For Only $130 a Month, You Could Lease an Entire Office Inside a Virtually Empty Staples

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By Lindsay Rittenhouse

Staples (SPLS) is testing a venture that could help it draw interest and traffic to its diminishing office supplies stores.

In September, Staples partnered with Massachusetts operator of co-working space Workbar, to bring offices, reservable conference rooms, private phone rooms and free onsite parking, plus unlimited coffee as the retailer pointed out, to monthly members at a cost of $130. The spaces are only available at three Staples stores located near Boston so far.

A Staples spokeswoman declined to comment on future endeavors.

The membership provides users with two hours of reservable room usage and two days use of 15 other Workbar spaces in Massachusetts. For an additional $100 a month, members receive 10 hours of reservable room usage, an extra $40 gets members mail service and another $40 provides locker space, according to Staples.

Corali Lopez-Castro, partner at KozyakTropin& Throckmorton’s bankruptcy and commercial litigation practice group, said the move is likely a ploy by Staples to gain foot traffic, as strategically the Workbar spaces are located in the back of the stores, forcing members to walk down the aisles of pens and notebooks before arriving at their destination.

“It’s the same reason milk is placed at the back of supermarkets,” Lopez-Castro said. “You have to walk through the whole supermarket before [reaching the common food item].”

A Workbar room in Staples.

The move comes amid years of slowing sales at Staples. Like many retailers, the company is planning for massive store closures this year.

Last year, Staples shuttered 48 stores in North America and plans to close an additional 70 this year after facing another weak year.

Staples’s revenue slipped 3% to $18.2 billion in 2016, missing Wall Street’s estimates for $20.25 billion, while comparable store sales fell 1%.

“Retailers are getting battered in this marketplace and it calls for creative solutions,” Lopez-Castro said, likening Staples’ venture to athletic apparel retailer Nike (NKE) opening a basketball court in its 55,000-square-foot New York City store and fashion discounter Urban Outfitters (URBN) purchasing pizzerias in cities including Philadelphia and New York.

It’s about “creating an experience,” a “plan B,” in case their retail stores go down the tubes, she said.

Click here for the original article.

cleveland

Sears warranties could be worthless if company files bankruptcy: Money Matters

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By Teresa Dixon Murray

Q: Now that Sears seems to be warning it could file bankruptcy, I’m wondering what could happen to my extended warranties on the appliances I’ve bought from Sears? I bought a new refrigerator, stove and dishwasher last year and also purchased extended warranties. If Sears goes out of business, who would honor those warranties?

S.S., Westlake

A: It is a bit unsettling that so many retailers that have existed for generations are having serious financial problems today. It’s no shock that Sears, which also owns Kmart and has been closing chunks of stores for years, announced it’s closing more stores this year.

But the sucker-punch last week was Sears’ warning that its end could be near. “Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern,” the company said in a statement, adding it hopes to “unlock value” from a range of assets, and that could mitigate the problems.

It needs to cut costs, borrow money and raise money by selling assets. Sears said if this current path continues — its debt has increased from $3 billion to $4 billion — then the company’s future is bleak. It lost $2 billion in the most recent fiscal year and it hasn’t been profitable since 2010. Sears was once the nation’s largest retailer.

While it sold its Craftsman brand of tools in January to Black & Decker, it can’t sell everything because it will need some assets to cover pension plans. But Sears may yet sell its Kenmore appliance brand and Diehard automotive brand.

Miami bankruptcy expert Corali Lopez-Castro said it’s not a good time to be holding a warranty bought through Sears.

“The warranties could be a very big problem,” said Lopez-Castro, an attorney with KozyakTropin& Throckmorton, who specializes in bankruptcy, creditors’ rights and commercial litigation matters.

Sears is pushing back on that.

If Sears does file for bankruptcy, it may sell its appliance division to a third party,  Lopez-Castro said. The key would be whether the third party would honor the warranties.

There’s reason to think the new buyer would indeed honor the warranties as a goodwill gesture and to hold on to customer loyalty, she said. But the buyer wouldn’t necessarily be forced to honor the warranties.

If the third party didn’t want to honor the warranties, those would become unsecured claims that would take a place in line behind suppliers and other creditors.

“We are a leader in the service contracts industry and proudly stand behind our product,” Howard Riefs, director of corporate communications, said in a statement. “Sears, as well as any other company that legally sells service contracts, is required to meet regulatory requirements designed to provide adequate resources to fulfill service contracts into the future. We will fulfill our commitment to our customers and members.”

On a another issue, Sears’ rewards through its Shop Your Way program, Lopez-Castro urged consumers to use their points as soon as possible. “You should redeem them sooner rather than later. You may not be able to later,” she said. “We just don’t know how long the runway is for Sears.”

I’d urge the same warning about gift cards. Use ’em soon. Who knows what happens to Sears gift cards if the company goes under.

How far has Sears fallen? A decade ago, Sears had 3,400 stores in the United States. Now, it has 1,400. In 2006, it had 355,000 employees. Now, it has 140,000. The latest round of store closings nationwide including locations at Richmond Mall in Richmond Heights and Chapel Hill Mall in Akron.

Sears, of course, isn’t the only retailer that’s hurting. Macy’s and J.C. Penney have been closing stores for years. Others announcing closings this year: The Limited, CVS, H.H. Gregg, Abercrombie & Fitch, Radio Shack, Payless Shoes and Office Depot.

