Page 4 - Fashion Law

S4 | MONDAY, AUGUST 28, 2017 | Fashion Law | NYLJ.COM
No Stress Distress: Asset Management Strategies For Facing Downturns With Style
BY ADAM C. ROGOFF, ERICA D. KLEIN
IAND MARSHA SUKACH
n our world of shifting consumer behavior, increasing focus on mobile and electronic commerce, and a rap-
idly evolving retail landscape, rarely a day passes without news of department stores, specialty and other retailers, and brands facing financial hardship, with many head- ing toward bankruptcy while searching for a save-the-company solution. This article provides an overview of the current retailer restructuring environment, identifies strate- gies for maximizing retail asset value, and provides practical tips to optimally position retailers and brands to succeed, including via out-of-court or in-court restructuring.
Identifying Core Assets And Repackaging Value
Retail has moved past the days of simply assessing the “four-wall” profitability of indi- vidual stores. Successful strategic restruc- turing requires understanding a company’s current and potential asset value—assessing the benefits of physical stores, online sales, licensing, and other branding opportunities. Value may present through different sources, often depending on a retailer’s maturity. For example, brand value may be core to an established retailer, while proprietary technology may differentiate a newer one. Assessing the role played by discrete com- pany assets can unlock additional value and inform the direction of reorganization.
Take Sharper Image, a company with sub- stantial brand equity, which faced opera- tional challenges under its traditional brick and mortar model, leading to its filing for Chapter 11 in 2008. After shutting all stores and liquidating its inventory and FF&E, the Sharper Image brand was sold and transi- tioned to a licensing model offered through an alternative distribution strategy, thereby reinvented as a robust online platform. This path recognized the reputational value and consumer goodwill reflected in the Sharper Image brand, and strategically repurposed these assets to drive sales.
Linens ‘N Things was similarly successful
ADAM C. ROGOFF is a partner in Kramer Levin Naf- talis & Frankel’s corporate restructuring and bank- ruptcy department, and ERICA D. KLEIN is a partner in the firm’s fashion and consumer brands practice. MARSHA SUKACH is an associate in the corporate restructuring and bankruptcy department.
at leveraging its brand equity to transition its business model. After Linens ‘N Things closed nearly 600 stores, investors acquired the Linens ‘N Things brand name, domain names, bridal and gift registries, and other IP assets in a bankruptcy auction. The new owners re-launched a branded website, and licensed the company’s trademarks to expand and diversify its product offerings. This strategy capitalized on the reputation of the Linens ‘N Things brand, while dispensing of the burdens of brick-and-mortar stores. Both Sharper Image and Linens ‘N Things reflect value opportunities beyond the tra- ditional tangible assets of a retailer.
Reflective of this more expansive value recognition, several recent strategic plays
keys—or obstacles—to a successful restruc- turing. Effectively structuring these assets aids to facilitate the restructuring process, and to manage the retailer’s and investors’ expectations.
IP Licensing Activities
Whether a retailer’s intellectual property rights are predominantly owned or licensed can substantially affect their utility as fund- raising tools, and their value in a bankruptcy. This is particularly true for trademarks, which are often a retailer’s most material intellectual property rights, due to the treat- ment of trademarks under the Bankruptcy Code.
ing to obtain direct control over its brand or to get higher proceeds from a sale to a third party who, in turn, wants the freedom to use the trademarks without interfering with a pre-sale license arrangement. (Look- ing at debtors who moved from stores to licensing strategy shows why this is impor- tant as value shifts from traditional tangible assets). Whether such action is available in the context of bankruptcy is likely to depend on where the trademark licensor files for bankruptcy. This is because §365(n) of the Bankruptcy Code, which protects the rights of IP licensees, does not, by its terms, apply to trademarks. Nonetheless, certain courts, including in the Third, Seventh and Eight Circuits, have extended varying degrees of protection to trademark licensees. Because outcomes vary significantly by jurisdiction and depend on the terms of the license at issue, distressed retailers should be mind- ful of all factors that might affect existing or potential trademark license agreements.
Trademark Positioning
With limited exceptions pertaining to “famous” marks, trademark rights are tied to particular goods/services. If a retailer’s plan for future success involves pivoting from brick-and-mortar to e-commerce, it would be well-served to ensure that its trademark rights extend to the provision of online retail services, or at least that such extension would not be foreclosed by a prior third-party rights-holder. Similarly, a retailer seeking to expand its product line (directly, or through licensing or co-branding) should first evaluate whether its rights are sufficient to support such activities. With forethought, retailers could build their trademark port- folio to better position them for expanded opportunities. While the expense of trade- mark filings may seem unnecessary, particu- larly for a struggling retailer, they can make or break a future restructuring deal.
Financing Opportunities And Obligations
Financing opportunities may be available to assist a retailer’s recovery, particularly where a retailer’s assets are unencumbered. IP rights, in addition to inventory, equipment, and other (typically owned) assets can be pledged as collateral to secure one or more loans. Closely reviewing existing financing documents might also reveal opportunities for alternative financing, including through supplemental loans or corporate restructur- ing. Litigation by lenders alleging breach of certain loan documents arising out of J. Crew’s recent restructuring suggests that retailers would be wise to carefully consider whether any restructuring may, » Page S11
by Walmart recognized value beyond brand. Through its acquisition of Jet.com in 2016, Walmart gained the benefits of Jet.com’s e-commerce platform, and its expertise using data to personalize customers’ expe- rience. Walmart’s subsequent acquisition of ModCloth, an e-tailer with a strong millen- nial following, offered Walmart a preexisting onramp to reach a niche yet geographically widespread customer base. These examples demonstrate that value may exist in many different forms, and can be unlocked to serve many different purposes.
Planning Ahead to Maximize Asset Value
Preserving and creating value in a retail- er’s assets requires planning before distress ensues. A retailer’s IP licensing activities, as well as its trademark positioning, financing obligations, data protection policies, inven- tory balance, and real estate holdings, can be
The Sharper Image and Linens ‘N Things examples demonstrate that a robust trade- mark portfolio can attract investment. In addition to traditional licensing arrange- ments, distressed retailers might monetize trademark rights through co-branding or alternative distribution opportunities beyond their primary field. Strategic part- nerships outside the distressed setting, such as Marvel Entertainment’s ventures with Reebok, the NBA and Harley Davidson, illustrate that extending a brand’s reach into new markets, demographic segments, and/ or distribution channels could offer auxiliary revenue streams.
Retailers that license their trademarks will also want to consider whether they may reject such licenses in a potential bankrupt- cy, or whether the possibility of rejection might provide leverage to renegotiate more favorable terms outside of bankruptcy. For example, a retailer may want to terminate an unfavorable license as part of its restructur-
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