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Life After Bankruptcy: Why Some Brands Survive and Others Don’t

The odds of making it through bankruptcy intact are growing smaller. BoF looks at what happens when a brand goes through the process — and then rises again under new ownership.
Source: Shutterstock
By
  • Cathaleen Chen
BoF PROFESSIONAL

NEW YORK, United States — By the time Gordon Brothers bought Wet Seal out of its second bankruptcy, the teen retailer had shrunk from hundreds of stores to little more than a brand name and a list of former customers' email addresses.

Still, the company was worth $3 million to the liquidator, which specialises in reviving nearly dead brands. After all, the last Wet Seal store may have shuttered in 2017, but plenty of people had at least a hazy recollection of the brand, a precursor of Forever 21 with storefronts in hundreds of American malls in the early aughts. “This is a brand that did half-a-billion-dollar sales in 2014 … a brand that already spent hundreds of millions of dollars marketing itself,” said Ramez Toubassy, president of the brands division at Gordon Brothers.

“It has an awareness could be used to relaunch the business. We took that awareness and affinity and took it to the new world, where fast fashion is done online and there are a lot of new players on the market."

Filing for bankruptcy is an opportunity for broken retailers to revamp their business models without having to worry about looming rent and debt payments. But that’s easier said than done these days, and Wet Seal’s first two attempts at restructuring are case in point. Today, the forces that triggered the first wave of bankruptcies — online competition and declining mall traffic — have only grown more disruptive. Rising interest rates, which make refinancing debt more expensive, make bailing out retailers like Wet Seal less attractive.

Sears has barely emerged from the bankruptcy process earlier this month, as many of the department store’s creditors and even some mall landlords pushed for liquidation over chairman Eddie Lampert’s $5.2 billion winning bid for the chain and its remaining 400 stores. Children’s clothing company Gymboree is preparing to liquidate all of its stores after failing to procure the capital needed to keep the company alive, less than two years after it filed for bankruptcy in the first place.

“Many times, these companies will come out of bankruptcy [with] restructured capital but they haven’t fixed the underlying business,” said Deb Rieger-Paganis, managing partner at consultancy AlixPartners. “Unless you figure out the operating problems, there’s no shot.”

But lenders are also now wary of the sector in general … many investors have been burned already.

It's a worrying sign for other troubled retailers, from luxury department store chain Neiman Marcus to mall staples like J.Crew, Charlotte Russe and Payless ShoeSource, all of which face a toxic combination of sluggish sales and looming debt payments. Payless, in fact, face the prospect of filing for Chapter 22 bankruptcy — or the second bankruptcy that follows a failed first attempt at restructuring.

“Retailers are finding themselves in difficult situations because their business model, first and foremost, is broken,” said David Tawil, president of distressed-focused hedge fund Maglan Capital. “But lenders are also now wary of the sector in general … many investors have been burned already.”

But for brands like Wet Seal, nonetheless, there is the possibility of an afterlife under new ownership — that is, if they can retain their brand affinity with customers after the messy ordeal of bankruptcy.

Old Brand, New Company

After liquidation, some brands wind up in the hands of licensing companies such as Marquee Brands and Gordon Brothers, which resurrect dying businesses by making heavy use of licensees. Among the biggest of them is private equity-backed Authentic Brands Group, whose portfolio includes the likes of Nine West, Aeropostale, Juicy Couture and Hervé Léger. ABG’s brands generate over $9 billion in annual retail sales, with the owner taking a cut via royalties.

Popular brands like Nine West typically attract multiple competing bids among all the top players when they hit the auction block. But the ratio of bankrupt brands-to-buyer is still favourable to the ABGs and Marquees of the world.

“Right now, it’s a buyers’ market,” said Gordon Brothers’ Toubassy. “There’s not a lot of people who do what we do.”

Marquee Brands, for instance, has assessed over 300 brands over the last five years, but “only acted on six,” including BCBG Max Azria, Ben Sherman and Bruno Magli, said chief operating officer Cory Baker.

“It’s a careful litmus test,” he said, one that involves customer surveys, input from retail partners and interviews with executives. For example, the company acquired BCBG Max Azria for $108 million in August 2017 after determining that consumer perception of the brand was still strong, even if its financial state was not.

