Daffy’s Inc., the discount fashion retailer that began in 1961 as “Daffy Dan’s Bargaintown,” plans to sell all its assets and liquidate merchandise in bankruptcy, citing competition from online retailers that turned over 50 years of profits into losses beginning in 2011.
The 19-store chain in the U.S. Northeast, with 1,162 employees, plans to sell its real estate leases and merchandise and repay creditors in full, according to papers filed yesterday in Manhattan bankruptcy court. A joint venture of Gordon Brothers Retail Partners LLC and Hilco Merchant Resources LLC will liquidate merchandise, and Jericho Acquisitions I LLC, an affiliate of JEMB Realty Corp., will buy the company’s leases and certain intellectual property for $43 million, if the court approves, Daffy’s said.
Daffy’s, based in Secaucus, New Jersey, filed for Chapter 11 protection listing assets of $60.2 million and debt of $70.5 million as of July 1.
“The debtors’ operations during the last 50 years have generally been profitable,” company Vice President of Finance Richard Kramer said in court papers. Beginning in 2011, the economic downturn and increased competition from online discount retailers led to a loss of $11.4 million.
After hiring new senior management in February of 2011, losses continued, and by early 2012, Daffy’s board had fired the new management and begun cutting costs. Sales continued to decline by about $1 million to $1.5 million a month, and on June 5, one of its lenders, Wells Fargo & Co., said Daffy’s had defaulted on a loan, according to court papers.
Net sales for the year ended Jan. 1 were $151.3 million, and net operating losses were $11.4 million, the company said.
Irving Schulman opened the company’s first store in 1961 in Elizabeth, New Jersey, and the chain grew to 19 stores while selling brands such as Calvin Klein, Coach and Timberland at a discount. Nine of the stores are in New York.
Under its agreement with the liquidators, Daffy’s will get 99.5 percent of the cost of its inventory, estimated to be worth about $17 million. The agreement will therefore give Daffy’s about $16.92 million, depending on a final estimate of the inventory’s value when liquidation sales begin.
Marcia Wilson, the company’s main shareholder, owns Daffy’s along with five family trusts which hold voting stock in the company. An affiliate of Jericho, along with Morris Bailey, will also buy certain properties from Wilson, for $40 million, according to court papers.
JEMB Realty, a Manhattan-based real estate developer, said in a statement today that an affiliate would buy three properties from Daffy’s at an undisclosed price. The company is looking forward to working with Daffy’s on a wind up of its business, JEMB Chief Executive Officer Morris Bailey said in a statement.
Daffy’s assets had been used to guarantee the three properties’ loan obligations, worth $9.4 million, to Wells Fargo. Daffy’s also made a $1.2 million loan to a former director of the company, under which $613,000 is outstanding, according to court papers.
The sale of real estate leases to Jericho Acquisitions I for $43 million includes Daffy’s most valuable asset -- a lease for its 97,124 square-foot store at Herald Square in Manhattan, being sold for $20 million. Daffy’s said the lease has a current rent which is substantially below market rates.
Daffy’s said it expects to get $60 million from the sale of its merchandise and leases, more than enough to repay $27 million in pre-bankruptcy claims and pay bankruptcy costs of more than $5 million, allowing all creditors will be repaid in full, with interest. As a result, it isn’t filing an outline of the terms of its plan or soliciting creditor votes, the company said in court papers.
Daffy’s joins Syms Corp. (SYMSQ) and its Filene’s Basement LLC affiliate in bankruptcy. The two clothing chains filed for bankruptcy in November as consumer spending dropped and competition from discount retailers increased.
The company’s bankruptcy petition was filed by lawyers at Weil Gotshal & Manges LLP.
The case is In re Daffy’s Inc., 12-13312, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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