Click here for the original article.

Don’t Write That Mall Obit Yet

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By Caletha Crawford

The litany of recent store closures reads like a who’s who of once beloved retailers. Whether to bankruptcy or restructuring, hundreds of doors have been—or are already slated to be—on the chopping block.

What’s a mall owner to do?

There’s been lots of talk about of how malls can transform from retail destinations to more lucrative—and one hopes—secure lifestyle centers, but at the rate doors are shuttering, they’ll have to move at the speed of Superman’s Clark Kent.

For mall owners who have seen the writing on the walls, the pivot is already underway. In the meantime, they’ll deal with the broken leases and legal maneuvering that follow each new harrowing headline.

Dealing with delinquents

While consumers might be surprised to learn their favorite store is “suddenly” going under, malls are rarely caught off guard, said Jasmin Yang, an associate attorney at Los Angeles-based law firm Snell & Wilmer. Often, struggling stores are already on the landlord’s radar, and they get away with it to avoid a mall corridor pocked with darkened doors.

“A lot of times, even before a bankruptcy, they haven’t been paying rent for a long time,” said Yang, who handles bankruptcy-related actions. “[Mall owners] don’t like to have empty store fronts, so they’ll wait to pull the trigger. They’d rather have the mall busy, full and lively, even if [tenants] are two years behind on their rent.”

While the property owner may turn a blind eye in some cases, others prompt a round of “Let’s Make a Deal,” in which the landlord has to decide how much its worth to them to trade off revenue from one store for the good of the entire mall.

“You’ll see malls where a tenant has switched from a base rent to a percentage of sales rent,” said Edward Dittmer, vice president, CMBS, Morningstar Credit Ratings, adding modifications like that would be negotiated for a specific period of time to give the store a little relief.

But olive branches like those are reserved for viable businesses. If that delinquent store ends up throwing in the towel, the mall now has the dreaded empty spot on top of years of missed rent.

That’s why Corali Lopez-Castro, a bankruptcy and commercial litigation attorney for Kozyak Tropin Throckmorton in Coral Gables, Florida, advises her clients to be proactive.

“Always enforce your rights,” she said. “I would start eviction proceedings immediately, and I would try to get a judgment of eviction as possible because once the rights under that lease have been terminated, you cannot get them extended in bankruptcy. The squeaky wheel gets the grease so it’s in their favor.”

In Corali-Lopez’s experience, once a retailer starts a downward spiral, the situation rarely recovers.

One reason not to hold on till the bitter end is that if the store files for bankruptcy, the landlord is lucky to collect “pennies on the dollar” for back rent, according to Yang.

A filing doesn’t necessarily mean the storefronts will close immediately. After a store files, they have the option of assuming (continuing) or rejecting (terminating) a lease. If they decide to assume it, they have to play by the rules from that point forward.

“In bankruptcy, you have to pay rent as you go,” Lopez-Castro said. Otherwise, she said, rent becomes an administrative claim, which has a higher legal priority.

This difference in status between pre-bankruptcy and post-bankruptcy rent claims is one reason why a landlord might push a tenant to decide to assume or reject as quickly as possible.

“Historically people would ask for multiple extensions and have years to decide if they were going to keep or reject a lease,” Lopez-Castro said. “Now, those decisions are made much more quickly.”

Breaking the mold

A property owner may hope the store rejects the lease because it frees them up to pursue other options.

Owners that have “B” malls may feel a bit more handcuffed to their ailing tenant but “A” mall owners are likely to feel liberated due to a long list of would-be suitors.

“If it’s a desirable location, and [the tenant] wants to bargain on the rent, you can reject the lease because you have two or three other tenants that want it,” said Joe Bell, director of corporate communications for Cafaro Company, which operates more than 43 locations.

Bell said Cafaro stays in communication with companies looking for space in its properties so as soon as a vacancy opens up, it already has the right new tenant lined up. “It’s like a game of chess,” he said.

And these days, property owners are making the first move. “They’re not waiting for the Sears to close its store before they start looking at new tenants. If they find a new tenant, maybe they won’t renew Sears’ lease because they think that tenant will bring in more traffic and money for the mall,” Dittmer said, by way of example.

“They’re going after tenants that have an entertainment component and dining seems to be a big thing. Those all add to the appeal because you can go buy a few things, stop for a nice dinner and then you can go home. If you think about your customer as a lifestyle consumer as opposed to a retail consumer, I think that’s the right mindset.”

Dittmer said in-demand businesses are those like Dave & Busters, Legoland Discovery Center and a Sea Life Aquarium—all places where families flock to entertain the kids. And, while they’re there, they’ll often stop to eat or shop.

The holy grail of tenants, according to Dittmer? “If everybody could have a Cheesecake Factory, they’d probably put one in there. Obviously every mall owner would love to have an Apple store because of how high Apple sales are on a per square foot basis.”

But it doesn’t have to be marquee brands like those, Bell said. His company replaced a space once occupied by Sears with a Planet Fitness and a trampoline park. In another large space, Cafaro had luck with a technical training school. Though it might not sound like an ideal fit for the stores in the mall, it paid off. “Suddenly you have a couple hundred students who were on the property every day who needed to go get lunch, wanted to shop, wanted to hang out with their friends, so that provided a new source of customers,” he said.

