Insolvent clothing retailer Le Château Inc. was in financial difficulty – recording mounting losses, borrowing money from its founder and turning to its landlords for rent relief – long before the COVID-19 pandemic tanked retail sales across Canada.
The Montreal-based clothing chain announced on Friday that it would soon begin liquidation sales and close down all of its stores, after six decades in business. It is the latest among a wave of retailers seeking creditor protection. While others have done so in order to restructure operations or even sell the company – as outdoor retailer MEC recently did – Le Château was left without options after an effort to sell or refinance the business fell flat.
Starting in mid-August, Le Château reached out to 105 possible investors, lenders and purchasers in an attempt to either sell the company or refinance its debt. Of those, 34 signed non-disclosure agreements to view information about the company.
No buyers emerged, and only one lender sent a letter of intent proposing a refinancing option. That proposal included conditions Le Château could not meet – including obligations to maintain minimum liquidity going forward – according to a report filed on Thursday by PricewaterhouseCoopers Inc., which is acting as the monitor in the creditor-protection process. At that point, the company began putting together a plan to wind up the business.
“The appetite today from financiers for retail, it’s not great,” Franco Rocchi, Le Château’s senior vice-president of sales and operations, said in an interview with The Globe and Mail on Friday.
Things came to a head in July, when Le Château reported earnings and included a warning about “material uncertainties that cast significant doubt upon the company’s ability to continue as a going concern.” That warning meant the company was in default on some of the covenants under a $70-million revolving credit facility with Wells Fargo Capital Finance Corp. Canada, and a $15-million loan from Gordon Brothers Finance Co.
The company’s debts amount to $125-million, according to its application for creditor protection filed in Quebec Superior Court on Thursday. Le Château has $59.4-million drawn on the Wells Fargo credit facility, and also owes $21.2-million in deferred rent to landlords.
In recent years, Le Château founder Herschel Segal advanced approximately $51-million to the business through his holding company, Rainy Day Investments Ltd., “in order to allow Le Château to maintain the necessary liquidities to continue its operations as a going concern,” the court application states. Of that amount, $12.3-million was assigned as loans from landlords; $35-million was converted into shares in Le Château; and $3.9-million is held as a loan by Rainy Day.
The document reveals that Le Château was asking for rent deferrals from landlords before the pandemic caused many retailers to negotiate for such concessions; and many of its landlords had already granted “significant” deferrals in 2019. Its largest rent concessions have come from landlords Cadillac Fairview, Ivanhoé Cambridge, Oxford Properties and shopping mall property manager Cushman & Wakefield, according to the application for creditor protection.
Le Château had been working on a turnaround plan for years, before 2020 emerged as a crisis year for the industry. The clothing chain scaled back its brick-and-mortar presence by roughly half, closing underperforming locations and cutting the total number of stores to 121 from 243 in the past eight years, according to the monitor’s report.
The company also spent money to improve its e-commerce offering, but still made the bulk of its money from stores: Digital sales accounted for 13 per cent of its revenues in the past fiscal year. Meanwhile, brick-and-mortar sales have been in decline, and Le Château continued to lose money. For the three fiscal years ended Jan. 25, 2020, it reported combined net losses of approximately $117-million.
“Ironically, 2020 was supposed to be ground zero for the return to profitability,” Mr. Rocchi said in the interview on Friday.
That was not to be. In the six months ended July 27, Le Château had $32.3-million in sales, a 62.3-per-cent decrease from the same period last year. It had a net loss of $13-million in those six months, according to the report.
Its CCAA application states that Le Château will continue to look for alternatives to maximize the value of the business. In the meantime, store liquidation sales will begin on or around Nov. 1, “in order to maximize sales volumes during the pre-holiday period,” the monitor’s report states.
Sales are expected to be completed by April 30, 2021, though that could vary by store location, or based on potential further mandated shutdowns related to the pandemic. The company has secured $4.5-million in interim financing to fund the liquidation.
Winding up the business will affect 1,409 employees across Canada. It will also affect other businesses that Le Château contracts to manufacture its private-label clothing lines: About 30 per cent of the company’s inventory is made in Quebec.
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