Archive for year: 2017

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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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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By Suzette Parmley

 Mipri Haye, a high school junior, is on Instagram and Snapshot daily, showing off her latest outfits to her girlfriends.

She also shares where she got those clothes: Forever 21, H&M, and Charlotte Russe often top her list.

“I take pictures of myself trying on new things, post them, and see what my friends think,” said Haye on a recent Friday as she shopped with her mother, Capri Haye, inside Francesca’s at Cherry Hill Mall in the New Jersey portion of suburban Philadelphia.

Retail experts say such prolific use of social media by Haye and others is driving the rapid success of some teen retailers, and causing the quick demise of others. Teen brands have also been among the slowest to close their brick-and-mortar stores and grow their websites.

In the last 18 months, Aeropostale, with 800 stores, Pacific Sunwear, with nearly 600 stores, and American Apparel, with 273 stores, have all filed for bankruptcy. (An ownership group stepped up in September 2016 to buy Aeropostale for $243 million at auction; the new owners plan to reopen its 500 stores across the country this year.)

Wet Seal, a California teen-oriented brand with 171 stores, filed for Chapter 11 last month. It specialized in selling clothing and accessories to young women.

Others, such as Abercrombie & Fitch and American Eagle Outfitters, are struggling. On a recent Friday at Cherry Hill Mall, neither store attracted much foot traffic from 7 to the 9:30 p.m. closing.

E-commerce sales continue to grow at about 15 percent a year, noted Garrick Brown, vice president, retail research of the Americas for Cushman & Wakefield. And online retailers keep gaining market share.

But while most have been focused on millennial shopping habits, “what has been missed . is the impact of the next generation: Generation Z,” Brown said. “This generation (the first to have grown up completely on smartphones) are poised to put that growth to shame.”

In 2015, Forrester Research reported that, despite low incomes due to their youth, Generation Z consumers spent 8.75 percent of their total income online. This compared with 5.33 percent for millennials and 3.85 percent for Generation X.

“The entire apparel marketplace has been sharply impacted by the encroachment of Amazon into the fashion arena and by the general rise of e-commerce,” Brown said. “But that impact has been sharpest on teen apparel because their core consumer, Generation Z, have been even stronger users.”

Combined with retailers being slow to develop an in-store/online sales strategy, “this is why there has been a wave of teen apparel retail failures that is nowhere near finished,” he said.

Ken Perkins, president of Retail Metrics Inc., which provides investors with research on retail, cited four factors in teen fashion’s fall:

-Teen apparel retailers are almost exclusively located in malls (Aero, Wet Seal, PacSun, American Eagle, Abercrombie, Tilly’s, Zumiez). “Consumers are venturing to (mediocre, under-performing) malls at a rapidly declining rate. Teen chains are not alone in their inability to make up for lost foot traffic with rapid e-commerce growth.”

-Social media have changed what teen consumers focus on. “Teens are more interested in dining out with friends, attending shows, concerts, sporting events that they can post to social media than they are about their wardrobes.”

-Teens are very fashion fickle, and no overarching fashion trends are driving sales. “Denim is a constant but what else?” said Perkins.

-The transition to mobile spending and rapid delivery “is happening so rapidly that most retailers cannot keep pace with it,” he said. “Amazon is eating everyone’s lunch.”

Compared with all of retail, the teen category has under-performed every quarter since 2008, according to Retail Metrics.

A similar pattern holds with earnings growth. Teen earnings are far more volatile than the industry’s and have under-performed in 13 of the last 16 quarters.

Corali Lopez-Castro, a Miami-based lawyer, has handled retail bankruptcies and regularly represents landlords. She said “fast fashion” retailers, such as Zara out of Spain, which sell a lot of volume and change offerings daily, were altering the rules of the game. Zara will debut a store at Cherry Hill Mall in fall 2017.

“Zara changes the trends all the time,” Lopez-Castro said. “Teens will go to the store here (in Miami) just to see what’s new. There’s often a group waiting outside for the store to open. It has great price points and a very hip web presence.”

With teens, “status is less important,” Lopez-Castro said. “Today it’s more about what’s unique.”

Yung Girbaud, 22, who stopped going to malls when he was 19, represents the malls’ greatest fear.

He was at another Philly-area mall on a recent weekend to hang out with his buddies and “pick up girls,” he said sheepishly. His posse was sitting on sample massage chairs in front of Aeropostale, and never ventured into the store.

Girbaud, of Hamilton, N.J., said he does virtually all of his shopping online from such websites as Neiman Marcus, Barney’s, and Saks Fifth Avenue.