Of course these days, any tenant could turn out to be a bad bet. If nothing else, the recent retail upheaval has taught landlords to be more savvy.

In addition to staying on top of accounts receivable, Lopez-Castro said landlords need to limit their exposure. “Landlords are now requiring a letter of credit to protect themselves,” she said, allowing property owners to guarantee they’ll get paid even if there’s a bankruptcy.

Yang suggested malls consider shorter durations for their leasing agreements, enabling property owners to be more agile.

Bell advised mall owners to consider all angles before signing a new tenant. Just because a business comes in waving money around, it won’t matter if it flames out tomorrow.

Ultimately, he said, malls are surviving—and even thriving—by focusing on the future.

“We’re keeping a close eye on the experiences and services that our customers want to see, and the next thing coming down the road,” Bell said.

Click here for the original article.

Here’s what will happen to your Sears warranty if the company goes bankrupt

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By Hayley Peterson

Albert Barrera of Odessa, Texas, walked into a Sears store recently with a pressing question for the manager: “If Sears closes, who will service my refrigerator?”

Barrera had bought a Kenmore refrigerator for $529 several months earlier, and along with it, he purchased a three-year service warranty that cost $229 — almost half as much as the refrigerator.

Now he’s worried that Sears could go out of business and that his warranty will be canceled as a result. He says the store manager failed to alleviate his fears.

“He had no answer for me and assured me he had not heard of them shutting down at all, which I highly doubt,” Barrera told Business Insider.

Barrera is in the same boat as countless other customers.

Sears has long been a top seller of home appliances in the US, and with those appliances, the retailer has sold countless warranties.

But within the last decade, Sears’ sales have plunged and now speculation is growing that the company could go bankrupt.

That has left many customers like Barrera wondering: what will happen to my Sears warranty?

According to bankruptcy lawyer Corali Lopez-Castro, there’s a possibility warranties would be dissolved in the event of a Sears bankruptcy.

“The warranties are going to be a huge issue,” Lopez-Castro, a partner at the Florida-based law firm KozyakTropin& Throckmorton, told Business Insider. “There’s a real risk that they will not be honored.”

She said gift cards and rewards points earned through Sears’ Shop Your Way loyalty program could also be erased.

“I would advise customers to redeem their points now,” she said.

If Sears filed for bankruptcy protection, the fate of its warranties and rewards points would be decided in court.

Sears would have a lot of creditors to pay — including its suppliers — before customers and their outstanding warranties and loyalty points would be considered, she said.

Filing for bankruptcy protection allows companies to reorganize by restructuring their debts or selling assets to try and stay in operation.

When the sporting goods retailer Sports Authority filed for bankruptcy last year, the company petitioned a judge to allow it to honor its gift cards and loyalty points throughout the restructuring process.

Eventually, the company went out of business and the value of unused gift cards was lost.

Lopez-Castro believes a similar fate awaits Sears if it files for bankruptcy because the underlying retail business is ailing.

The company’s sales have fallen nearly 40% in the last five years.

“It’s not just about deleveraging their balance sheet,” she said. “You have to actually deal with the operations, which is a much bigger problem.”

Sears raised fears about a possible bankruptcy this week after it said in a filing that there’s “substantial doubt” about its ability to stay in business.

The company’s chief financial officer, Jason Hollar, later tried to reassure investors in a blog post saying the company remains focused on meeting its financial obligations.

“We are a viable business that can meet its financial and other obligations for the foreseeable future,” he said.

Click here for the original article.

Amazon Is Causing Catastrophe by Being the Most Disruptive Force in Retail and Technology Today

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There’s seemingly no end to what Amazon can do.

By Lindsay Rittenhouse

 It’s no secret that Amazon (AMZN) is upending retail, with a new bankruptcy filing or store closure announcement coming nearly every day since the beginning of March from traffic starved bricks-and-mortar retailers.

And the digital beast is showing no signs of letting up.

As KeyBanc Capital Markets pointed out in a Wednesday research note, Amazon is continuing to add new private-label brands. Nine of the 14 brands Amazon now offers are exclusive to Prime members. A Prime membership costs $99 a year.

“Amazon is one of the most disruptive forces in retail and technology today,” KeyBanc analyst Edward Yruma said in the note. “We think it will continue to take market share and also benefit as total share accorded to e-commerce continues to grow.”

Amazon’s fashion lines that are exclusive to Prime members include Amazon Essentials, its men’s and women’s basic apparel; Buttoned Down, its men’s dress shirts and Ella Moon, its line of women’s bohemian-style casual clothes. Its fashion lines available to all include Franklin & Freeman, which offers men’s dress shoes; mae, its line of women’s intimate apparel and Society New York, its line of women’s dresses and handbags, according to KeyBanc.

Yruma told TheStreet that the retailers likely to be the most negatively impacted by Amazon’s fashion lines are not Kohl’s (KSS) or J.C. Penney (JCP) but rather Macy’s (M) and specialty stores. Macy’s is already feeling the pressure, along with 13 other specialty and department store retailers planning for massive store closures.

