Dive Brief:

• In the months before it declared bankruptcy, suppliers put the squeeze on Gymboree, hastening the children clothing retailer’s descent into financial calamity, according to documents filed this week in bankruptcy court. 
• Following news reports earlier this year of then-CEO Mark Breitbard’s departure, Gymboree’s vendors began demanding stricter terms to their arrangements. These included cash on delivery and refusals to extend ordinary credit, James Mesterharm, a managing partner at turnaround consultancy AlixPartners who is serving as Gymboree’s “chief restructuring officer,” said in a court document filed Monday. In some cases the demands were even more punishing. “Several vendors have threatened to suspend shipping inventory until the debtors pay upfront,” Mesterharm noted.
• The vendor demands exacerbated Gymboree’s struggles, according to the company. As the filing puts it: “This shift in payment terms both strained the debtors’ liquidity and put the delivery of the debtors’ winter 2017 purchase orders at material risk, jeopardizing the debtors’ ability to fully capitalize on customer demand during the peak holiday selling season.”

Dive Insight:

Gymboree’s clash with vendors — which hail from China, Vietnam, India, Cambodia and other Asian countries — highlight how financial problems for struggling retailers can snowball. As signs of the company’s ailments started to emerge, skittish vendors, in Gymboree’s view, conducted what amounts to a financial run on the company.

The stresses eventually led Gymboree in April to provide supply-chain management company Li & Fung with a $10 million letter of credit and $20 million incremental term loan. Li & Fung then provided credit to Gymboree vendors on current and future orders and helped cement the retailer's relationship with its suppliers. In May, just days before reports that Gymboree had missed a bond interest payment, Gymboree provided Li & Fung with $15 million in cash so that it could secure winter 2017 inventory. In effect, Gymboree prioritized its underlying business, and its ability to keep borrowing on credit tied to inventory, over its bondholders.

Gymboree is not the only distressed retailer contending with worried suppliers looking to add certainty to their own balance sheets, which are closely tied to the fate of the retailers they work with. Sears, for example, has had unusually public spats with its vendors and has filed lawsuits against two of them as the company wrestles with the dark financial cloud hanging over its head. Sears CEO Eddie Lampert has said publicly that he thinks vendors have taken advantage of negative media stories about the department store retailer.

David Silverman, senior director for retail coverage at Fitch​, said in a Monday interview vendor issues often lie below the public’s radar but are typically indicative of a company in distress. “Weakening vendor relations are definitely a step toward a restructuring process,” Silverman said. “Tighter terms from vendors with regard to payment, and frustrations with regard to store closures and negative comp sales would cause the vendors’ sales and profits to be impacted. Strained quantitative and qualitative relations, if you will, between retailers and vendors are a step along the path [toward bankruptcy].”

To be sure, Gymboree had issues beyond its vendors. The company was laboring under a $1 billion-plus mountain of debt — a legacy of Bain Capital’s leverage buyout of the retailer in 2010 — with a looming maturity. In March the company reported a total sales decline of 6.4%, a comparable sales decrease of 5% and a net loss of $324.9 million. By spring, stories surfaced that the company had hired restructuring consultants and was preparing to file for bankruptcy.

Gymboree announced late Sunday it had filed for bankruptcy with a restructuring agreement between it and a majority of loan holders. The deal proposed would reduce the company’s debt by $900 million and provide operating capital, allowing Gymboree to continue “business as usual,” in the retailer’s words, while closing as many as 450 stores. Gymboree also announced Chief Financial Officer Andrew North would step down and be replaced by Liyuan Woo, a director at AlixPartners, a consultancy specializing in corporate turnarounds working with Gymboree through the bankruptcy process.

Gymboree this week moved to reassure vendors it could meet its obligations. On the website devoted to the company’s restructuring, it set up a page specifically for vendors to address their questions. Here, the company noted the debtor-in-possession financing it would receive as part of the restructuring agreement that will “will ensure we are able to continue meeting all of our financial obligations throughout the Chapter 11 process, including paying our vendors as usual for all goods and services.” Products and services that vendors provided Gymboree before the bankruptcy filing (date June 11) will need court approval for payment.