Diesel USA Inc. – U.S. Subsidiary of Iconic Denim Brand Files Chapter 11, Looks to Close Stores and Reject Expensive Leases to Revive Brand in US
by New Generation Researchon March 5, 2019
March 5, 2019 − Diesel USA Inc. ("Diesel USA" or the "Company") filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-10432. The Company, a wholly-owned subsidiary of Italy's Diesel S.p.A. (the "Parent") and the United States member of the international Diesel brand family of companies, is represented by Pauline K. Morgan of Young, Conaway, Stargatt & Taylor, LLP. Further board-authorized engagements include (i) Arent Fox LLP as counsel, (ii) Mark Samson of Getzler Henrich & Associates LLC as Chief Operating Officer and (iii) Stretto as claims agent.
The Company's petition notes between 200 and 1,000 creditors; estimated assets between $50mn and $100mn; and estimated liabilities between $10mn and $50mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) U.S. Customs and Border Protection ($574k debt), (ii) New York Speed Inc. ($300k trade debt) and (iii) Arvato Digital Services LLC ($156k trade debt).
Chapter 11 Goals and Reorganization Business Plan
In a declaration in support of the Chapter 11 filing (the "Samson Declaration"), Mark G. Samson, Diesel USA's Chief Restructuring Officer, outlined the Company's Chapter 11 objectives and new strategic path. The Samson Declaration states, "The new management team has formulated a new strategic path over the next 3 years (the 'Reorganization Business Plan') to restore the Diesel brand in the United States, return the Debtor to its pre-recession profitability, ensure its ability to continue operating in the United States, and preserve hundreds of jobs in addition to creating new ones through opening new stores. Specifically, the Reorganization Business Plan entails closing certain underperforming and costly stores with significant terms remaining on their leases (and allowing other leases to expire in the near term by their terms).
The Debtor commenced this chapter 11 case to obtain relief from its burdensome unexpired leases and executory contracts in order to revive its brick-and-mortar retail operations, which will allow it the opportunity to implement the Reorganization Business Plan. The Debtor is currently analyzing its executory contracts and unexpired leases to determine which will be rejected through this Chapter 11 Case, which will be accomplished through the chapter 11 plan of reorganization that was filed on the Petition Date (the 'Plan'). Absent the ability to utilize the chapter 11 process to obtain such relief, the Debtor's ability to continue operating would be severely threatened and it would be unable to implement the Reorganization Business Plan, which is crucial to its ability to continue operating as a going-concern."
Events Leading to the Chapter 11 Filing
Against a backdrop of challenges facing the retail sector as a whole, the Company embarked on a series of failed strategic initiatives, was impacted by a high level of "chargebacks" in respect of its wholesale operations and was the victim of several material frauds. The Samson Declaration explains, "The Debtor's operations have suffered from the same challenges that have plagued the retail industry as a whole in recent years, namely the general downturn in the brick- and-mortar retail industry resulting from the drastic shift in consumer preferences.
Unfortunately, however, the Debtor's recent hardship is the result not only of macroeconomic trends, but of certain failed strategic decisions implemented by prior management in an attempt to effect a post-recession out-of-court turnaround of the business.
Specifically, prior to 2015, prior management began employing a real estate strategy that involved substantial investments in its retail stores, including nearly $90 million in capital expenditures across the business between 2008 and 2015 that was primarily allocated to brick-and-mortar stores. Given the recession and its impact on the retail industry, those investments were ill-timed, excessive, and unfruitful.
Furthermore, in 2015 prior management implemented a strategic initiative that was focused on repositioning Diesel stores and products in premium locations and with premium customers so as to place them side-by-side with other premium fashion brands across the retail, online, and wholesale platforms. Unfortunately, since its implementation, the Debtor's net sales have significantly decreased while its losses have significantly increased.
The primary means of implementing the 2015 strategy was to reposition the Debtor's full-price retail and outlet stores to "premium", high-profile, and high-visibility locations, which was executed by opening certain new stores and relocating others to "premium" locations while closing others deemed not to fit the new strategic positioning model. The result was…entry into several expensive, long-term leases for certain of the Debtor's retail locations, such as the Debtor's "Flagship" store on Madison Avenue, which do not expire by their terms until 2024-2026.
Of course, it was then (and remains today) an inopportune time to make long-term commitments to costly retail leases and the significantly increased lease expenses have not been offset by increased sales, which, in fact, have dropped precipitously.
In addition, the Debtor's wholesale business suffered in recent years due to the substantial amount of "chargebacks" issued by the Debtor's wholesale customers. As is common in the retail industry, the Debtor provides certain customers with allowances for markdowns, returns, damages, discounts, and cooperative marketing programs (collectively, the 'Chargebacks'). If the Debtor's customers fail to sell the Debtor's products, they generally have the right to return the goods at cost or issue Chargebacks, which are netted against the Debtor's accounts receivable. Due to mounting Chargebacks from wholesale customers, the Debtor was forced to significantly reduce its wholesale activities in recent years. As a result of the brand repositioning strategy and the significant Chargebacks, the Debtor's wholesale net sales dropped from approximately $62 million in 2014 to $19 million 2018.
In addition to economic challenges, the Debtor was the victim of multiple incidents of theft and fraud that together caused additional losses approximating $1.2 million over the past three years. The first instance was a series of thefts of over $900,000 in cash from one of the Debtor's stores between 2016 and 2018. The Debtor detected the theft in April 2018 and believes it to have been committed by a former employee. The Debtor was also the victim of two separate instances of cyber-fraud theft by internet 'spoofers' who, posing as one of the Debtor's vendors, submitted two falsified invoices over the course of two months in 2018. The Debtor paid the two invoices totaling approximately $300,000 prior to its discovery of the fraud in early 2019."
About Diesel USA
The Company, a Delaware corporation launched in the United States in 1995, is a wholly-owned subsidiary of the Parent, Diesel S.p.A. The Company is the United States member of the international Diesel brand, an innovative lifestyle and apparel brand founded in Molvena, Italy in 1978. Beginning as a leading pioneer in denim, Diesel today continues to specialize in a variety of denim-wear but has expanded its offerings to include a vast array of premium casual clothing and accessories for men, women, and children. Diesel has likewise expanded geographically, now operating in approximately 85 countries. The Debtor advertises, markets, and distributes Diesel products and other merchandise through retail, e-commerce, and wholesale channels throughout the United States. The Parent is part of the OTB group of companiesis chaired by Diesel founder Renzo Rosso.
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