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The Bankruptcy Boom of 2020

COVID-19 has left a path of devastation in its wake. One particularly hard-hit industry is retail, specifically the apparel sector. Since March, household name brands have been closing their doors, laying off or furloughing employees, and announcing plans for restructuring. While this bankruptcy boom is definitely impacted by the pandemic economy, many of these brick-and-mortar businesses were already struggling for years prior as a result of the rise in online shopping. The implications of COVID-19 are simply accelerating the losses that were already happening.

While it will take time for the full impact to hit, we’re already seeing well-known brands filing for Chapter 11 or, in some cases, Chapter 7 bankruptcy. It’s expected that the stores that can remain in operation through the holidays will do so, but we can anticipate another big surge of filings in January 2021 as companies begin to run out of options.

In previous blogs, we’ve covered that bankruptcy doesn’t automatically equal liquidation and going out of business. For the companies that have filed a Chapter 11 bankruptcy, their intent is usually to achieve a financial restructuring to create an opportunity to turn things around. This filing is frequently referred to as “bankruptcy protection” because the business can stay in operation while removing financial burdens; this could mean closing store locations or negotiating debts. The end goal is to sell off what’s not serving them and keep the parts of the business that are still profitable. A Chapter 7 bankruptcy, on the other hand, means liquidation and that stores shut down for good.

Let’s explore some of the biggest brands that have filed for bankruptcy so far this year to get a better understanding of the reasoning behind filing for a Chapter 11 vs. Chapter 7. Rest assured that even though these companies have filed, you can still expect to see these big names for years to come if they follow a prudent plan for restructuring set out by a competent legal team.

Brooks Brothers

The high-end clothing company filed for Chapter 11 bankruptcy on July 8, closing their three U.S. factories and 51 stores. Their drop in sales was likely caused by an increasingly casual workplace culture prior to the pandemic coupled with a mass migration of their target consumer base to a virtual office. The company – that’s been around for over 200 years – is currently still looking for a new buyer.

Lord and Taylor

America’s oldest department store filed for Chapter 11 on August 2. They plan to liquidate stores (including one of their newest location in New York’s trendy Hudson Yards) and sell to a potential buyer.

Lucky Brand

Lucky Brand closed 13 of 200 stores and filed for Chapter 11 bankruptcy in early July. This decision came from previously acquired debt that was exacerbated by the mandated store closures during the peak of the pandemic. They plan to sell the brand for $140 million making them one of the “lucky” ones in the economic fallout.

Tailored Brands

Tailored Brands, the umbrella that owns Men’s Wearhouse, Jos. A. Bank, Moores Clothing for Men, and K&G was struggling before COVID-19. As of August 2, they have secured $500 million in debtor-in-possession financing from lenders and plan to continue operations stores through the bankruptcy process.

Neiman Marcus

This well-known department store filed for bankruptcy on May 7 citing unsustainable debt as a result of extra burdens from private equity buyouts. As of August 24, the negotiations were still underway.

JC Penney

JC Penney filed for Chapter 11 on May 15 and conversations to find a buyer have hit a standstill. A September 10 deadline has been set to reach an agreement.

J. Crew

On May 4, J. Crew filed for Chapter 11 bankruptcy with plans to continue operations, convert debt into stock, and maintain the popular Madewell brand internally. This company was already struggling with debt prior to the pandemic as a result of a private equity buyout.

Stein Mart

Stein Mart filed for Chapter 11 with cautiously optimistic hopes for a potential buyer. This outcome is unlikely, so the brand is planning to liquidate all of its stores and sell assets, including its intellectual property and e-commerce operations.

It’s safe to bet that high rents and low revenue as a result of longstanding changes in consumer behavior will continue to drive more big brands to file for bankruptcy. With the right legal counsel, in most cases of our country’s most cherished brands, the businesses will be able to recover and eventually thrive when putting this tough season behind them. If the state of the economy continues to decline, we might see more liquidations come out of this. Even if a company liquidates all of its stores and inventory, some parts of the business known as intellectual property, such as the name or website, may survive beyond 2020.

If you’re considering filing for a Chapter 11 or Chapter 11 Subchapter V Bankruptcy, it’s essential that you seek counsel early to ensure that you have a strategic plan in place. Give us a call and we can explore the option to restructure your business so that you can maintain operations and weather the storm of COVID-19.