In the KeyBanc note, Yruma specifically highlighted mae, which sells women’s bralettes and panties ranging in price from $16 to $34.50, as a threat to L Brands  (LB) , the parent company of Victoria’s Secret.

But, as TheStreet reported, selling lingerie may prove to be difficult to do online as sizing becomes a major issue.

“Yes, the initial fitting is ideal at a store,” Yruma told TheStreet. However, he called Amazon’s line of intimates “replenishment” items, which means once women know the fit they need, they may opt to quickly order a bra, for example, online on the second or third purchase.

“The one issue Amazon is grappling with is that fashion is an emotional purchase,” Yruma said.

Right now, Victoria’s Secret “has done a masterful job” linking its lingerie to its brand, he said. But, as Amazon continues to expand its private-label offerings, he expects it to gain recognition, as well.

In January, it was reported that Amazon is preparing to launch an athletic apparel line to compete with the likes of Under Armour (UA) , Nike (NKE) and LululemonAthletica (LULU) , as well.

If Amazon doesn’t slow down soon, retail will be left completely in the dust.

Corali Lopez-Castro, partner at Kozyak Tropin & Throckmorton’s bankruptcy and commercial litigation practice group, said in a interview that she expects retail bankruptcy filings in 2017 to continue at a pace of more than one a month.

Just in the past few weeks, Wall Street saw bankruptcy filings from sporting goods retailer Gander Mountain, RadioShack successor General Wireless Operations, everyday value price department store operator Gordmans Stores (GMAN)  and appliances, electronics and furniture retailer HHGregg (HGG) . Last Wednesday, children’s apparel retailer Gymboree cautioned that it was low on cash and may not survive.

“It’s a catastrophe,” Lopez-Castro said. “It’s hitting every single segment.”

Click here for the original article.

The Gazette

Fashion brands go out of style faster

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Lower mall foot traffic, online hurt bricks-and-mortar

American Apparel bit the dust. So did Nasty Gal. BCBG Max Azria filed for bankruptcy as did teen retailer Wet Seal.

The fashion industry long has been a fickle beast, with trends rising and dying sometimes in the space of weeks. But changing consumer habits — including the emergence of e-commerce and the decline of traffic at many malls — is further shortening the life cycle for many fashion brands, analysts said.

“Thirty years ago, you didn’t have to adapt as fast,” said Ron Friedman, a retail expert at accounting and advisory business Marcum. “The retail environment is completely going through a revolution. Your normal brick-and-mortars are restructuring. Brands are going out of style.”

Faced with seismic changes, bankruptcies in the retail sector have been on the rise. In 2012, three retail companies with liabilities of $50 million or more filed for bankruptcy, according to a study by consulting firm AlixPartners.

Eight retail bankruptcies occurred in 2014, a number that was reached just six months into 2015, the last year analyzed in the study — although that still pales in comparison to 20 bankruptcies in 2008 during the height of the recession.

To be sure, once-hot brands faded away with nary a whimper before the digital age — Robert Hall in the 1970s, Rogers Peet in the 1980s and Merry-Go-Round in the 1990s.

But the web has been a double-edged sword for fashion brands, both a way to reach a worldwide audience for their wares, while also serving as a giant emporium where shoppers can click to a rival site in seconds.

“There’s a perfect storm now,” said Corali Lopez-Castro, a partner at KozyakTropin and Throckmorton who has handled retail bankruptcies. “I don’t know if many retailers can adjust.”

Some retailers have stumbled, including a number of southern California brands. It’s a region that already has been hard-hit by a decline in garment manufacturing — and as home for many casual brands, is especially susceptible to the rise of fast fashion.

BCBG concedes its failure to harness the web contributed to its downfall. The Los Angeles company said e-commerce sales made up only “a small proportion” of its overall business, according to bankruptcy documents.

The rise of fast-fashion rivals also has shortened the attention span of consumers. Before H&M and Zara came on the scene, retailers that had a lackluster season could course-correct a few months down the line — knowing shoppers probably would come back to browse while strolling their local mall.

But now shoppers can hop online or go to fast-fashion stores that introduce fresh fashions on a weekly basis.

“If you are a fashion apparel retailer, you have to have a steady flow of newness,” said Craig Johnson, president of Customer Growth Partners. “You can’t just regurgitate what was hot last year.”

At the same time, consumers are spending a diminishing chunk of their income on clothing, opting to shell out for electronics or experiences instead. Less than 4 percent of every dollar is now spent on buying apparel, Johnson said, compared with 8 percent in the mid-1990s and 20 percent a century ago.

Since 2005, 55 percent of retailers that have filed for bankruptcy have ultimately liquidated their business, compared with 5 percent of bankruptcies in other industries, the AlixPartners survey said.

This year is expected to be another big year for bankruptcies.

“You’re going to see one every single month in 2017,” Lopez-Castro said. “Once you lose a customer, it’s very hard to get that customer back.”

Click here for the original article.

Sears Has Finally Admitted That It’s Almost Dead

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By Brian Sozzi

 Kudos to Sears Holdings Corp. (SHLD) for finally admitting what everyone already knew: it’s almost dead.

As TheStreet broke the news on Twitter Tuesday evening, Sears indicated in its newly filed annual report that “substantial doubt exists related to the company’s ability to continue as a going concern.” For those clickbait-loving headline writers out there with no financial services training: what Sears essentially said is that yes, it’s unsure if it could stay in business. Well, duh.

