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Law360 (September 9, 2020, 3:57 PM EDT) -- Montreal-based fashion retailer Groupe Dynamite Inc. filed for the equivalent of bankruptcy protection Tuesday in Canada, the same day it asked a Delaware court to recognize the proceedings in which it plans to negotiate a new "COVID-friendly operating model" with its landlords.
The retailer announced that as a result of the financial strain of months of store closures, it had filed for and received protection from its creditors under the Companies' Creditors Arrangement Act from the Superior Court of Quebec.
"This pandemic has created a corporate tsunami," executive chairman Andrew Lutfy said in the Tuesday announcement. "At the end of the day there are many things we control, but unfortunately not the impacts of this global pandemic."
Founded in 1975, the company currently operates 237 stores in Canada and 85 in the U.S. under the Dynamite and Garage brands, according to its Delaware bankruptcy court filings seeking Chapter 15 recognition of its Canadian proceedings. It has about 4,300 employees, according to the filings.
According to the U.S. filings, the company currently has $149.4 million in funded debt, $35.6 million in trade and vendor debt and about $6.6 million in outstanding gift cards. The filings said the company also accumulated $52 million in unpaid rent during the closures of its stores due to the pandemic.
In the Delaware court declaration, Lutfy said that while the company has been consistently profitable and over the last two years has been successfully becoming a "digital-first retailer," the widespread COVID-19 store closures and slow reopenings hit the company hard.
Despite a 220% increase in online sales for the second quarter of 2020, overall sales were down 50% for the quarter, and operating costs were up 23% due to health and safety measures, he said.
As a result, the company laid off 95% of its workforce, cut the salaries of the remaining 20%, entered into agreements with its vendors and lenders, and tried to negotiate with its landlords for rent abatements and new "COVID-19 friendly" lease terms.
"However, after two months of negotiations with the landlords through an experienced team of brokers, Groupe Dynamite has only been able to enter into agreements regarding 22 out of 322 leases," he said.
He said that currently, 90% of its leases are on the "pre-pandemic" fixed-rent model, with the remainder paying rent as a percentage of sales.
He said the company will seek to use the bankruptcy to reject the leases of "deeply unprofitable stores" and to renegotiate the leases of less unprofitable locations on a "new COVID-friendly operating model."
He also said the company will propose a compromise on liabilities incurred "since the initial phase of the pandemic."
Representatives of Groupe Dynamite declined to provide additional comment Wednesday.
The company is represented in the Canadian proceedings by McCarthy Tetrault LLP and has retained Deloitte Restructuring Inc. as its bankruptcy monitor.
The company is represented in its U.S. proceedings by Laura Davis Jones of Pachulski Stang Ziehl & Jones LLP and Patrick J. Nash and AnnElyse Scarlett Gains of Kirkland & Ellis LLP.
The U.S. proceeding is In re: Groupe Dynamite Inc. et al., case number 20-12085, in the U.S. Bankruptcy Court for the District of Delaware.
--Editing by Abbie Sarfo.
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