Barneys Files for Bankruptcy As Rents Rise and Visitors Fall

(Bloomberg) -- Barneys New York Inc. filed for bankruptcy protection from creditors and laid out plans to shutter most of its stores after getting squeezed by rising rents and fewer visitors to its luxury fashion stores.

The Chapter 11 filing in New York allows the department-store chain to stay open while it seeks to sell a slimmed-down business and to negotiate with its landlords.

The company, owned by billionaire investor Richard Perry, said it has secured $75 million from affiliates of Hilco Global and Gordon Brothers Group to help meet its financial commitments. Authentic Brands Group LLC is one party in discussions with the retailer to potentially purchase assets including the company’s name brand and trademarks.

“Like many in our industry, Barneys New York’s financial position has been dramatically impacted by the challenging retail environment and rent structures that are excessively high relative to market demand,” Chief Executive Officer Daniella Vitale said in a statement Tuesday.

Barneys’ proposed bankruptcy loan would allow it to repay $50 million of debt and provide $25 million to help facilitate a sale in the next 60 days, court papers show. Before Barneys arranged that financing, one existing lender -- TPG Specialty Lending Inc. -- proposed $10 million of new money financing that would have required going-out-of-business sales at all but two Barneys stores, other court papers show.

What’s Closing

The bankruptcy had been telegraphed for several weeks as the retailer sought to avert Chapter 11 by finding a partner or buyer. Barneys said its stores on Madison Avenue and downtown New York City will remain open, as well as locations in Beverly Hills, San Francisco and Boston.

The company currently employs 2,300 people, according to court papers.

Two Barneys Warehouse locations will also stay open, and online operations will continue to operate. Among locations slated for closure include stores in Chicago, Las Vegas and Seattle, in addition to five smaller concept stores and seven Barneys Warehouse locations.

“Aside from the high price tags on goods, this department store faces the same challenges as any department store,” George Angelich, partner at restructuring law firm Arent Fox, said in an interview before the filing. As rents increase and consumers shift to buying online, “it becomes very challenging to maintain profitability,” said Angelich, who isn’t involved in the case.

Prior Bust

Founded as a men’s retailer in 1923 in Manhattan, Barneys morphed into a high fashion icon for women and men by the 1970s. It went bankrupt once before in 1996, after a falling out with a Japanese partner.

Earlier this year, Barneys sought to downsize the Madison Avenue store to reduce the annual rent, which tripled this year, Bloomberg previously reported. The retailer was working on a restructuring plan with advisers at MIII Partners and Houlihan Lokey, and lawyers at Kirkland & Ellis.

The chain listed $200 million of funded liabilities, with $800 million of revenue in 2018, according to papers filed in U.S. Bankruptcy Court for the Southern District of New York. Barneys also says it has about $120 million of federal net operating losses that could be used to offset future taxable income. Barneys is asking court permission to reject 15 store leases across the country, including deals with Brookfield Properties Inc. and Simon Property Group Inc. That could save the the company $2.2 million per month in rent and related expenses, Chief Restructuring Officer Moshin Y. Meghji said in a court declaration.

Vendor Uncertainty

The prospect of liquidation sales at such a high-end store raised questions about how discounting could affect Barneys’ relationships with its vendors.

“Barneys works with the crème de la crème of vendors, who don’t want their items hitting the market at discounted prices, and are probably not used to their merchants filing for bankruptcy,” said Stephen Selbst, chair of the restructuring and bankruptcy group at New York law firm Herrick, Feinstein LLP. “Their only possible recourse is to offer to buy back inventory to avoid it hitting the distribution channel, but that’s expensive. It’s going to be a walk into a very cold shower.”

While maintaining good relationships with its vendors will be crucial to turning Barneys’ remaining business around, David Silverman, Senior Director in Fitch Ratings’ corporate group, wasn’t too concerned about the implications of discounting related to store closings.

“It’s not like the company’s going to be putting yellow 40% off signs in the window,” Silverman said. “You can discount a good product by a little bit and drive a lot of excitement and traffic into the stores.”

He added that, “customers are aware that these kind of markdown events are one time. This is an isolated incident.”

The case is Barneys New York Inc., 19-36300-cgm, U.S. Bankruptcy Court for the Southern District of New York (Poughkeepsie).

--With assistance from Jordyn Holman, Anne Riley Moffat, Eliza Ronalds-Hannon and Lauren Coleman-Lochner.

To contact the reporters on this story: Katherine Doherty in New York at kdoherty23@bloomberg.net;Jeremy Hill in New York at jhill273@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Nicole Bullock, Dan Wilchins

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