Sheikh Shoes ultimately blamed its trip to bankruptcy court on its inability to secure shipments from Nike, by far its largest supplier that holds an unsecured creditor’s claim of $16 million in the case. But it’s also counting on Nike to revive its fortunes.

As part of the filing in California Central Bankruptcy Court, the urban retailer, based in based in Ontario, CA, is seeking to hire Gordon Bros. to liquidate 31 of its 124 stores, while it moves to restructure its operations, leases and debt. But it’s also seeking special preference for Nike to regain shipments from the sneaker giant.

Sheikh Shoes wrote in court papers, “The debtor believes that a successful overall reorganization would maximize the value of the estate, provide for payment to unsecured creditors, and allow the debtor to emerge from chapter 11 with a reorganized and viable ongoing business. However, a successful restructuring that would maintain the debtor’s current business model and without a significant alteration in the debtor’s operations will require the cooperation of Nike.”

Sheikh Shoes said that in anticipation of its filing on November 29, the company engaged in extensive negotiations with Nike to reach an agreement under which Nike would agree to continue supplying Sheikh Shoes with product immediately.

The agreement, subject to court approval, sets a process to start paying down Nike’s pre-petition debt as a “critical vendor” with Nike resuming shipping product to the debtor on a cash-in-advance basis

The terms for Nike to re-commence shipments include:

  • Prior to Nike’s shipment of any product, Sheikh Shoes will wire $1 million to Nike, which Nike may apply to its earliest outstanding invoices, described as a “Pay Down Payment;”
  • In addition to the Pay Down Payment, Sheikh Shoes will pay Nike an amount equal to the full value of the product to be shipped, including taxes, fees, freight, shipping, and costs in what’s described as a “New Product Payment.” Upon receipt of both the Pay Down Payment and New Product Payment, Nike will ship the products.
  • For each $1 million that Nike receives in Pay Down Payments, Nike will ship a maximum of $3 million in product, including taxes, fees, freight, shipping, and costs, to Sheikh Shoes.

Under the agreement, Nike will also be entitled to super-priority administrative claim status in the case.  Super-priority claims are paid before other administrative expense claims. The agreement also calls for Nike’s claims to have priority over all other super-priority claims.

Finally, Shiekh Ellahi, the owner and founder of Sheikh Shoes, has executed a personal guaranty as part of the agreement with Nike to cover the “entire outstanding balance the debtor owes to Nike.” The personal guaranty is a condition precedent to Nike’s execution and performance under the terms of the “Nike Agreement.”

In court papers arguing for approval of the Nike Agreement, Sheikh Shoes noted that 60 percent of its revenues come from Nike, including the Nike and Jordan brand. Sheikh Shoes said Nike is a premium product that “is able to sell at a relatively high margin, generating substantially more than the cost of the product; (ii) sells quickly; and (iii) drives more traffic to the debtor’s stores and websites.”

As such,  Shiekh Shoes has expended ”considerable resources” over the years in order to maintain its relationship with Nike, including constructing specially-branded space in each of its stores for Nike product, developing special marketing campaigns and launch events, providing dedicated training of store managers and sales associates on all Nike product, as well as executing on Nike’s biggest initiative to date requiring the remodeling all the Shiekh Shoes stores beginning in 2015.

In July 2014, Matthew Fine, who formerly worked for Nike for over a decade, was hired as Sheikh Shoes’ first president to lead the store remodel initiative.

Those store remodels initially were funded by a $15 million loan Ellahi provided to Sheikh Shoes. The remodels have already been done at 61 of its stores at a cost of approximately $30 million, “with the hope that the return on its investment would be realized in years to come.”

A customer of Shiekh Shoes for 25 years, Nike had traditionally shipped to the chain on credit, like most vendors, which required Shiekh Shoes to pay amounts owed monthly. Nike historically had also required Ellahi to personally guarantee credit it extended to Shiekh Shoes.  Ellahi’s personal guarantee was permitted to expire, however, when he contributed personal funds to substantially pay down the Nike line at the end of 2016.

More recently, Nike determined that “based upon payment trends, financial conditions and other economic factors, Nike was unwilling to continue to supply Sheikh Shoes with product, even on a cash-in-advance basis.” That led to discussions prior to the bankruptcy that led to the Nike Agreement as part of a bankruptcy proceeding.

Shiekh Shoes wrote, “Needless to say, only Nike is capable of supplying the Debtor with Nike product. Nike’s goods are not replaceable without severe disruption and irreparable harm to the debtor’s current business model and overall operations. As a result, Nike and its product are critical to the debtor’s current operations.”

Sheikh Shoes, which was originally founded in 1991, traced its path to bankruptcy and liquidity challenges to early 2012, when it began looking for opportunities to expand in the Midwest and explored acquiring 45 former Athlete’s Foot stores in the metropolitan areas of Chicago and Detroit from Sportsland Inc. Sportsland, a franchisor, had similarly lost Nike, its biggest and most profitable supplier, as a supplier and was facing challenges.

As negotiations progressed, Sheikh Shoes acquired 34 “of the most promising locations” by the time the deal closed in late 2012 and Sheikh Shoes began dedicating significant resources to converting the 34 stores to Sheikh Shoes and continuing to “work on solidifying approval” from Nike’s Midwest team. However, as construction was nearing completion, Sheikh Shoes was unable to obtain approval from Nike’s Midwest team so the company “immediately pivoted and began developing a store-closure plan to get out of the Midwest,”according to court papers.

Currently, only four of the original 34 Midwest stores remain in operation. By early 2018, the goal is to close all of its Midwest stores.

“The financial repercussions of the failed entry into the Midwest marketplace, coupled with declining store revenues due to the rise of e-commerce, has made it increasingly difficult” for Sheikh Shoes to post a profit in recent years.

According to court papers, revenues at Sheikh Shoes were $173 million in the twelve months ended May 31, of which about 11 percent represented e-commerce sales.

After Nike’s claim for $16 million, the top 20 unsecured trade creditors included Timberland, owed $1.02 million; New World Creation in Oakland, NJ, $834,366; Adidas, $674,177; and Puma, $532,944.

Those under the $500,000 level include Hinkle Constructions, based in San Jose, CA, $428,265; VF Imagewear, the former parent of Majestic Athletic, $388,780; Reason Brand, based in New York, $318,839; Twin Tiger, Rowland Heights, CA, $317,550; Converse, $295,041; Under Armour, $253,461; PF Flyer, $200,530; Design Asylum Retail, Los Angeles, $137,689; G-III/Leather Fashions, $122,220; and New Era, $118,567.

On the non-trade side, unsecured creditors included Sportsland, which is $458,075 as part of a dispute over the acquisition of the Athlete’s Foot locations. Jade Randolph holds an unsecured claim of $295,000 in a dispute over an employee settlement. Unsecured claims also include $348,500 tied to a Detroit lease and $164,312 related to a lease at Del Amo Fashion Center in Indianapolis. American Express is owed $124,272, representing amounts owed on credit cards to run the business.

Sheikh Shoes in its first-day motions was seeking to retain Sulmeyer Kupetz as legal counsel, KGI Advisors as financial consultants, and Gordon Brothers Retail Partners as lease consultants. Gordon Brothers may also be hired to handle store-closing sales.

Photo courtesy Sheikh Shoes