After months of speculation and preparation, Tailored Brands has joined the retail parade in bankruptcy court.
Late Sunday, the men’s wear retailer filed Chapter 11, the latest victim of the coronavirus. The company’s situation was exacerbated by its dependence on tailored clothing and the debt load it had accumulated by its $1.8 billion acquisition of Jos. A. Bank Clothiers in 2014.
Under the terms of the deal, that was filed in the U.S. Bankruptcy Court for the Southern District of Texas, the retailer filed a pre-arranged financial restructuring plan that is expected to reduce its debt by at least $630 million. It has received commitments for $500 million in debtor-in-possession financing from its existing revolving credit facility lenders. Following court approval, this financing, combined with cash on hand — including approximately $90 million of restricted cash that the lenders have agreed to unrestrict and cash flow generated by ongoing operations — is expected to be sufficient to meet the company’s operational and restructuring needs. The restructuring agreement further expects the DIP financing will convert to a $400 million revolving credit facility from existing lenders upon the company’s emergence from Chapter 11.
“As evidenced by the positive results we saw in January and February, we have made significant progress in refining our assortments, strengthening our omnichannel offering and evolving our marketing channel and creative mix. The unprecedented impact of COVID-19 requires us to further adapt and evolve,” said Tailored Brands president and chief executive officer Dinesh Lathi. “Reaching an agreement with our lenders represents a critical milestone toward our goal of becoming a stronger company that has the financial and operational flexibility to compete and win in the rapidly evolving retail environment.”
The official bankruptcy filing included 17 affiliated brands including JA Apparel Corp., Jos. A. Bank Clothiers, Inc., Joseph Abboud Manufacturing Corp., K&G Men’s Company Inc., Moores Retail Group Corp. and The Men’s Wearhouse, Inc.
The largest unsecured creditor is the Bank of New York Mellon Trust Company in Houston, which is owed $180 million, and the largest industry creditor is Peerless Clothing, which is owed $8.1 million. WHP Global is owed $5.8 million in royalties, David’s Bridals is owed $3.5 million in royalties, Phillips Van Heusen Corp. is owed $2.7 million and Kenneth Cole Productions is owed $1.5 million in royalties.
Lathi declined opportunities to comment further on Monday, however, sources were quick to criticize him and the current management team for the company’s recent woes, saying that its troubles were evident long before COVID-19 took its toll. “But the current board and the executive team lack any of the tools they need to fix things,” one said.
Another source was more forgiving, saying that the fact that Tailored Brands had entered into the bankruptcy with the support of more than 75 percent of its senior lenders was a good sign. “It’s not for sale and they set it up as a restructuring so they can cleanse the company and continue to live when they exit,” the source said, adding that the real losers in this situation are the landlords of the 500 stores that the company will close during the bankruptcy proceeding.
The company set up a page —TailoredStronger.com — on its web site with a letter to the Tailored Brands community that said the decision to file Chapter 11 “was made to help us better position our company for the future.” It said it would continue to honor gift cards, rental reservations, custom orders and loyalty programs. It also included an overview of the Chapter 11 process for employees, customers and “other stakeholders.”
The Chapter 11 filing did not come as a surprise — the handwriting has been on the wall for months for the parent company of Men’s Wearhouse, Jos. A. Bank, Moores and K&G. In late July, the company said in a filing: “We have determined that there is substantial doubt about our ability to continue as a going concern. Although we are evaluating several alternatives, it is likely that we will pursue a reorganization under applicable bankruptcy laws.”
On July 1, the company missed a $6.1 million interest payment and said it did not have “sufficient liquidity to repay the amounts due under our indebtedness.”
A missed interest payment is a sign of extreme stress that has become increasingly more common among U.S. retailers since the pandemic began. Both J.C. Penney Co. Inc. and Neiman Marcus Group skipped interest payments and used their grace periods to explore alternative paths forward, but ultimately filed for bankruptcy protection from creditors.
As of the end of the first quarter on May 2, Tailored Brands had cash and cash equivalents of $244.2 million and its total debt stood at $1.4 billion.
In the first quarter, total sales plummeted 60.4 percent to $286.7 million, and e-commerce sales were down 31.9 percent versus a year earlier.
In mid-July, the company said it would close up to 500 of its 1,400 stores in the U.S. and Canada, and cut 20 percent of its workforce. That move was expected to result in a pre-tax charge of about $6 million in the second quarter of fiscal 2020 for severance payments and other termination costs, all of which are cash costs, it said.
Like most other retailers, Tailored Brands has been hard hit by the pandemic, and as a merchant with a strong dependence on tailored clothing, it has also been impacted by the trend toward more casual attire by many men, especially in the past few months as most have been working from home.
But Tailored Brands’ issues began even before the pandemic. Longtime executives for the company had been exiting the retailer for the past two years. Doug Ewert, who had been with the company for more than two decades, retired as ceo in September 2018. Parts of his tenure was rocky and included a nasty, public fight with the corporation’s founder, George Zimmer, that resulted in Zimmer being ousted from the firm in 2013.
Ewert was also in charge during the $1.8 billion acquisition of competitor Jos. A. Bank in 2014, a back-and-forth bidding war that lasted for nearly six months. When the then-Men’s Wearhouse ultimately emerged victorious, it created a public men’s wear specialty store behemoth, but the purchase also saddled the corporation with a hefty debt load.
For two years following the acquisition, Ewert took heat from Wall Street as he worked tirelessly to turn the Bank business around. Bank’s aggressive promotional strategy — as much as “buy one, get seven free” at one point — was revamped, some 250 stores were closed, and a restructuring strategy initiated. But it also put him at loggerheads with Lathi, executive chairman of the board. After Ewert’s departure, Lathi moved into the top role shortly thereafter.
The one-time chief of One Kings Lane and an eBay executive was highly critical of the company’s existing management and said it needed to change quickly, offer more personalized products and service, a better omnichannel experience and fewer promotions. He also brought in a new merchant team, headed by Carrie Ask, who had worked for Levi Strauss and Nike, who shone a spotlight on smart casual apparel and storytelling.
But the changes didn’t come quick enough and in early January, the firm made the bold move of selling its Joseph Abboud trademark to WHP Global for $115 million. The deal for the brand that represents some $500 million at its stores, was intended to help the company pare down the debt it acquired after purchasing Jos. A. Bank. Under the terms of the deal, it entered into a licensing agreement with WHP for the exclusive rights to sell and rent Joseph Abboud branded apparel and related merchandise in the U.S. and Canada.
The list of retailers and fashion brands that have been flattened by COVID-19 is long and, growing. Among the retailers that have filed so far are Neiman Marcus Group, J.C. Penney Co. Inc., J. Crew Group, Brooks Brothers and Ascena Retail Group.
Men’s Wearhouse was founded by Zimmer in 1973 and went public in 1992. The gravelly voiced Zimmer made the business famous by his ubiquitous commercials with the tag line: “You’re going to like the way you look. I guarantee it.”