Sears’ cash position has melted from a high point of $1.7 billion for the 2009 calendar year to a mere $286 million to close out 2016. Revenue hasn’t grown since the credit boom lifted all ships in retail in 2006. The company hasn’t generated cash flow from its operations since 2006. “With negative news like this, it’s never good for confidence on the company,” Moody’s VP Christina Boni told TheStreet. Earlier this year, Moody’s downgraded its credit rating on Sears to Caa2 from Caa1. The downgrade reflected the accelerating negative sales performance of Sears’ business and risk of possible default.

There are a probably zillion other horrible sounding stats floating around in the Bloomberg terminal, but they all point to the same conclusion that the company is a dead man walking. The seriousness of Sears’ disclosure must not be downplayed. For if Sears raises more cash from high yield debt issuance (always a favorite move from retailers on the verge of dying), the market will still go back to the statement and reason Sears is still doomed. If Sears sellsmore assets such as land or the Kenmore brand, the market still won’t believe it can continue as a going concern.

In effect, Sears has admitted that its current asset base is worth less than its ridiculous comments made in recent years (you should see the zombie properties out there for sale in rural America). Moreover, it has admitted that no matter what it does, such as deliver on the $1 billion in recent cost cuts it has promised, the business will still likely die.

Believe it nor not, there are remaining delusional Sears fans out there that believe the company is sitting on amazing land holdings that are worth billions of dollars. Take this email I received on Tuesday from an analyst that works for a firm that holds Sears shares.

“I often read your articles with amusement because I think they are so far off. But after reading the last one on Target, had to at least respond. You are totally off and Target (TGT) setting up shop there is AWESOME news for the box at Penn Plaza and value, if only you looked at this on asset value and stopped looking at this from the traditional lens of a failed retailer which it surely is.”

I hear you, my man. Listen, I have covered the death of Sears going on 10 years now. The asset values have never lived up to their hype. Meanwhile, the operations have performed worse than anyone’s already low expectations. Bottom line: On March 21, 2017 the once-iconic Sears declared itself dead.

“The blood bath continues,” Corali Lopez-Castro, partner at KozyakTropin& Throckmorton’s bankruptcy and commercial litigation practice group, told TheStreet.

“Is this new? No,” Lopez-Castro said. “The fact that they put it into writing is scary.”

When asked when she expects we will see a bankruptcy filing from Sears, she said she’s not sure because it will avoid it at all costs.

“Depends, I would want to know what their vendors are insisting upon,” Lopez-Castro said. “When you go into bankruptcy, you lose control. And no company wants to lose control.”

For the record, Lopez-Castro doesn’t believe Sears can get out of its current dire situation without filing for insolvency. If, or when, the retailer does, she said it will likely tap Kirkland & Ellis for debtor counsel.

Shares of Sears finished the session lower by 12.3% to $7.98.

Read These or It’s Your Loss

A great day for drinking could be canceled: A South Philadelphia Cinco de Mayo festival has been canceled thanks to high tensions around Trump’s stance on immigration, The Christian Science Monitor reports. One should expect more of these cancellations to pop up in coming weeks. Sucks for beer makers such as Boston Beer Company (SAM) and liquor purveyor Diageo (DEO) .

Here’s your sign the tech bubble is overdue to pop: The salaries for those in the tech industry are getting out of hand, a factor that could keep profits below market expectations this year for startups and some less than top-tier publicly traded Nasdaq Composite names. Oddly, $250,000 entry-level coder jobs aren’t enough to cover the rent in the red-hot real estate market that is San Francisco, which is home to many tech companies. Zapier, a workflow automation company, said that it’s offering new hires in the Bay Area $10,000 to help them “delocate”, or move out of the paycheck-zapping Bay Area, reports The Christian Science Monitor.

Here’s how to play rising confidence in Asia: Business sentiment at Asia’s top companies advanced to its highest in nearly two years in the first quarter of 2017, according to a new survey from Thomson Reuters/INSEAD. TheStreet reveals 12 companies that could benefit from improving economic conditions in China.

Bye-bye Howard Schultz: Wednesday marks the final shareholder meeting (I am betting that at some point he will return, again) for Action Alerts PLUS charity portfolio holding Starbucks’ (SBUX) Howard Schultz as CEO. Obviously, Schultz has had one hell of a career. TheStreet runs down Schultz’ top accomplishments through the years.

Nike (NKE) shares get whacked on solid quarter: Shares of Nike are plunging on Wednesday following a slight quarterly sales miss and a plunge in gross profit margins. But, as TheStreet reports, Nike had one of the most upbeat conference calls in recent memory (at least the past year). With the company picking up the pace of innovation, the pullback may represent a good buying opportunity.

Click here for the original article.

Fashion brands — including several L.A. retailers — are dying off as consumer habits change

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By Shan Li

American Apparel bit the dust. So did Nasty Gal. BCBG Max Azria filed for bankruptcy, along with teen retailer Wet Seal.

The fashion industry has long been a fickle beast, with trends rising and dying sometimes in the space of weeks. But changing consumer habits — including the emergence of e-commerce and the decline of traffic at many malls — is further shortening the life cycle for many fashion brands, analysts said.

