive to pursue a sale to stay in business and the expectations of secured pre-petition lenders, whose goals generally are to get repaid in full, even if that may mean pushing for liquidation. TPG had issued a proposal that involved a $10 million advance through a term loan, but which would have required Barneys to conduct a “going-out-of-business” sale on most of its physical stores soon after filing for bankruptcy, according to Meghji’s declaration.
Lenders tend to be wary of a going-concern sale process because it’s not a given that it will provide enough liquidity to cover the administrative expenses of the company, especially during a bankruptcy, said experts. And without a buyer lined up, or a so-called stalking-horse agreement in the bankruptcy context, it can be harder for lenders to support a sale process since they can’t gauge what the sale price or the terms of the sale might be.
“There can be a tension between what’s in the best interests of the estate, between a liquidation versus a going-concern sale,” said Regina Kelbon, who heads Blank Rome LLP’s national bankruptcy practice.
“And often you don’t know what is in the best interests of the estate when you don’t have a purchaser lined up before the bankruptcy,” she said. “If you have a purchaser lined up pre-petition, the lenders can evaluate the bid.”
It was against those challenges that Barneys found DIP lenders willing to take out its pre-petition lenders and provide a runway — albeit a short one — to pursue a sale through the bankruptcy proceedings.
Even against the backdrop of whether a buyer will be found, Barneys is looking beyond the turmoil and planning for the holidays, spring and beyond. For vendors, of course, the choice to ship goods remains tricky, even with the increased $40 million consignment facility that Barneys secured this month as part of its improved DIP financing package. For one, factoring firm Hilldun is not approving shipping to Barneys at this time, according to Hilldun ceo Gary Wassner.
This window of uncertainty requires a delicate balancing act between Barneys and vendors. Luxury retailers rely on a continuing supply of goods, but maintaining relationships with vendors during a financial crisis is always a challenge, and vendors planning out their future business with Barneys face tough choices.
“It’s a difficult decision [for vendors] but it is a decision that everyone has to make,” said Wassner. “Everybody is hoping that [Barneys] is an ongoing concern, and that there’s an opportunity to rebuild the business with Barneys in a healthier way.”
Wassner has a role on the unsecured creditors’ committee in the Barneys bankruptcy, but he spoke as the ceo of Hilldun, and not on behalf of the committee.
The retailer is working directly with a number of brands, as it usually has, and those brands continue to ship to Barneys and process orders for the holiday season as well as spring and resort 2020, according to a representative for the retailer. Brands are also still hosting events at the store. The specifics on just how many brands are still working with the retailer could not be learned.
The $40 million consignment facility, which Barneys’ DIP lenders agreed to increase from $30 million after pressure from the unsecured creditors committee, is a pool that vendors can rely on beyond the retailer’s working capital, attorneys for Barneys have said in court. As of early September, Barneys had already used at least $14.1 million under the consignment facility, according to recent court filings.
In this context, a consignment facility refers to a fund created by the DIP lenders to pay vendors for goods they’re selling, and not the traditional sense of a consignment arrangement between vendors and retailers, where vendors retain ownership of the goods they ship.
This consignment facility may provide some security for vendors, but Barneys also has strains on its working capital, including ongoing lease payments on its open flagships. Under the bankruptcy code, a company in Chapter 11 has to keep up with such administrative expenses, or, again, risk liquidation.
And the clock continues to tick. Under deadlines negotiated as part of Barneys’ financing package with DIP lenders, including Brigade Capital Management LP, the retailer has until Oct. 24 to find a buyer. Though the company bought itself some extra time with the Brigade financing — its previous DIP proposal involving other lenders had given it only until late September — it is still a short window for potential buyers to evaluate an investment.
The big question surrounding Barneys for months has been just who would buy the company.
Brand expert Authentic Brands Group has been said to be courting the company, eyeing new ways to use its intellectual property. And sources said Ares Management, a principal owner of the Neiman Marcus Group, took a preliminary interest in the retailer but is now on the sidelines, although it could reevaluate as the company’s October deadline approaches.
Even with a sale, the scope of Barneys’ future operations would depend on any new investors’ plans and resources for the business. New buyers could, for instance, choose to close more of the seven remaining Barneys stores, preserving only what they perceive as its most essential flagships.
“They’re in a situation where Barneys is sort of in limbo,” said Ray Wimer, assistant professor of retail practice at Syracuse University.
Barneys’ stakeholders are keen to see the retailer return to at least some of its former glory, taking the view that there is value for the right buyer who wants to maintain Barneys with a strong presence as a brick-and-mortar and digital business.
The unsecured creditors committee, in a recent court filing, said its goal “quite simply is to have Barneys survive as a going-concern retailer that is well-capitalized and with the maximum possible physical footprint.”
The existential reckoning of the luxe department store, a symbolic institution that for the better part of a century has served Manhattan’s elite, has been playing out in Poughkeepsie, N.Y. Morris, who is overseeing the case, sits in a courthouse a little over half a mile along Main Street from the Hudson River, a grayscale stretch of nursing homes, empty-looking storefronts and desolate pizza joints.
On Wednesday, lawyers and consultants from all the interested parties will make their way back to Dutchess County and Morris’ courtroom. The judge will consider the retailer’s proposed sale maximization incentive plan that would reward Vitale and Risi if they successfully steer the retailer toward a sale on favorable terms.
Barneys’ board has approved the proposed incentive plan, but Vitale, a director, wasn’t involved in that decision, according to a court filing. Vitale and Risi have foregone other incentives and the only compensation they are receiving is their base salary.
“Running the marketing and sale process, including interfacing with potential bidders, will require this senior leadership team to go well beyond their normal responsibilities,” Barneys wrote in the filing.
Barneys is proposing the incentive plan in part to “ensure these key individuals are properly focused to meet these significant challenges, particularly in light of the uncertainties for management inherent in these Chapter 11 cases and the implications of consummating a change of control,” according to the filing.
On Friday, the U.S. Trustee objected, arguing that the retailer hasn’t shown enough evidence that the incentives to the executives would really help the luxury retailer garner its best sale price. The trustee generally plays a sort of watchdog role in these cases, often arguing about preserving the integrity of the bankruptcy process.
“The performance targets set forth in the incentive plan are in large part duplicative of the work performed by the investment banker engaged by the debtors in this case and already part of the insiders’ fiduciary duties to the estate,” the trustee wrote in a filing Friday.
But just how well the sale process is conducted could be the difference between liquidation and a new lease on life for Barneys.