Buyers at bankruptcy auctions are often looking for intellectual property — a well-known brand identity that a new owner can adopt. Clothing brands associated with a particular style, such as BCBG’s trendy dresses or J.Crew’s preppy look, are more attractive than department stores that rely on third-party brands rather than their own products. That’s not always the case: Neiman Marcus valued its intangible and other assets, a category that includes its brand and other IP, at more than $500 million in 2017. ("Any speculation about a potential future path for the company other than business as usual is reckless and inaccurate," the Dallas-based company said in an email statement to BoF in response to a request for comment.)

J.Crew took the precaution of transferring its IP to a subsidiary in late 2016, which would protect the value of the brand against its loan holders in case of default. Creditors challenged the move, though the matter was settled as part of a 2017 deal where two investment firms, Blackstone’s GSO Capital Partners and Anchorage Capital Group, bought the company’s debt.

Neiman Marcus is attempting a similar maneuver with its MyTheresa asset transfer, which is now being challenged in court by one of its creditors, Marble Ridge Capital.

Another factor that determines whether a retailer is worth saving is the state of its supply chain. New owners may look to renew a pre-existing licensing deal rather than start from scratch. “Ideally, we’ll know the pool of licensees we can go to before we purchase something and sometimes we bounce it off them to gauge the interest,” Toubassy said. “Sometimes the brand itself have existing licensees that we can extend so that gives us some comfort.”

The Revival Playbook

Under new ownership, some brands can even flourish once they come out the other end of the bankruptcy process. Marquee held onto most of BCBG’s roughly 40 stores, but has since has opened a new location in New York City, added wholesale partners and signed new licensees for footwear, handbags, cosmetics and a girls’ apparel category. Sales are up 20 percent since the acquisition, according to Diane Bekhor, senior vice president of the BCBG Group. Next up: expanding in Latin America, Asia and Europe, she said.

But before growing the business, Marquee’s first task with BCBG was marketing: a new ad campaign, slate of events and influencer partnerships.

“When companies get into financial distress, the first thing they cut is design and marketing, so naturally those are the areas that we immediately started putting money into,” Baker said.

Wet Seal had already closed its stores before Gordon Brothers bought it, meaning the buyer inherited little more than a name, some social media accounts, and the email addresses of former online customers. After securing a manufacturer, Gordon Brothers was able to immediately set up the Wet Seal website and use the email addresses to reintroduce the brand as an online-only shop. The next step, according to Toubassy, is to seek customers who once shopped at the brand's nearly 500 stores but not online. After that, Wet Seal will make a wider push for new customers with paid online and social media marketing.

Old-time retailers have trouble reimagining the brand all the way to the studs... We are brand people and licensing people, so we have a unique ability to determine the value and the future of a brand.

To compete with the fast fashion retailers that had originally put the chain out of business, Wet Seal sped up its production cycle by sourcing prototypes from its licensee, a manufacturer that’s a subsidiary of a Mexican e-commerce company. Without stores to attract new customers, the company is trying alternative ways of gaining attention, such as letting people vote for their favourite styles in a product drop, and giving prizes to those who predict the most popular items, said Toubassy.

“Old-time retailers have trouble reimagining the brand all the way to the studs,” he said. “We are brand people and licensing people, so we have a unique ability to determine the value and the future of a brand.”

As more brands approach the auction block, liquidators and licensing companies are not only reaping the benefits of their dying businesses but also building a formula for success as they build a portfolio. “Old is new. If you take the old and make it really new, there’s a built-in customer base,” Jamie Salter, founder and chief executive of ABG, told BoF in an August interview. “You tap into nostalgia but you give [consumers] a new feel.”

Still, it’s a risky business — to invest in a stale brand with no guarantee of returns.

“A lot of what we do is art and science. It’s gut feel — do you really think you can do something with this brand?” Toubassy said. “If we don’t believe it then we pass.”

Editor's Note: This article has been updated with ABG's latest sales number to reflect its recent acquisition of Camuto Group and Heritage Home Brands.

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