In an affidavit filed in U.S. Bankruptcy Court in Delaware, Mark Walsh, CEO of Eastern Outfitters, blamed the company’s bankruptcy on “very restrictive credit terms” imposed by vendors since it emerged from a first bankruptcy last July, as well as the ongoing challenges at retail.
The parent of Eastern Mountain Sports (EMS) and Bob’s Stores filed a chapter 11 petition on Sunday.
On the bright side, Walsh noted in the affidavit that its last-minute agreement to have Sports Direct acquire substantially all the business prevented an all-out liquidation that would have resulted in the loss of all jobs at the company, limited recovery for some senior creditors and limited or no recovery for unsecured creditors. Negotiations between Versa, the parent of Eastern Outfitters, and Sports Direct are ongoing.
As proposed, Sports Direct, the United Kingdom’s largest sporting goods chain, will continue to operate EMS and Bob’s Stores as a going-concern. Some of the 86 EMS and Bob’s Stores locations will close, but the amount wasn’t given.
Walsh did note, however, that the Sports Direct deal will preserve 1,900 jobs, which compares to 2,600 employees listed at the time of the bankruptcy petition – representing a decline of 27 percent.
Eastern Outfitters was formed in July 2016 after Versa reacquired EMS and Bob’s Stores in bankruptcy proceedings. In the first bankruptcy, eight EMS locations and one Bob’s location were closed, while the Sport Chalet chain was liquidated.
In the affidavit, Walsh said since emerging from bankruptcy, Eastern Outfitters has faced “very restrictive credit terms” from the vendor community, depressing inventory levels. In some categories, unit inventories are down as much as 30 percent versus levels just prior to exiting the first bankruptcy. Due to the inventory shortages, sales have been below plan.
Walsh also noted that “the current challenging retail environment” also played a role in the company’s poor performance. Walsh added, “The continuing shift in consumer behavior away from traditional brick-and-mortar retailers toward online-only stores, together with increased competition from big-box and specialty sporting goods retailers, have contributed to an industry-wide weakness in the debtors’ business segments.”
Bright spots include the proprietary EMS private-label brand, which saw same-store sales increase 35 percent year over year, although the filing didn’t provide a time frame. Also performing well has been its e-commerce operations, with bobstores.com climbing 113 percent and ems.com ahead 24 percent. In 2016, Eastern Outfitters generated 10 percent of its sales through bobstores.com and ems.com
Facing the operational challenges along with reduced levels of vendor support and the company’s “constricted” balance sheet, Eastern Outfitters began in September 2016 a “robust process” to explore and solicit interest in a number of potential alternatives, including the sale of all or a material business unit of the company, equity investments and a licensing transaction. The company retained AP Services as turnaround advisors, Spencer Ware, of AlixPartners, as chief restructuring officer and Lincoln Partner Advisors as its investment banker.
During this process, Lincoln approached 47 strategic and financial investors with experience or an existing business presence in the value and outdoor sports retail markets, including some who had participated in such discussions in the first bankruptcy.
Ultimately, two prospective purchasers emerged: Sports Direct and a unidentified bidder described as “an East Coast-based buyer and licenser of brands.”
After negotiations, the East Coast-based bidder extended an offer for the EMS intellectual property in exchange for a licensed fee and the opportunity to expand the brand into other channels and new geographies. Expected to close in November, the closing was pushed to late December and then into 2017 as Eastern Outfitters awaited the outcome of holiday results. In January 2017, the East Coast-based bidder pulled out of the deal because certain additional conditions could not be met.
With the company unable to secure a committed transaction that would allow it to continue operations, Malfitano Advisors was hired in January 2017 as asset disposition advisors to solicit liquidity proposals from various national liquidation firms. Prior discussions with Sports Direct were also renewed.
