By Thomas J. Ryan

<span style="color: #333333;">Modell’s Sporting Goods, unable to find a buyer, announced plans to liquidate its remaining 141 stores in bankruptcy proceedings. The retailer claims to be the oldest sporting goods chain in the U.S.

The exit of the 130-year-old family-owned chain adds to the massive disruption the sporting goods space has seen in recent years with the exits of Sports Authority, MC Sports, Sports Chalet, and City Sports. The retailer’s locations are spread out across the Northeast and Mid-Atlantic regions with a heavy concentration in the New York market.

The bankruptcy petition was filed in New Jersey late Wednesday. Court papers show Modell’s has liabilities of $288 million, assets of $220 million, and more than 11,000 creditors and parties-interest, including current and former employees and contract counterparties. For the fiscal year ending February 2020, Modell’s had gross sales totaling approximately $490 million.

…

Fourth-generation Owner Mitchell Modell had tried to line up support with its vendors and landlords to keep the chain out of court, but ultimately fell short. The company decided that if it was unable to find a buyer by 12:30 p.m. Tuesday, it would file for bankruptcy and begin liquidating, Modell’s said in court papers.

Modell’s has been engaged in discussions with its financial creditors and exploring a recapitalization of the business through a potential sale of some or all of its assets or an equity investment. Those discussions will continue but the CEO’s comments in a statement offered little hope of finding a white knight.

“Over the past year, we evaluated several options to restructure our business to allow us to maintain our current operations. While we achieved some success, in partnership with our landlords and vendors, it was not enough to avoid a bankruptcy filing amid an extremely challenging environment for retailers.” —Mitch Modell

Modell’s sales in 2019 were down $200 million in part due to a bankruptcy scare the prior year that led to inventory shortages for most of last year. Warm weather in the northeast over the holiday season, the loss of six days of selling between Thanksgiving and Christmas and ongoing competition from Amazon were other factors cited in a holiday shortfall. Poor seasons by a number of the bigger New York sports franchises, including the Knicks, Jets and Giants, also put pressure on results.

…

In mid-January, Modell’s said it was seeking concessions on payments from vendors and landlords to provide time to enact a restructuring and avert a bankruptcy filing.

RBC, an investment bank, was hired to help find an outside investor to acquire a minority stake in the company to shore up finances. Berkeley Research Group’s restructuring team and the legal firm Cole Schotz were also hired to support restructuring, possibly as part of bankruptcy proceedings. Modell’s recently announced it was closing 19 stores in the first phase of the restructuring.

By late February, however, news arrived that Modell’s vendors had rejected the chain’s proposal for a slower payment schedule over the next three years.

Modell’s was reportedly hoping to file for bankruptcy with a stalking-horse bidder in place in order to support a sale of the company in a bankruptcy auction. JackRabbit, which acquired Olympia Sports last year, was seen as the ideal suitor but the retailer was forced to pursue a liquidation.

“We are extremely appreciative of the support that our lenders (JP Morgan Chase and Wells Fargo), vendors and landlords provided during this difficult period, engaging in extensive renegotiation efforts and allowing us to pursue every possible avenue to preserve the jobs of our loyal associates. I want to thank each and every one of our associates for their support over the years and our customers for their historic support of Modell’s.” —Mitch Modell 

On February 24, Model took an unusual step of reaching out publicly through a press release and an appearance on Fox Business to find an outside investor in order to save “a New York Institution” and 3,300 jobs.

“For the first time ever, I never thought I would sell equity, but I’m now willing to sell a minority stake in our company,” Modell said in the interview with Fox Business’ Maria Bartiromo.  “But the fascinating part of the story is how I plan to do this. We are looking at this platform as crowdsourcing at the highest level. I’m hoping someone watching the show will say ‘I love the brand and want to invest’.”

…

In a video included in the release that was shared with vendors and landlords, Modell chronicled the story of his company’s history and his fight, including his wish for his two sons to succeed him.

Modell said in the statement, “This is certainly not the outcome I wanted, and it is one of the most difficult days of my life. But I believe liquidation provides the greatest recovery for our creditors.”

Modell has partnered with Tiger Capital Group to liquidate the remaining stores beginning Friday morning, March 13. The return from the liquidation of the first 19 stores managed by Tiger “has been beyond spectacular, and we are confident this performance will continue across the remaining stores maximizing return for our creditors,” said Modell.

Robert Duffy, managing director, BRG, has been named chief restructuring officer of the company.

…

In an affidavit filed with the U.S. Bankruptcy Court District Of New Jersey, Duffy, who has been chief restructuring officer since January 29, elaborated on the reasons Modell’s landed in bankruptcy court and steps to avoid the trip.

Duffy wrote, “The debtors’ business operations, like those of many of their peers in the sporting goods retail space, have been negatively impacted by adverse market trends, including the shifting of sales from traditional brick-and-mortar retailers to online resellers, increased competition from big-box and specialty sporting goods retailers, decline in sports team participation among youth and teens and changing consumer preferences. The industry-wide weakness in the debtors’ business segments is reflected by the bankruptcy filings of several of the debtors’ competitors over the last several years including Sports Authority, Sport Chalet, City Sports, MC Sports, and Eastern Mountain Sports.”

