Barneys New York’s bankruptcy, the market’s take

New York – Weighted by high rents and online competition, Barneys New York announced at the beginning of August its decision to seek for bankruptcy protection. The high-end department stores chain has also secured a last-minute lifesaver in the form of a 218 million dollars capital injection.

“Like many in our industry, Barneys New York’s financial position has been dramatically impacted by the challenging retail environment and rent structures that are excessively high relative to market demand,” explained thus their decision the company’s CEO, Daniella Vitale, in a statement.

Owned by hedge fund manager Richard Perry, Barneys said it secured 218 million dollars in financing and will continue to operate until it finds a buyer. Many in the market are expectant, curious to understand how this second re-birth from its ashes goes for the department store operator. The first time the company went bankrupted in 1996, it took it three years to emerge from protection, recalls Bloomberg.

Last-minute new funding gives Barneys some breathing room while it finds a buyer

The new lifeline came just one day before Barneys New York filed for Chapter 11 bankruptcy protection. The corporate attorneys said the company received a larger capital-infusion offer, extended by Brigade Capital Management and B. Riley Financial.

In response to this announcement, made at the start of the company's first bankruptcy hearing, U.S. Bankruptcy Court Judge Cecelia G. Morris said this funding could replace the retailer's previously secured 75 million dollars from Hilco Global and the Gordon Brothers Group. The judge further suggested Barneys could use those 75 million dollars in new funding to pay employees, vendors, and other creditors, while giving the company more breathing room to operate and rethink its business.

Skyrocketing rents, the last straw for Barneys

Seen by many as a symbol of New York City luxury fashion, Barneys started weighing a second bankruptcy after the retailer’s 16 million dollars annual rent more than doubled, reaching 30 million dollars at its Madison Avenue flagship. This move was all Barneys needed to call advisors in.

Their 20-year commercial lease on Madison Avenue expired in January and contained a clause that allowed its owner to raise the rent to fair market value (he originally asked for 60 million dollars, according to sources close to the matter.) Peter Marino, the architect who designed the Madison Avenue flagship, said in an interview with the ‘New York Times’ that a new tenant is not likely to replace Barneys, adding that “It’s crazy to double the rent; half of Madison Avenue is empty.”

The luxury fashion department store hired earlier this summer various advisers from law firm Kirkland & Ellis, consultants MII Partners and investment bank Houlihan Lokey, aimed at reviewing the various financial alternatives, including a bankruptcy, renegotiating leases, or bringing in a strategic adviser, the ‘New York Times’ reported back then.

The retailer confirmed the news issuing a corporate statement: “Our board and management are actively evaluating opportunities to strengthen our balance sheet and ensure the sustainable, long-term growth and success of our business.”

What’s next for Barneys?

After filing for bankruptcy this week, Barneys will start closing 15 of 22 stores across the entire country, determined to focus just on those cities where it fares well.

“It’s clear the direction that they’re taking going forward is reeling down their real estate,” said David Silverman, senior director at Fitch Ratings. “Certainly the stores that they’re keeping are in the most densely populated areas and they’re keeping the ones that are in fashion markets.”

‘Fortune’ magazine suggested that, on the bright side, “a leaner, more focused Barneys also stands a better chance of fighting incursions onto its home turf: Neiman, whose total sales are in decline, opened its first Manhattan store this spring, and the battle gets more intense in October when Nordstrom, also struggling, finally arrives in New York with a massive full-service department store.”

Market sources consulted by FashionUnited agree that a leaner Barneys might have now the capacity and focus to revamp its online business instead of being distracted by poor-performing stores.

Photo: Barneys New York Facebook