A'gaci readies to exit bankruptcy in coming weeks

Dive Brief:

A federal bankruptcy judge this week approved A'gaci's plan to exit Chapter 11 bankruptcy, according to court documents. The plan is subject to a vote by various lenders.
The women's fashion retailer, the first major industry bankruptcy in 2018, expects to officially exit Chapter 11 in late July with 55 stores, about 20 fewer than A'gaci had before entering bankruptcy, according to court papers. The retailer's bankruptcy plan calls for a focus on its historically profitable stores and an expansion of digital sales.
A'gaci Chief Merchandising Officer and co-founder David Won is set to take over control of the company on its exit, with the executive buying sole membership for $250,000. Under the plan, Won would step into the CEO position and be the retailer's sole board director. The company will pay about $1.1 million in administrative exit costs along with millions to pay off creditor claims.

Dive Insight:

A'gaci suffered with the broader disruption in its sector, with declining physical traffic and expanded competition from online sellers. But the retailer was also dealt a bad hand that was unique in some ways.

A'gaci's chief financial officer said at the outset of the retailer's bankruptcy that major hurricanes last year "ravaged" some of the retailer's most profitable stores in Texas, Florida and Puerto Rico, forcing those stores to close for an extended period and helping to tip the company into bankruptcy.

A'gaci, founded in 1971, also undertook a terribly timed physical expansion, building out 21 new stores over the past two years just as consumers began turning more to the internet to buy apparel. Hiccups in the implementation of a new business software system also caused problems, according to past court filings. The retailer's earnings fell by $7.2 million in the year before it filed, from $4.7 million in 2016 to around negative $2.5 million in 2017. The timing of the earnings hit was also terrible — it came as a major debt maturity loomed in 2018.

In bankruptcy, the retailer is closing fewer than half the stores it originally planned. (Along with closing around 20, the retailer said it negotiated better rents for others.) It does, however, still expand its focus on e-commerce. A'gaci expects comparable e-commerce sales to rise 35% in 2019 and 25% in 2020, while it projects brick-and-mortar comps to increase 5% next year and 3% in 2020, according to its bankruptcy plan.

A'gaci also plans to hire a digital marketing consultant and build a Spanish-language e-commerce website to reach its "core demographic" of Hispanics throughout the Southwest and Puerto Rico.

The retailer is set to leave bankruptcy with $12 million in exit financing, which the San Antonio Express-News pointed out comes with a relatively high interest rate of 10.5%. "So it's fairly expensive financing, but you don't get the cheap stuff when you're a Chapter 11 debtor, right?" Chief U.S. Bankruptcy Judge Ronald King said at a hearing to approve the request, according to the Express-News.

A'gaci's outcome was ideal as far as these things go. It went into Chapter 11 following a partly un-anticipated financial calamity and used the bankruptcy process to trim its physical footprint, get its financial books in order and reposition itself for the current market. Now, with the court process winding down, comes the more uncertain part: retailing in a quickly changing world.