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“Thirty years ago, you didn’t have to adapt as fast,” said Ron Friedman, a retail expert at accounting and advisory firm Marcum. “The retail environment is completely going through a revolution. Your normal brick-and-mortars are restructuring. Brands are going out of style.”

Faced with seismic changes, bankruptcies in the retail sector have been on the rise. In 2012, three retail companies with liabilities of $50 million or more filed for bankruptcy, according to a study by consulting firm AlixPartners. Eight retail bankruptcies occurred in 2014 — a number that had already been reached just six months into 2015, the last year analyzed in the study (although that still pales to 20 bankruptcies in 2008 during the height of the recession).

To be sure, once-hot brands faded away with nary a whimper before the digital age — Robert Hall in the 1970s, Rogers Peet in the 1980s and Merry-Go-Round in the 1990s. But the Web has been a double-edged sword for fashion brands, both a way to reach a worldwide audience for their wares, while also serving as a giant emporium where shoppers can click to a rival site in seconds.

“There’s a perfect storm now,” said Corali Lopez-Castro, a partner at KozyakTropin& Throckmorton who has handled retail bankruptcies. “I don’t know if many retailers can adjust.”

Some retailers have stumbled, including a number of Southern California brands. It’s a region that has already been hard-hit by a decline in garment manufacturing — and as home for many casual brands, is especially susceptible to the rise of fast fashion.

BCBG admits its failure to harness the Web contributed to its downfall. The Los Angeles company said e-commerce sales made up only “a small proportion” of its overall business, according to bankruptcy documents.

The rise of fast-fashion rivals has also shortened the attention span of consumers. Before H&M and Zara came on the scene, retailers that had a lackluster season could course-correct a few months down the line — knowing shoppers would likely come back to browse while strolling their local mall. But now shoppers can hop online or go to fast-fashion stores that introduce fresh fashions on a weekly basis.

“If you are a fashion apparel retailer, you have to have a steady flow of newness,” said Craig Johnson, president of Customer Growth Partners. “You can’t just regurgitate what was hot last year.”

At the same time, consumers are spending a diminishing chunk of their income on clothing, opting to shell out for electronics or experiences instead. Less than 4% of every dollar is now spent on buying apparel, Johnson said, compared to 8% in the mid-1990s and 20% a century ago.

The off-shoring of manufacturing has dramatically reduced the price of clothing over the last few decades. That has wounded brands catering to young shoppers. Irvine-based Wet Seal, for example, is preparing to close its stores after filing for bankruptcy for the second time in February.

Aside from premium denim, Southern California brands tend to offer more casual wear, compared to designer-heavy New York, Johnson said. Shoppers therefore find it easier to switch to buying via e-commerce sites such as Amazon or in fast-fashion stores — one reason so many local firms have faltered in recent years.

“There is virtually nothing that places like Wet Seal or American Apparel sell that you can’t get on the Internet for a lower price,” Johnson said. “There is nothing that distinguishes it.”

New fashion brands are also finding an increasingly tough climb. They can reach potential customers directly on social media and sell product from their own websites. But it requires heavy investment to get eyeballs — especially when companies are trying to attract investors by demonstrating fast growth, analysts said. Nasty Gal, a once-hot Los Angeles firm that sold its intellectual property for $20 million after filing for bankruptcy in November, saw its sales plunge after it ran out of money to invest in online marketing and advertising.

Friedman, who has consulted for fashion brands for decades, now tells new businesses that they need starting capital between $500,000 to a $1 million. That’s compared to $200,000 to $300,000 about a decade ago, he said.

“Before, you could go to Fred Segal and get your product on the floor, or go to Bloomingdale’s headquarters and get it on their floor,” Friedman said. “Today, you have got to go to the Internet and sell direct to consumers, and the cost can be very high.”

That cost means that fashion brands can burn through cash quickly, which can be a death knell for those without fresh investment or brisk sales.

After changes to the U.S. bankruptcy code in 2005, retailers that are forced to file for bankruptcy protection are also less likely to survive. Those changes shortened the time frame that retailers have to get approval for restructuring or a sale; companies only have 210 days to decide whether to hold onto or get rid of store leases.

Brick-and-mortar retailers, especially, have been hit hard. Instead of getting out of unprofitable leases and emerging from bankruptcy as a leaner business, many end up going out of business entirely and selling their brand.

That has led to an environment in which only the savviest company, especially those with physical stores, can survive.

“It’s the law of nature,” Johnson said. “Whether it’s an animal species or a retailer, the weakest players get winnowed out.”

Since 2005, 55% of retailers that have filed have ultimately liquidated their business, compared to 5% of bankruptcies in other industries, the AlixPartners survey said.

This year is expected to be another big year for bankruptcies.

“You’re going to see one every single month in 2017,” said Lopez-Castro. “Once you lose a customer, it’s very hard to get that customer back.”

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Fossil Is Still Making Billions of Dollars Selling Watches, but Its Stock Looks Like a Broken Clock

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By Lindsay Rittenhouse

 Fossil Group (FOSL) may not be dying like Sears (SHLD) undoubtedly is, but it definitely appears to be struggling right along with nearly every other retailer.

