Aeropostale, the teen-clothing chain, filed for bankruptcy protection after battling its main supplier and closing hundreds of stores to stem years of losses.
The Chapter 11 petition filed Wednesday in New York follows meltdowns by American Apparel Inc., Quiksilver Inc. and Sports Authority Inc. Mall-based retailers have struggled to adapt to online sales and the changing tastes of teenagers. New York- based Aeropostale (NYSE:ARO) has also had to contend with fast-fashion competitors that get new trends on shelves sooner.
Online competition isn’t the only source of the company’s woes, Chief Executive Officer Julian Geiger said in court papers blaming decisions of Sycamore Partners, which also owns a key clothing supplier, MGF Sourcing.
In a 2013 conversation about naming Geiger to Aeropostale’s board, Sycamore’s managing director Stefan Kaluzny told him to “do nothing” and “just observe” because “his plan was to let Aeropostale deteriorate so that he could buy the company in bankruptcy,” Geiger said in court papers.
When Geiger complained last year that MGF’s prices were too high — causing Aeropostale to pay $25 million more than it would for comparable merchandise from competing suppliers — Kaluzny said he had to make his numbers at MGF, Geiger said in the complaint.
Aeropostale, a brand established by R.H. Macy & Co. in the early 1980s, expanded and became part of Federated Department Stores Inc. before going public in 2002. Sycamore stepped in during the summer and fall of 2013 when its affiliate Lemur LLC bought 8 percent of Aeropostale’s equity in the open market, the company said in court papers. Sycamore and entities it controls have developed relationships with Aeropostale since 2014, and Sycamore also owns Aero Investors LLC, its largest secured creditor, according to court papers.
Will immediately close 154 stores
It plans to close 154 stores immediately, according to papers filed in the bankruptcy. As of the 2015 fiscal year end, it operated 811 stores, and it currently has 14,500 employees, court records state. Since 2013, Aeropostale has closed about 215 stores, Poonam Goyal, a senior retail analyst at Bloomberg Intelligence, said in a report in April.
Kaluzny and Sycamore Partners didn’t immediately return calls for comment before usual business hours Wednesday. Aeropostale has asked the court to appoint an independent examiner to probe Sycamore and Kaluzny, along with others.
In response to earlier allegations that Sycamore had violated a sourcing agreement with Aeropostale, the private equity firm denied the allegation, saying, “In fact, MGF has taken action to protect itself by reducing payment terms as permitted under the agreement.”
A smaller Aeropostale would emerge from the Chapter 11 process within the next six months, the company said.
The company said it secured a commitment for $160 million in debtor-in-possession financing from Crystal Financial LLC, which, combined with operating cash flow, will allow the retailer to meet financial commitments.
Bankruptcy can make shuttering stores easier because of rules that allow companies to cancel contracts, including leases. But the U.S. Bankruptcy Code also grants landlords rights they can exercise to pressure a retailer into reorganizing quickly or liquidating.
Three years of losses
Aeropostale’s filing follows three straight years of losses. It had also feuded with Sycamore prior to its bankruptcy, saying in March that MGF was holding up the delivery of merchandise and violating the terms of its agreement. The retailer said on April 15 that it would delay filing its annual report because it was distracted by the fight with MGF.
In March, Aeropostale tapped Stifel Financial Corp. to help assess a possible sale or restructuring. The company also is working with law firm Weil, Gotshal & Manges LLP and FTI Consulting Inc. on the filing.
Suppliers to the U.S. retailer include Hampshire Group Ltd., a New York-based maker of sweaters, and Hong Kong’s Li & Fung Ltd., which also supplies clothing and toys for major retailers such as Wal-Mart Stores Inc., according to supply chain data compiled by Bloomberg. A spokeswoman for Li & Fung said the company declined to comment.
Aeropostale listed $390 million in total debt and about $354 million of assets in its Chapter 11 petition.