Among the newer and recent challenges was the shift in customer preferences away from physical stores and toward online-only stores. Duffy wrote, “Given the debtors’ substantial brick-and-mortar presence, their business has been heavily dependent on in-store traffic, which has declined in recent years. The debtors’ financial condition is weighed down by a store footprint that is disproportionate to market demands.”

The weather in the Northeastern states where Modell’s operates was warmer than expected in both December 2019 and January 2020, leading to a decrease in cold-weather apparel and footwear sales.

The success of regional sports teams “also significantly influences” Modell’s sales, Duffy wrote. For example, the Philadelphia Eagles Super Bowl win led to strong sales in the fourth quarter of 2017. For fiscal years 2018 and 2019, however, sales declined given the lack of success of regional sports teams.

Finally, Modell’s recent struggles were due to inventory flow disruption during the first half of 2019 due to rumors surrounding the financial stability of the business.

The Wall Street Journal reported on March 11, 2019 that Modell’s had missed some payments following a disappointing holiday season and retained Berkeley Research Group (BRG), known for its work for bankrupt companies, as an advisor. That led vendors to subsequently stop shipping the chain or demand cash on advance. Vendors only resumed shipments after Modell and his merchandising chief, Charles Castaneda, contacted the contacted the top executives at 300 suppliers and providing financials under nondisclosure agreements to ensure Modell’s financial stability. Modell also last year injected $6.7 million of fresh capital into his company to shore up the balance sheet as a sign of confidence.

Duffy wrote, however, “As a result, in early 2019, the debtors suffered a disruption in the flow of inventory which deprived their stores of needed merchandise for several months. The delayed access to goods negatively affected the debtors’ financial performance.”

Modell told SGB Executive in an interview in February that the chain wasn’t able to achieve adequate inventory levels until last November.

Due in part to the inventory constraints, Duffy noted that during the course of fiscal year 2019 Modell’s “continued to miss sales targets causing another strain on the debtors’ liquidity.” The holiday shortfall in cold-weather merchandise and fan licensed sales further fed operating losses that “further impaired the debtors’ liquidity.”

In January 2020, Modell’s retained BRG to again evaluate strategic alternatives. In the weeks leading up to bankruptcy filing, pre-petition lenders increased discretionary reserves, further constraining already tightening liquidity. By the date of the bankruptcy filing, the lenders had imposed incremental reserves of $18 million. Duffy wrote, “As a result, the debtors’ availability under the credit agreement was only $9.589 million and did not provide enough liquidity to continue to operate in the ordinary course of business.”

…

To address the liquidity challenges, Duffy said Modell “negotiated tirelessly” with vendors and landlords to support an out-of-court restructuring. While he was able to obtain rent concessions from some landlords, “given the debtors’ limited runway, the debtors were unable to execute on any such out-of-court restructuring.”

At the same time, out-of-court options for increasing liquidity included hiring RBC Capital Markets to explore a sale as a going concern, Tiger Capital Group as consultant to conduct store closing sales, and A&G Realty Partners as real estate advisor.

Duffy’s affidavit noted that in January 2019, RBC was also retained to similarly explore a sale. In early 2019, RBC contacted 25 strategic and financial buyers, had executed confidentiality agreements with 14 buyers and conducted eight management presentations.

On June 4, 2019, however, Modell loaned the retailer $6.8 million. The retailers also obtained rent deferrals, re-negotiated many of the store leases and secured improved payment terms from many vendors to suspend the sales efforts.

In January 2020, RBC was retained again and launched an accelerated marketing process in late January. The investment firm subsequently engaged in “significant negotiations” with a potential acquisition partner in weeks before the bankruptcy filing. However, on March 10, 2020, Modell’s and the unnamed potential acquirer “reached an impasse in those negotiations and, given the lack of other interested parties and the debtors’ tightening liquidity, it became clear that the pursuit of a going concern sale was no longer viable.”

Duffy wrote that after determining that a going concern sale to the potential bidder was no longer a feasible path, Modell’s determined that commencing store closing sales at all locations was the best course of action. Duffy wrote, “By moving expediently with the closing sales, the Debtors hope to maximize overall recovery for the estates while minimizing their liabilities. In addition to their store closing sales, the Debtors intend to market and sell their locations as well as their intellectual property.”

…

BRG is continuing to act as the company’s restructuring advisor, Cole Schotz is the company’s legal counsel, and A&G Realty Partners is marketing the store leases.

The company’s lenders and long-standing partners will provide the company with the financial flexibility to operate the business in the near term, including the timely payment of employee wages and benefits, continued provision of customer orders and shipments and other obligations as they come due going forward.

Modell’s first store opened by the CEO’s great grandfather, Morris A. Model, on Cortlandt Street in Lower Manhattan in 1889. The first store initially sold hats and gloves to people getting off ships from Europe in Lower Manhattan. In recent decades, the retailer has been known for its bargains, its ample supply of fan apparel and its catchy tagline, “Gotta Go to Mo’s.” The retailer is also a primary supplier and supporter of local youth leagues.

Photo courtesy Modell’s Sporting Goods