As TheStreet‘s sister publication The Deal reported, Moody’s Investors Service downgraded Fossil’s secured credit facilities on Wednesday, citing weakness in its traditional watch business. Fossil holds about $636 million in debt. A month ago, Fossil reported a 7% slip in fourth quarter sales, driven by declines in leather accessories and traditional watches.

CEO KostaKartsotis said fourth quarter sales, although weak, were driven by the Fossil brand and smartwatches it makes via a license arrangement with Michael Kors (KORS) .

To offset slowing traditional watch sales, Fossil said that it was making a “big bet” on tech wear, adding some 300 new stock-keeping units in the second half of the year. In 2016, Fossil launched 100 wearables for Alphabet‘s Google (GOOGL) Android Wear 2.0 platform.

“Fossil brand’s smartwatches – both its touchscreens and its hybrid smartwatches – are selling incredibly well,” a Fossil spokeswoman told TheStreet.

A host of groups aren’t so sure of that.

“While pivoting into wearables could be the only option (traditional watches down double-digits while wearables up double-digits), competition is growing quickly in a market driven by a vendor push rather than consumer demand,” wrote Oppenheimer analyst Anna Andreeva. The analyst is particularly concerned about the erosion in Fossil’s profitability metrics.

In the U.S., Andreeva points out, Fossil lost money in the U.S. last year. Pre-tax profit margins in the U.S. have plunged 1,500 basis points over the past two years.

“Overall as a segment, (wearables) is not one that has seen a huge growth,” says Melissa Gonzalez, CEO and founder of experiential retail pop-up shop agency The Lion’esque Group.

Gonzalez thinks Fossil needs to figure out how to “differentiate themselves”, and she’s not sure wearables can be its “game changing” product given that Apple (AAPL) dominates the category.

Moody’s said in its downgrade that Fossil will have a hard time competing against Fitbit (FIT) . That’s alarming, considering Fitbit issued preliminary guidance on Jan. 30 that warned investors it will probably not meet fourth quarter revenue expectations due to a drop in demand for its fitness trackers.

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The unfortunate reality may just be that Fossil’s products fall into a grey area.

Consumers either are young millennials searching for a bargain fitness tracker or older, wealthier individuals with large disposable incomes, who “if they can afford luxury,” they will buy a Rolex. Fossil doesn’t fit into either category, said Corali Lopez-Castro, partner at KozyakTropin& Throckmorton’s bankruptcy and commercial litigation practice group.

Lopez-Castro noted that brand loyalty doesn’t exist anymore, a serious problem for Fossil. “I remember when every young girl had a Coach (COH) purse,” Lopez-Castro said. “All of a sudden they decided it wasn’t cool anymore.”

Lopez-Castro said she believes the consumers who want a smartwatch, won’t care if they’re designed by Fossil – they’ll just buy the Apple Watch because it offers the best technology.

Meanwhile, major department store closures from Macy‘s (M) and J.C. Penney (JCP) are only turning consumers further away from malls and Fossil, where the brand dominates the watch displays.

“The retail industry as a whole is undergoing challenges,” the Fossil spokeswoman said. “However, we feel our investments in omni-channel and our connected strategy well position us for the future.”

Kartsotis said on the fourth quarter earnings call that Fossil’s “e-commerce business is thriving,” despite it being a small portion of its retail business. Still, dwindling mall traffic contributed to a 7% slip in Fossil’s comparable store sales.

For now, Fossil’s stock could keep winding down as it works through its challenges.

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Health Care Bankruptcy: Not An Ordinary Chapter 11 Case

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Various factors including increased competition and reimbursement landscape challenges led hospitals and other health care providers to file for bankruptcy over the last few years. For the remainder of 2017, due in part to the current uncertainty in the health care industry and its legislative oversight, more financially distressed providers are considering Chapter 11 bankruptcy to effectuate closures, consolidation, restructurings and related transactions.

Expanding the Role Call in Health Care Provider Chapter 11

The Patient Care Ombudsman

Health care provider bankruptcies differ from garden-variety Chapter 11 cases, as they address unique issues regarding patients’ care, record keeping and privacy rights, at times with intermediary oversight by a court-appointed patient care ombudsman. The Bankruptcy Code requires the appointment of a patient care ombudsman within 30 days after commencement of a “health care business” bankruptcy case, unless the court finds that an ombudsman is not necessary for the protection of the patients under the circumstances of the case. The ombudsman must report every 60 days regarding the quality of patient care. The fees of the ombudsman are paid by the bankruptcy estate and are entitled to administrative expense priority.

Government and Private Insurance Company Payers

Health care provider bankruptcies are complicated by disputed bankruptcy court jurisdiction over the provider reimbursements and payer claims reconciliation process relative to exhaustion of administrative remedies, the automatic stay, and setoff and recoupment rights, as well as disputing the treatment of provider agreement obligations in free and clear sales and/or assignments of executory contracts under Sections 363(f) and 365 of the Bankruptcy Code.

Pledging Government Receivables as Collateral

Many times receivables owed from a payer are pledged as collateral to a provider’s lender, which again raises issues in the government payer context. Exercising remedies on government accounts receivable is complicated because the receivables are subject to related federal and state “anti-assignment rules” affecting Medicare and Medicaid health care programs. These anti-assignment rules require that Medicare and Medicaid payments be made only to a deposit account over which the health care provider has sole control. Any attempt by a provider to assign these receivables in violation of the anti-assignment rules may result in the termination of the provider agreement.

