Your Favorite Retailer Is Bankrupt — Here’s What That Really Means

Retail has seen more than its share of hard times lately.

Over the past three years, a stream of some of its most beloved brands have poured into courts with bankruptcy declarations — oftentimes to the disappointment of their most loyal constituents.

Nine West Holdings Inc., for example, spawned Twitter hysteria in April after it announced its decision to file for Chapter 11. Fans of the label took to the social media channel to grieve the loss of the brand, which they assumed was going out of business.

For many, the term “bankruptcy” connotes finality, but more often than not — according to David Adler, co-managing parter at McCarter & English LLP law firm in New York — Chapter 11 can mean quite the opposite.

“If the brand is viable and has value — in most instances — after filing, it will either continue by virtue of a 363 sale or by a reorganization plan,” Adler explained. “The brands that are worth a lot of money and have value [are likely] to continue on [such as] Nine West or any company that relies on its intellectual property for its business.” (In bankruptcy, a 363 sale refers to that of a company’s assets, which occurs under Section 363 of the U.S. Bankruptcy Code.)

What’s more, in the case of Nine West, part of the public confusion resulted from the fact that the brand and its holding company shared the same name.

Nine West Holdings — the entity that filed bankruptcy in April — owned Bandolino, Nine West, Anne Klein and several other brands at the time. The firm said it had taken the Chapter 11 route to facilitate the sale of its Nine West and Bandolino brands and to adjust its capital structure around its more “profitable and growing businesses,” such as One Jeanswear Group, The Jewelry Group and Anne Klein.

When social media users read “Nine West Holdings Is Bankrupt,” many assumed news headlines were referring to the brand itself.

Ultimately, the firm sold Nine West and Bandolino to Authentic Brands Group this month (a 363 sale) and the new owners said they plan to keep the brands in business. The holding company then retained its apparel, jewelry, and jeanswear businesses — continuing to operate them under a new capital structure (a reorganization).

The point of corporate bankruptcy, or Chapter 11, is to help a business reduce its debt and carry on — whether it’s through a sale of some or all of its assets to a new company or through a plan that allows it to effectively reorganize and move forward (think Payless, which filed in April 2017 and emerged four months later as a reorganized firm), according to Adler. Some companies — Nine West is one example — do a combination of both, selling off certain assets and continuing on as a reorganized firm.

Although filing for bankruptcy can sometimes cast a negative light on a brand’s name, Adler said public memory tends to be short-term, while the Chapter 11 process has several key benefits for companies.

store closing bankruptcy
CREDIT: Shutterstock

“Many different legal provisions are triggered under the bankruptcy code when a company files,” Adler said. “It means an automatic stay is in effect, which prevents creditors from seeking to collect on their debts outside of the bankruptcy process … One of the [main] purposes of Chapter 11 is to centralize the financial and operational issues of a company and bring them back to one court, the bankruptcy court, whose job it is to oversee the case and deal with the administration and confirmation of a plan and ultimately — hopefully — the emergence of a company from Chapter 11.”

Generally, it bodes well for the bankrupt company that parties involved in a Chapter 11 tend to want to see a business limit layoffs, emerge from the process and become successful again.

Still, not all companies make it (e.g., Sports Authority).

Though each case has its nuances, often businesses that are unable to restructure via bankruptcy have one major factor in common: “Advisers look at a company and see that it will not be cash-flow-positive even if restructures the obligations owed to banks, bond holders and/or landlords [by closing stores and so on],” Adler said.

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