Could Barneys Pull Off a Bankruptcy Turnaround?

Barneys New York has been a Manhattan institution for nearly a century, but a massive rent hike at its Upper East Side flagship is threatening to push the retailer into bankruptcy.

The company is reportedly on the brink of filing for Chapter 11 protection as it contends with an annual rent bill that nearly tripled in January to more than $44 million, including enormous property taxes on its 660 Madison Ave. store. (Under the prior lease with landlord Ashkenazy Acquisition Corp., it had been paying $16 million per year.)

While the 275,000-square-foot flagship reportedly accounts for a third of Barneys’s annual revenue, the luxury retailer is struggling with many of the same forces that are battering its competitors, including declining foot traffic and fierce online competition. Plus, the rent increase is likely already weighing significantly on its margins. This spring, a spokesperson denied reports that the company was looking to shrink the store — a strategy that many retailers, including Macy’s, are currently trying out as a way to ease costs and adapt to changing consumer habits.

Some industry sources say that a smaller floor plan for Barneys — at a location already less than half the size of rival Saks Fifth Avenue’s nearby flagship — could do more harm than good, however.

“I think that downsizing would be the beginning of the end for them,” said Joseph Aquino, president of JAACRES, a commercial real estate firm. “It would be the tourniquet, but it would still be bleeding. There will be less of an attraction and a little less of a reason to go there, so I don’t see that to be the answer.”

While a bankruptcy court could help Barneys get out of unwanted leases, he said, all signs point to the retailer wanting to hold on to the flagship store, which it has occupied since 1993.

If it were forced to vacate, it would deal another blow to a retail corridor that’s already suffering from a slew of empty storefronts. According to a recent report from the commercial real estate company Cushman & Wakefield, nearly 30.0% of all storefronts on Madison Ave. between East 57th and East 72nd are available for lease. (Barneys stretches between East 60th and East 61st.)

Ashkenazy, meanwhile, could move to replace Barneys with a nonretail tenant: The store occupies the bottom nine floors of a 23-story tower that also houses offices and residential units. Earlier this year, WeWork closed a deal to buy Lord & Taylor’s Fifth Avenue flagship for $850 million; now, Amazon is reportedly interested in leasing some of the space.

Whatever Barneys’s next move may be, the road ahead won’t be easy, said Scott Stuart, CEO of Turnaround Management Association, a corporate restructuring organization. “If they are to survive, I see them as a contracted group of stores in markets [where] they know that they can succeed and make money, but a lot of things have to happen before then: Leases will need to be rejected. They’ll need vendor support. They’re going to need to reach debt concessions with both their equity and their unsecured creditors.”

The retailer has already been through bankruptcy once, in 1996, due in part to overexpansion in the first half of that decade. It shuttered its original store on Seventh Avenue in 1997, and today it operates 13 stores, with another still scheduled to open in the fall at the American Dream retail and entertainment complex in East Rutherford, N.J.

In that case, it took nearly three years to reorganize, eventually emerging under the majority control of Whippoorwill Associates and Bay Harbour Management, with the descendants of founder Barney Pressman ceding most of their equity.

Barneys has reportedly been in talks with numerous potential buyers this time around, too, but it has yet to announce any deal. “Our board and management are actively evaluating opportunities to strengthen our balance sheet and ensure the sustainable, long-term growth and success of our business,” the company said in a statement. According to reports, it has hired law firm Kirkland & Ellis and financial advisers M-III Partners to help with the potential bankruptcy preparations.

If it were to find a buyer, said Stuart, it would be someone who would “have to understand the segment, believe that there’s value that can be garnered and pony up a reasonable amount of money that both is necessary to satisfy the debt obligations that are going to have to be satisfied and be able to fund it going forward.”

Particularly concerning is that Barneys’s struggles come at a time when the economy is booming, especially for the high-income clients the retailer courts. The average asking rent in the Madison Avenue corridor has declined more than 25% year-over-year, according to the Cushman & Wakefield report, and yet the flagship is still unaffordable in the current climate.

“The interesting thing from a restructuring perspective is every time retail thinks it’s figured itself out, there’s another curve ball that gets thrown in, and then it unfigures itself out,” said Stuart. “This has been a continual cycle for many, many years now, and it seems to just be perpetuating and continuing.”

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