However, parties have enacted a successful workaround mechanism in which the government receivables are deposited directly into a provider’s bank account, and then the government payments are subsequently swept daily into a second deposit account under the lender’s control. Upon a provider bankruptcy filing, however, a lender must stop the automatic sweep of cash from the provider’s account due to the Bankruptcy Code’s automatic stay. As such, it is advisable for Chapter 11 providers and their lender to enter into cash collateral agreements subject to bankruptcy court approval, which typically provide for adequate protection payments and a negotiated budget.

A Fight Over Where to Fight with Payers

Outside of bankruptcy, the federal government and its contractors routinely withhold Medicare and Medicaid payments upon determining a health care provider has been overpaid on a prior unrelated reimbursement claim. Under 42 U.S.C. § 405(h), federal courts may take jurisdiction over Medicare disputes only after a party exhausts applicable appeal processes within the Medicare system. The federal courts are split regarding the plain language of 42 U.S.C. § 405(h), as it relates to bankruptcy courts’ jurisdictional limitations, thus impacting a provider’s protections in Chapter 11. Some circuit courts have determined that a requirement to exhaust administrative remedies is inapplicable in bankruptcy cases; others have found that exhaustion of administrative remedies applies even in federal bankruptcy court. A provider in bankruptcy currently has a petition on file with the U.S. Supreme Court for certiorari review of this issue.

Forum disputes also exist between network providers in bankruptcy and their private insurance payers, as most contracts contain arbitration clauses and administrative remedies provisions. There is some disagreement by courts as to the enforcement of arbitration clauses in this context.

Payer Take-Backs as Setoffs or Recoupment

The government system regarding Medicare and Medicaid payments differs meaningfully from private insurance company payments. Government payments to providers are made on an interim basis under a prospective reimbursement system, which results in payments before a determination that the services rendered are covered and costs are reasonable. Due in large part to the prospective payment system, more courts than not find that the subsequent take-backs are recoupments as part of a single, integrated and ongoing transaction between the government and the payer.

In the private insurance company setting, payments are not made on a prospective reimbursement system where claims are vetted and approved prior to initial payment. Yet, there are instances of payment error which trigger requests for overpayment reimbursement. Many insurance company payers resort to unilateral take-backs where they apply their asserted reimbursement overpayment against a more recent valid claim of an unrelated patient. The private insurance company payers seemingly have a weaker argument to support that these take-backs are recoupments instead of a setoff.

This distinction between setoff and recoupment is important because setoffs are subject to the Bankruptcy Code’s automatic stay, and generally setoff obligations fall within claims that can be sold free and clear in bankruptcy sales merely attaching to sale proceeds, but not applied against a bankruptcy purchaser of a provider license. In addition, setoff may not be permitted by the court. Recoupments, however, are not subject to the automatic stay nor the distribution scheme for creditors, and may not be discharged in a bankruptcy sale or plan confirmation. However, payer recoupment actions remain an equitable defense remedy subject to judicial determination upon challenge by a provider.

A Fight Worth Fighting For

The relationship between the Medicare/Medicaid programs and providers is captured in a written provider agreement, which afford providers a license/number to participate in the Medicare/Medicaid prospective reimbursement program. A dispute arises when the provider seeks a sale of assets in bankruptcy, including the provider number. The government’s general position in bankruptcy is that the provider agreement is an executory contract subject to the Bankruptcy Code requirement that its obligations (the overpayments) must be cured before it can be assumed and assigned to a purchaser/assignee.

Providers and purchasers tend to argue that the provider licenses/numbers are not executory contracts and are licenses/assets that can be sold free and clear of the overpayment obligations existing at the time of the sale. The general rationale is that the provider license is not a negotiated agreement like most contracts, but is a regulatory form application that is completed and approved by the government. Also, a ruling requiring a cure prior to assumption/assignment or of potential successor liability either would block the sale or greatly diminish the value of the assets, impeding an ability to maximize value for case constituents.

However, even if the provider license is not deemed to be an executory contract, if the overpayment recovery actions are deemed a recoupment, then more cases than not hold that a 363 sale still could not extinguish that claim against the purchaser. Because of this, many times settlements are reached and workarounds are accomplished, such as setting up a portion of the sale proceeds in escrow or setting up a waterfall overpayment recovery scheme from the sale proceeds, other bankruptcy estate funds on hand and then perhaps a budgeted annual-capped amount from the purchaser.

Conclusion

Health care provider Chapter 11 cases are multifaceted and include additional parties and issues than in standard Chapter 11 cases. A financially distressed provider considering Chapter 11 is best served to find a properly vetted stalking horse deal partner prior to filing the case and engage in meaningful discussions with their payers and lenders, if possible.

Providers should aim to move the case to the sale and Chapter 11 plan process expeditiously where the jurisdictional, license and setoff-recoupment issues can be teed up and addressed in short order, during which time patient care can be properly maintained pending litigation and further settlement discussions with the creditor constituents.

—By David A. Samole, Kozyak Tropin & Throckmorton LLP

David Samole is a partner at Kozyak Tropin in Miami. He handles an array of corporate bankruptcy matters, as well as litigation on behalf of healthcare providers.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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