DavidsTea Inc. is the latest retailer to seek creditor protection to restructure its business, contributing to a wave of vacant storefronts that will emerge from the COVID-19 pandemic.
The Montreal-based company announced on Wednesday that it is seeking protection under the Companies’ Creditors Arrangement Act as it significantly reduces its bricks-and-mortar retail presence. The company said it would focus primarily on selling tea and accessories through its website and through wholesale distribution to more than 2,500 grocery stores and pharmacies in Canada, as it tries to “stem the losses” from unprofitable stores.
DavidsTea said it would also apply for bankruptcy protection for its U.S. subsidiary.
The company is now in discussions with landlords about “more favourable lease conditions,” and may close a “significant number” of its 222 stores, all of which are currently closed, chief financial officer and chief operating officer Frank Zitella said in a statement.
DavidsTea had experienced declining sales at its bricks-and-mortar stores for multiple years before COVID-19, and the new retail environment makes it difficult for the tea seller to operate.
The company declined a request for an interview on Wednesday.
Many Canadian retailers that were already attempting to transition to cope with a changing retail environment have seen challenges to their businesses accelerate because of mandated shutdowns during the pandemic.
Clothing retailer Le Château Inc. – which was founded in 1959 by Herschel Segal, who is also the co-founder, chairman and interim chief executive officer of DavidsTea – reported on Monday that it is seeking new sources of financing, and warned that “material uncertainties ... cast significant doubt upon the company’s ability to continue as a going concern.”
More restructuring processes are likely to arise in the retail industry as uncertainties about the economic recovery, as well as people’s shopping habits, continue to affect sales.
“Almost every law firm is talking to one or two clients that have multiple retail locations, that are considering their options right now,” said David Ullmann, a partner and restructuring and insolvency lawyer with Blaney McMurtry LLP in Toronto.
The CCAA process requires that companies have liabilities in excess of $5-million. Another avenue to restructuring is to file a “notice of intention” under the Bankruptcy and Insolvency Act, a lower-cost option that also provides somewhat less flexibility and requires companies to propose a plan within a shorter time period than under CCAA.
Reitmans Canada Ltd. and Aldo Group both filed for CCAA protection in May. In an interview with The Globe and Mail at the time, Aldo confirmed a plan to close more than 40 per cent of its corporate-owned stores.
Last month, clothing retailer Frank and Oak’s parent company, Modasuite Inc., filed a notice of intention, saying it would shutter some stores and refocus on e-commerce. In May, Coalision Inc., the owner of activewear brand Lolë, also filed a notice of intention, seeking a buyer for its assets.
Sail Outdoors Inc. filed for protection under the Bankruptcy and Insolvency Act in June, saying it planned to close six of its 14 stores. Comark Holdings Inc. – which owns Ricki’s, Cleo and Bootlegger stores – announced its restructuring under CCAA last month.
For retailers that were already facing significant challenges, the industry shock of the pandemic may help to make the case that creditor protection is necessary.
“What COVID gives the debtors is a universally understood narrative for why they need restructuring,” Mr. Ullmann said. “... The statutes are really good at helping companies navigate a crisis while preserving an otherwise viable business.”
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