Aeropostale Files for Bankruptcy, Seeks Probe of LenderTiffany Kary, Steven Church and Lauren Coleman-Lochner
Changing tastes, fast-fashion rivals prove too much for chain
Company asks to examine alleged abuse by lender Sycamore
Aeropostale Inc. filed for bankruptcy and asked for court permission to investigate lender Sycamore Partners, saying the private equity firm used a supplier it controlled to drive the teen-clothing chain into Chapter 11.
Mall-based retailers have struggled to adapt to online sales and the changing tastes of teenagers. New York-based Aeropostale has also had to contend with fast-fashion competitors that get new trends on shelves sooner. Its bankruptcy petition, filed Wednesday in Manhattan, follows meltdowns by American Apparel Inc., Quiksilver Inc. and Sports Authority Inc.
Online competition isn’t the only source of the company’s woes, Chief Executive Officer Julian Geiger said in court papers, citing actions by Sycamore, which also owns a key clothing supplier, MGF Sourcing.
In a 2013 conversation about naming Geiger to Aeropostale’s board, Sycamore managing director Stefan Kaluzny told him to “do nothing” and “just observe” because “his plan was to let Aeropostale deteriorate so that he could buy the company in bankruptcy,” Geiger said in court papers. Aeropostale is asking the court for permission to investigate Sycamore and Kaluzny, along with others.
When Geiger complained last year that MGF’s prices were too high -- causing Aeropostale to pay $25 million more than it would for comparable merchandise from competing suppliers -- Kaluzny said he had to make his numbers at MGF, according to Geiger.
Sycamore denied the allegations.
“Any such action would be counter-productive to its large financial investment in the company,” according to Michael Freitag, a spokesman for Sycamore, who noted that it was formerly Aeropostale’s largest shareholder and is the retailer’s largest secured creditor. MGF’s sourcing agreement with Aeropostale requires MGF to provide product at competitive prices, and the chain is free to source product from competing vendors, he said.
Aeropostale, a brand established by R.H. Macy & Co. in the early 1980s, expanded and became part of Federated Department Stores Inc. before going public in 2002. Sycamore stepped in during 2013, when its affiliate Lemur LLC bought 8 percent of Aeropostale’s equity in the open market, according to court papers. Sycamore and entities it controls have developed relationships with Aeropostale since 2014, and Sycamore also owns Aero Investors LLC, the retailer’s largest secured creditor, according to court papers.
The chain said it plans to close 154 stores immediately. At the end of fiscal 2015, Aeropostale operated 811 stores, and it currently has 14,500 employees, according to court records. Since 2013, the chain has closed about 215 stores, Poonam Goyal, a senior retail analyst at Bloomberg Intelligence, said in a report in April.
A smaller Aeropostale would emerge from the Chapter 11 process within the next six months, the company said.
Bankruptcy can make shuttering stores easier because of rules that allow companies to cancel contracts, including leases. But the U.S. Bankruptcy Code also grants landlords rights they can exercise to pressure a retailer into reorganizing quickly or liquidating.
Aeropostale said it secured a commitment for $160 million in debtor-in-possession financing from Crystal Financial LLC, which, combined with operating cash flow, will allow the retailer to meet financial commitments. It will seek court permission Wednesday in New York to draw on the loan.
Aeropostale’s filing follows three straight years of losses. It had also feuded with Sycamore prior to its bankruptcy, saying in March that MGF was holding up the delivery of merchandise and violating the terms of its agreement. The retailer said on April 15 that it would delay filing its annual report because it was distracted by the fight with MGF.
In March, Aeropostale tapped Stifel Financial Corp. to help assess a possible sale or restructuring. The company also is working with law firm Weil, Gotshal & Manges LLP and FTI Consulting Inc. on the filing.
Suppliers to the U.S. retailer include Hampshire Group Ltd., a New York-based maker of sweaters, and Hong Kong’s Li & Fung Ltd., which also supplies clothing and toys for Wal-Mart Stores Inc., according to supply chain data compiled by Bloomberg. A spokeswoman for Li & Fung said the company declined to comment.
Aeropostale listed $390 million in total debt and about $354 million of assets in its Chapter 11 petition.
The case is In re Aeropostale Inc., 16-11275, U.S. Bankruptcy Court, Southern District of New York (Manhattan).