Escada America’s Trip to Bankruptcy Court
It was rent payments, retailing in the age of COVID-19 and a thwarted turnaround that sent Escada’s U.S. division to bankruptcy this week, the company said in court filings.
Escada America LLC filed for Chapter 11 protection from its creditors in Los Angeles federal bankruptcy court late Tuesday, stating that both its debts and its assets ranged from $1 million to $10 million.
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The business has over 58 full-time employees and runs Escada’s 10-door retail network in the U.S. with office space in New York.
The division is part of the broader Escada business, which Beverly Hills-based private equity firm Regent bought from the Mittal family in late 2019. While the filing covers only the Escada America unit, there have been financial difficulties at the brand, which also saw its German division file for insolvency in 2020.
According to the bankruptcy paperwork, Regent bought the business with an eye toward turning around its operations, but ran head-first into the pandemic. In its filings, Escada America paints a picture of a company that was in trouble before the pandemic and a turnaround that did not have a chance to take flight.
The bankruptcy paperwork also looks past the troubles of the past couple years and into the state of the business at the time of the deal.
“Historically, Escada (under its prior ownership and prior management) had run its affairs in an unprofitable manner: (1) overaggressive expansion into new, untested, and/or unprofitable markets and store locations; (2) overpriced commercial retail leases; (3) expensive management overhead and poor leadership; and (4) failure to update the brand so as to keep it relevant with changing tastes and generational shifts….[Escada America] believed that the business could be operated at a profit if fundamental business-model changes were implemented, such as overhauling the [company’s] technological suite and reducing speed to market by shifting supply chains from Asia to Europe,” the filing said.
However, a source close to the company before the brand was sold to Regent countered: “It’s surprising to hear this because it is simply not true. In fact, it’s total nonsense. The entire business was left very well capitalized and the U.S. business was historically the largest and strongest in the Escada group. Since the time of the sale over two years ago, COVID-19 has obviously impacted the global economy and that’s had a big hit on retail but it’s not right to connect the impact of that back to the previous ownership.”
Escada America, which does not own the brand’s intellectual property and technically uses the Escada name under license, started the pandemic with 15 stores, but had to try to adjust rapidly along with the fashion landscape that had consumers staying closer to home, buying more athleisure than eveningwear and spending online.
The company said in court filings that it cut its overhead expenses by $13.4 million over the past 21 months and negotiated with its landlords for rent relief, the company said in court papers.
“However, there remain multiple landlords that have remained obstinate, and the end of the government’s COVID-19 antieviction and antiforeclosure protections are for many landlords a herald’s call to commence lawsuits and eviction,” the business said. “It is because of the consequences of the COVID-19 pandemic that [Escada America] has been forced to file bankruptcy to restructure its business affairs.”
Escada America said it was able to reach deals with landlords of three of the initial 15 stores it had, but was unable to get any concessions for nine locations.
The company said it “cannot survive ongoing litigation with these landlords and the attendant litigation costs and potential liability for breach of those leases. Accordingly, the Debtor determined in its reasonable business judgment that it was in the best interest of its estate to file this current bankruptcy case to preserve the going-concern value of its business and save the jobs of its employees.”
Escada America identified five stores that are among its least profitable and told the court they should be closed “without delay,” including locations in Honolulu, Las Vegas, Cabazon, Calif.; Sunrise, Fla., and Central Valley, N.Y.
It is not unusual for retailers to file for bankruptcy — or to put a division into bankruptcy — to get out of leases, and the pandemic has taken down a long list of companies that were unable to move quickly enough with the times, either financially or operationally.
Now, the brand is looking to continue its evolution.
A company spokesperson told WWD: “As we continue making significant investments in global operations and improving design, production and marketing of our collections, we are also restructuring our U.S. retail business to move past pandemic-driven real estate challenges…Escada leadership remains steadfast in its commitment to the success of the company and its retail stores.
“Following restructuring, Escada will maintain a strong footprint of U.S. boutiques. We are, however, closing U.S. outlet stores as part of our overall brand strategy. This shift will allow the company to focus its efforts on producing the highest-quality product and optimizing inventory management in flagship retail locations.
“As other fashion companies license their brands, sell off their intellectual property or shutter their businesses, Escada will continue to operate as a full-service luxury brand and design house. Our ownership remains passionate about our iconic brand and is fully committed to the long-term success of Escada in the U.S. and across the globe.”
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