January 17, 2019 – Gymboree Group and 10 affiliated Debtors (“Gymboree” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Eastern District of Virginia, lead case number 19-30258. The Company, a portfolio of children's brands operating 380 specialty retail stores with clothing and accessories for children in the U.S. and Canada , is represented by Michael A. Condyles of Kutak Rock. Further board-authorized engagements include (i) Milbank, Tweed, Hadley & McCloy LLP (“Milbank”) as general bankruptcy counsel, (ii) . Stifel, Nicolaus & Company, Incorporated (“Stifel”) as investment banker and financial advisor, (iii) Berkeley Research Group, LLC (“BRG”) as financial advisor, (iv) Prime Clerk LLC as claims agent and (v) Hilco Real Estate, LLC (“Hilco”) as real estate consultant.
The Company’s Canadian subsidiary, Gymboree, Inc., intends to seek protection in proceedings pursuant to the Bankruptcy and Insolvency Act of Canada (“BIA”) in the Ontario Superior Court of Justice (Commercial List). Gymboree Group intends to use these proceedings to facilitate an orderly wind-down of all of its Gymboree and Crazy 8 store locations and operations, while continuing to pursue a going-concern sale of its Janie and Jack business and a sale of the intellectual property and online platform for Gymboree.
The Company’s petition notes between 5,000 and 10,000 creditors; estimated assets between $100mn and $500mn; and estimated liabilities between $50mn and $100mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) Hansoll Textile LTD ($12.1mn trade claim), (ii) Tip Top Fashions Limited ($9.7mn trade claim) and (iii) Pan Pacific Co Ltd ($7.1mn trade claim).
Chapter 22: Swings and Roundabaouts
This is the second Chapter 11 for Gymboree in under 2 years, the Debtors having previously announced a pre-negotiated Chapter 11 plan on June 11, 2017 and having emerged from that bankruptcy on September 29, 2017. In its first turn on the bankruptcy roundabout, Gymboree cancelled $171 million of its then-outstanding unsecured notes were cancelled and approximately $770mn of Gymboree’s then-outstanding funded debt was converted into equity. Additionally, the Company raised $80mn of new capital through a rights offering; and arranged $285mn in exit financing.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Coulombe Declaration”) [Docket No. 11], Stephen Coulombe, Gymboree’s Chief Restructuring Officer, detailed the events leading to the Company’s Chapter 11 filing, citing its inability to (i) withstand competition from other direct bricks and mortar competitors as well as an assault from discount stores, internet retailers, and big-box retailers competing on price and (ii) respond to chnaging customer preferences.
The Coulombe Declaration states, “Gymboree emerged from the Prior Cases with a substantially less leveraged capital structure and significantly reduced store count….Since the 2017 Plan Effective Date, Gymboree has closed additional stores, including all stores in South Korea and Australia, bringing its retail footprint to the current operating count of approximately 945 retail stores (excluding franchisees)….Nevertheless, Gymboree continued to face significant operational challenges that persisted after emergence from the Prior Cases.
The brick and mortar retail children’s clothing industry has remained highly competitive. Gymboree has faced competition from direct competitors, such as Children’s Place and the Gap, and indirect competition from discount stores, internet retailers, and big-box retailers that sell clothing at increasingly cheaper prices.
Furthermore, the industry-wide trend of commerce moving to online channels has resulted in shrinking in-store profit margins and declining profitability, as well as a larger-than-expected decline in Gymboree’s retail sales volumes in brick and mortar stores. Gymboree’s comparable store sales are in decline. Similarly, Gymboree’s wholesale platform, which facilitates the sale of large quantities of merchandise to bulk retailer, has performed below expectations. Net retail sales during the nine months ended November 3, 2018 decreased to approximately $573 million from approximately $785 million during the nine months ended October 28, 2017, a decrease of $212 million, or approximately 27.0%.
In addition to depressed sales, changing customer tastes and a merchandising strategy that did not timely achieve its expected results necessitated discounting across all channels (including online), making it increasingly difficult for the Debtors to support their cost and capital structure. Gymboree’s gross profits deteriorated from approximately $274 million for the nine months ended October 28, 2017 to approximately $171 million for the nine months ended November 3, 2018. As a percentage of net sales, gross profits during the nine months ended November 3, 2018 decreased to 29.8% from 34.8% during the nine months ended October 28, 2017, driven primarily by clearance sales."