The American buyers of Montreal-based clothing retailer Frank and Oak say that they want to expand the brand globally and are on the hunt to acquire other Canadian retailers.
New York-based investment company Unified Commerce Group announced the deal last week, providing some stability to the cash-strapped clothing brand. Terms of the deal were not disclosed. Frank and Oak’s parent company, Modasuite Inc., filed a Notice of Intention under the Bankruptcy and Insolvency Act on June 22, with a plan to close some of its stores and to put the business up for sale.
The buyers teamed up last September, and began looking at possible acquisitions of retail companies as the spread of COVID-19 became apparent in February and March.
“The aperture of what we have to look at has broadened quite a bit," said Unified Commerce Group co-founder and chief executive Dustin Jones. “There are a lot more opportunities for companies that require investment.”
Frank and Oak was launched in 2012 by former Deloitte consultants Ethan Song and Hicham Ratnani. The brand was aimed at millennial men who wanted to shop online for affordable but stylish basics, such as sweaters and button-up shirts. The e-commerce business grew quickly, in its early years, going beyond e-commerce to open stores across Canada and expanding into women’s wear.
But while the company had gained popularity with online shoppers, the brick-and-mortar expansion had left it with “too many stores for the size of the market,” according to a report from KPMG, which acted as a trustee during the restructuring process. As of June, Frank and Oak had 20 stores in Quebec, Ontario, Alberta and British Columbia, many of which were unprofitable, according to the report. Since then, Frank and Oak has closed all but nine stores, and now employs about 100 people in its stores; 50 head-office staff; and 30 to 40 people in the warehouse.
Frank and Oak had been losing money in recent years, and in January, the board of directors hired former Sephora Canada chief financial officer Jeremy Brown to help run the business. Mr. Brown took over as CEO when co-founder Mr. Song left the company in March. Co-founder Mr. Ratnani has been working with him during the transition.
Like many retailers, Frank and Oak was hit hard by the COVID-19 pandemic. The resulting store closings, and the precipitous drop in clothing sales, pushed some struggling companies to the brink.
“We were coincidentally due to raise some financing, and we were quite tight in terms of our cash position," Mr. Brown said. "The timing was terrible, to put it mildly.”
Frank and Oak had nearly $19-million in debt at the time and had breached covenants of a loan with Desjardins.
The company’s first goal is to prepare for the crucial holiday season. Financial backing allows Frank and Oak to stock up on more inventory than it would have otherwise been able to, he said. The company is also considering reopening some of the stores it had already moved to shut down permanently, as restrictions allow.
Despite its financial difficulties, the buyers say they believe the brand is healthy and has the potential to grow. They will begin looking at new markets for Frank & Oak over the next few months. The headquarters will remain in Montreal.
“We think there could be some real interest in Europe, and we certainly think Asian consumers would fit right in,” said Unified Commerce Group co-founder and chief financial officer Greg Freihofner.
China is a particular focus: Mr. Freihofner is an investment banker with experience advising Chinese companies on cross-border transactions, while Mr. Jones worked as managing director of Hong Kong-based Fung Retailing Group, which among other retail businesses, partnered with Roots Ltd. on its expansion into Asia.
The economic crisis precipitated by the pandemic has shaken the retail industry, and Frank and Oak is not alone in seeking protection from creditors to restructure its business. Reitmans Canada Ltd. and Aldo Group both filed for protection under the Companies' Creditors Arrangement Act (CCAA) in May. Comark Holdings Inc. – which owns Ricki’s, Cleo and Bootlegger stores – announced its restructuring under CCAA in June. Sail Outdoors Inc. filed for protection under the Bankruptcy and Insolvency Act in June – a lower-cost option that Frank and Oak also used, which gives companies less flexibility than the CCAA process and requires them to propose a plan within a shorter time period.
There are buyers for some distressed retail assets. Last week, sports and outdoor retailer MEC received court approval under the CCAA to sell the business to California-based private equity firm Kingswood Capital Management LP.
“With the second wave, I anticipate more bankruptcies. There will be somebody out there that will try to salvage them,” said George Minakakis, CEO of consultancy Inception Retail Group. “This turnover is going to flush out some weaker players.”
Frank and Oak’s buyers are “actively looking” at other possible acquisitions in the market, Mr. Freihofner said.
“We think there is an opportunity,” he said. “We would love to look at some other Canadian brands."
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