Mall offerings are “so vanilla,” he said. “When I see people walking around the mall, they are all wearing the same clothes.

“I like finding stuff on eBay – clothes and accessories that no one else is wearing,” he said, citing a Christian Dior wallet from eBay.

Girbaud then pulled out his iPhone to show off what he wore while recently visiting a friend in New York: a headband with a matching blue shirt/pants outfit. “Everything you can’t find in a mall,” he said.

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By: Cindy Kent

Law

KozyakTropin& Throckmorton announced that partner Javier A. Lopez has been named a recipient of the Hispanic National Bar Association’s Top Lawyers Under 40 award. Lopez will be honored during the HNBA Corporate Counsel Conference in Miami on March 31.

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By Kaya Yurieff

The list of troubled retailers seems to be getting longer by the day.

S&P Global Ratings recently downgraded four retailers: department store operator Macy’s (M) , luxury retailer Neiman Marcus, young-women’s fashion chain Charlotte Russe and thrift store operator Evergreen AcqCo1.

Macy’s was cut to BBB- from BBB last week, which is one level above junk bonds. The ratings change comes after the company reported weak fourth-quarter results, partially due to soft holiday sales.

“The downgrade reflects our view of the company’s weakened operating performance and competitive standing given the ongoing industry challenges, such as sustained low-customer traffic, increased price transparency and unrelenting competition from online, fast-fashion and off-price retailers,” credit analyst Helena Song said.

Fast fashion, from retailers such as H&M, Topshop and Zara, has disrupted the historical supply chain model as it emphasizes getting new trends out into the market quickly and cheaply.

“Fast-fashion retailers have thus been able to flood the market with new, inexpensive styles and have been able to react quicker to changes in consumer preferences,” Credit Suisse analysts said in a recent note.

“Zara is the star,” said Cori Lopez-Castro, partner at KozyakTropin& Throckmorton. The retailer is able to change its merchandise very quickly and customers keep coming back to the store because they know they’ll see something new. “No one is going into Macy’s to see what’s new.”

Off-price retailers have also become more popular as consumers seek bargains and forego department stores and malls.

Standard & Poor’s also downgraded department store Neiman Marcus to CCC+ from B- with a negative outlook this month. “The company’s capital structure is unsustainable over the long term. Trends such as weak mall traffic, highly promotional retail apparel environment and cautious consumer spending continue to weigh heavily on Neiman Marcus’ operating performance and EBITDA,” Song said.

Mall-based Charlotte Russe is also struggling. S&P lowered Charlotte Russe’s rating to CCC+ from B- with a negative outlook earlier this month. “The company’s suppressed debt trading prices and lack of prospects for a strong, sustained rebound could lead the company to pursue a potential debt restructuring,” said credit analyst Andrew Bove. “The apparel industry will only be more challenged over the next 12 months to 24 months.”

Teen retailers have especially struggled as evidenced by a string of Chapter 11 bankruptcy protection filings from companies such as American Apparel, Aeropostale, Wetseal, Quicksilver and PacSun.

“Kids moved away from those brands. It wasn’t popular on social media,” Lopez-Castro said, adding that the aforementioned companies also didn’t have a strong e-commerce presence.

The teen market is extremely competitive, highly cyclical and very trend driven. “If you lose your touch, your shoppers can desert you instantaneously,” said Stephen Selbst, the chair of the bankruptcy group at Herrick Feinstein.

Weakness in the retail sector is also being caused by stagnant consumer incomes, changing consumption patterns and the growth of e-commerce, according to Selbst.

The core shopper of big department stores such as Macy’s and J.C. Penney (JCP) are middle class women and middle class incomes have been stagnant for a generation, he said.

Clothing purchases made up between 5% and 6% of consumer expenditure a generation ago vs. only 3.5% before the Great Recession. That decline is continuing, according to data from the Bureau of Labor Statistics, which showed that aggregate household spending on clothing has dropped almost 10% since 2005.

“There aren’t more dollars to go around,” Selbst said, but noted that the upper strata of the American consumer population is not being squeezed.

While retailers in the past have blamed sluggish results on a bad holiday season or unfavorable weather, he believes they are missing the bigger picture. “Consumption patterns are changing,” Selbst said.

The rise of Amazon.com (AMZN) and Walmart’s (WMT) Jet.com have accelerated the shift to shopping online. “The whole shopping experience has been radically changed,” he said.

As for the outlook of this year? Said Lopez-Castro, “2017 will be the year of retail bankruptcies.”

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