Ultimately, Malfitano secured six proposals from three different bidding groups. The proposals either provided for sufficient cash or projected to generate sufficient cash to repay the pre-petition secured loan and the potential for a limited recovery for the pre-petition subordinate term loan. However, such proposals would have resulted in the termination of all Eastern Outfitters employees and limited or no recovery for vendors and other creditors. Absent alternatives, Eastern Outfitters began preparations for a chapter 11 filing with the best liquidation proposal they received.
On the eve of commencing the liquidation process, Eastern Outfitters received an offer from Sports Direct to purchase substantially all of its assets.
Walsh wrote the Sports Direct transaction “contemplates going concern operations of the business and continued employment of 1,900 of the debtor’s employees.”
In order to facilitate the sale, Vestis, an affiliate of Versa, and Sports Direct entered into a letter of intent on January 27. The letter of intent contemplates that Sports Direct will purchase all the rights and obligations of Vestis under the pre-petition subordinated credit agreement and related documents for cash and other contingent consideration.
Sports Direct also provided $10 million in emergency bridge financing to help Eastern Outfitters avoid an immediate liquidation and allow the parties to continue to negotiate the purchase transaction. Finally, Sports Direct agreed to act as the “stalking horse” bidder for the assets in an anticipated bankruptcy auction and to provide debtor in possession (DIP) financing to support the chapter 11 process.
Since signing the letter of intent, Eastern Outfitters has “engaged in round the clock, good faith negotiations” with Sports Direct’s U.S. representative and their consultant Theseus Strategy Group LLC “to fully document the terms of the proposed purchase transaction and a DIP facility. Those negotiations are ongoing.”
Once the sales transaction is finalized, Eastern Outfitters will seek approval for Sports Direct to become the stalking horse bidder, together with approval of sales and bid procedures for the related auction to see if a higher offer can be obtained.
“In my view, this process will afford the debtors a viable path for their business to emerge from bankruptcy proceedings intact and as going concerns,” wrote Walsh. “Furthermore, the stalking horse APA (asset purchase agreement) will be tested by an over bid process, which will afford the marketplace an opportunity to determine whether a higher or better transaction is available.”
He added, “The debtors are confident a sale to [Sports Direct] on the terms set forth in the letter of intent and the substantially complete asset purchase agreement will allow these core brands to emerge as part of a stable and strong enterprise, save an estimated 1,900 jobs and position the debtor to take advantage of the many opportunities in the market in which they will continue to operate.”
EMS, with 51 locations and founded in 1967, is the nation’s second largest specialty outdoor retailer after REI while Bob’s, with 35 locations and founded in 1954, offers value-oriented footwear, apparel and work wear with a big fan apparel business. Both focus on the Eastern and Mid-Atlantic regions. Combined, the stores generate annual sales between $350 million to $400 million.
Walsh noted in the affidavit that Bob’s Stores was acquired by Versa from TJX Cos. in 2008 and subsequently underwent a significant turnaround that helped the chain see “financial success not realized since the early 1990’s.” Walsh added that Bob’s Stores “remains the debtor’s most stable brand with consistent historical performance that has provided the infrastructure and management capability for the subsequent growth of the debtors.”
Versa acquired EMS in November 2012 when the retailer lacked liquidity, was unprofitable and suffered from poor sales performance due in part to an unseasonably warm 2011/12 winter. At the same the time, EMS “remained a widely recognized and highly valued brand name in the outdoor and active lifestyle retail categories.”
Walsh noted that both brands “enjoy a remarkable reputation and deep customer loyalty, and hold strong market positions and brand level profitability.”
The bankruptcy petition listed assets and liabilities in the range of $100 million to $500 million. According to Walsh’s affidavit, at the petition date, Eastern Outfitters had $41 million in pre-petition senior loans outstanding under the pre-petition senior credit agreement; $42 million outstanding under its pre-petition subordinate term loan agreement, and $12 million in unsecured claims, including amounts owned to vendors and landlords.
Photo courtesy Eastern Mountain Sports
