Shiekh Shoes To Shrink Significantly As Part of Bankruptcy Exit Plan

As part of the company’s plan to exit bankruptcy proceedings, Shiekh Shoes expects to be operating only 44 stores at the close of 2019, down from 125 when the company first filed for bankruptcy in November. The plan features a minimal payback for trade creditors, expect for Nike.

Under the plan, Shiekh Shoes is expected to emerge from bankruptcy with 83 stores, but expects to shrink to 44 by the beginning of 2020 due to continuing liquidity constraints, and in part, to challenges securing trade credit. The plan assumes that two stores will be closed in June 2018, 30 stores in December 2018, one store in June 2019 and six in December 2019.

The retailer had 127 stores at the time the company filed for bankruptcy protection in Los Angeles on November 29, 2017, Seventeen stores have closed in December 2017, 15 in February 2018, five in March 2018, three in April 2018 and seven in May.

Under the chain’s four-year projections, sales at continuing stores are expected to decrease 8.1 percent in 2018, increase 6.6 percent in 2019 and increase 3.7 percent annually in each of 2020 and 2021.

Sales are expected to decline from $161.1 million in 2017 to $128.5 million in 2018, $101.3 million in 2019 and $98.7 million in 2020. Sales are then expected to improve to $103.0 million in 2021.

With investments in in the company’s e-commerce platform and IT capabilities in 2017, as well an annual web marketing spend of roughly $2.3 million over the projection period, online sales are expected to expand at a faster pace than overall sales. Annual sales growth in the e-commerce division are projected to increase at a rate of 7.9 percent in 2018, 5.1 percent in 2019, 6.4 percent in 2020 and 6.5 percent in 2021. Due to the store closures and a higher online sales rate, e-commerce is expected to expand from 12.1 percent of the company’s sales in 2017 to 16.3 percent in 2018, 21.8 percent in 2019, 23.8 percent in 2020 and 24.3 percent in 2021.

The company operates ShiekhShoes.com, Shiekh.com, Karmaloop.com, TiltedSole.com and FBRKclothing.com.

From a profit standpoint, EBITDA is expected to improve from $1.1 million, or 8 percent of sales; to $2.4 million (2.4 percent of sales) in 2019, $3.5 million (3.5 percent of sales) in 2020 and $5.0 million (4.9 percent of total sales) in 2021.

Gross margins of 38.9 percent in 2018 are expected to remain comparable to 2017 gross margin of 38.4 percent. Gross margins are expected to grow slightly over the next three years–40.6 percent in 2019 and 40.8 percent in each of 2020 and 2021–due to an expected “healthier” continuing store base. At those levels, margins will return to historical actual gross margin levels, including 41.5 percent in 2015 and 41.0 percent in 2016.

The bottom line improvement is expected to largely benefit from a reduction in SG&A expenses from $73.0 million, or $45.3 percent of sales, in 2017, to $48.9 million, or 38.0 percent of sales, in 2018 and to $38.7 million, or 38.2 percent of sales, in 2019. SG&A expenses are expected to then dip to $36.8 million in 2020 and reach $$37.0 million in 2021.

The SG&A reduction largely stems from rent and payroll savings As a result of lease restructurings and store closings, total annual rent expense is expected to decrease 39.9 percent to $14.7 million in 2018 from $24.5 million in 2017. Of this total rent expense reduction of $9.8 million in 2018, approximately $4.7 million pertains to the 62 store closures expected in 2018. Rent expense is expected to decrease by $3.8 million, or 26.1 percent, in 2019, to $10.9 million in 2019, and then stay relatively constant at approximately $10 million per year, or 10 percent of sales, over 2020 and 2021.

As a result of the store closures and corporate payroll reductions, total payroll expense is projected to decline 29.2 percent in 2018, from $30.1 million in 2017 to $21.3 million in 2018. Payroll expense is projected to decline another $5.1 million, or 23.9 percent, in 2019 as a result of the additional store closures and is then projected to stay relatively constant at approximately $15 million per year, or 15 percent of total sales, over 2020 and 2021.

The SG&A reductions also reflect other operating expense cuts in line with lower sales outside rent expense and payroll expense.

Inventory is expected to see improvement over the next four years, due in part to the closure of lower performing stores, which are expected to allow Shiekh Shoes to allocate larger quantities of key shoe styles to the company’s higher-volume stores. Turnover is also expected to benefit from increasing sales concentration in e-commerce sales, stores liquidation activities in 2017 and 2018 that has trimmed excess inventory levels and management’s renewed focus on business operations after the emergence from bankruptcy.

The plan also noted that Shiekh Shoes has been operating on cash-in-advance merchandise purchases during the bankruptcy case, but preliminary discussions with some of the company’s key suppliers indicate that the company will receive a “moderate amount of trade credit” during the company’s peak inventory purchasing season over October and November in each of 2018 and 2019. The total amount of anticipated new trade credit is assumed to be $5.0 million, representing approximately 18 days of outstanding payables for these periods.

Shiekh Shoes said the company hopes that improved credit terms after the company’s bankruptcy emergence will help enable the retailer to keep certain stores open that are currently scheduled for closure due to liquidity constraints.

Under the plan, senior management remains the same. Shiekh Ellahi, who founded the business in 1991, will continue as CEO and sole managing member Abdul Haleem will continue as co-VP of operations and Amir Shiekh will continue as the other co-VP of operations.

The exit plan is being supported by a $5.0 million term loan from Shiekh Ellahi’s brother, Anjum Shiekh and an additional $11 million term loan sourced from Ellahi family assets, primarily residential property.

The plan poses to pay unsecured creditors 5.3 cents on the dollar for their claims, a total of $1.2 million that would be payable on a pro-rata basis in $100,000 over 12 quarters. Unsecured claims totaled $22.75 million in the case.

The plan includes a stipulation that, if any of the quarterly payments to unsecured claims holders is not paid due to liquidity constraints, Ellahi’s salary will be deferred until such payments are made in full. Ellahi will earn a $300,000 annual base salary, paid out in monthly amounts of $25,000.

Because the vendor makes up 60 percent of Shiekh Shoes’ mix and the brand’s importance to the retailer’s business model, Nike held a “Super-Priority Claim” in the case, and the company’s debts are being paid in full.

Under the “Critical Vendor Agreement” between Nike and Shiekh Shoes, a $1.0 million pay-down on pre-petition AP balances has been required to allow for new merchandise orders of up to $3.0 million. The “Critical Vendor” arrangement will continue until Nike’s accounts payable balance, $16.3 million at the date of the bankruptcy filing last November, is paid down to zero. That’s currently projected to occur by October 31, 2018.

Shiekh Shoes has blamed the company’s bankruptcy filing on a failed expansion into the Midwest, the expense of approximately $30 million towards the remodeling of a number of its retail stores, heightened competition from online retailers and a generally tough retail climate that led to losses in recent years.

A hearing on confirmation of the disclosure plan is set for June 14.

Photo courtesy Shiekh Shoes