skip to Main Content

Canadian retailers struggling against negative headwinds – Middle Market Memo

The pile of Canadian retail casualties continue to propagate as consumers opt to spend their loonies online and in discount stores, said seven industry sources.

The proliferation of internet purchasing coinciding with the recession plus the influx of international fast casual has led to a perfect storm, said Matthew Bordwin, principal and managing director at Keen-Summit Capital Partners. E-retailers have disrupted sales and profitability of brick-and-mortar stores, resulting in a string of insolvencies north of the border.

The latest insolvent retailers include Ben MossJewellers , a 66 jewelry store chain, Danier Leather, a Canadian leather goods manufacturer and retailer,Les Modes Sportives Tess Ltée, a women’s outerwear wholesale and manufacturer; 2473304 Ontario Inc., a woman’s clothing retailer operating 37 stores under the trade name Jones New York Canada and Powertek, a Canadian and US hockey equipment manufacturer.

It comes down to basic adequate return, said Andy Moser, co-head, retail and consumer products asset based lending group at Monroe Capital. Too often there is talk about retail sales rather than a focus on gross profit margins and defining adequate return for these businesses, added the retail lending veteran. The Canadian economy like others is grappling with wage growth, or lack thereof along with consumer confidence.

It is no coincidence a majority of these struggling retail chains had a significant presence in Western Canada, including Alberta and Manitoba, said AllanNackan, a partner with the Insolvency and Restructuring Practice at Farber Financial. These regions were adversely impacted by the drop in crude oil prices over the past 18 months, reaching lows of below USD 30.00 a barrel in early 2016. The regional challenges had put local landlords on the hunt for higher value international retail replacement brands.

Canadian insolvency laws give companies less time to rationalize their real-estate portfolio as opposed to the US. Companies in Canada under the Division 1 Proposal, which is a formal procedure governed by the Bankruptcy and Insolvency Act (BIA), permits an extension of dealing with leases to the tune of six months, said Nackan. He recalled Farber Financial having relied on the technique in the 2012 case ofClothing for Modern Times, a 116 store mall-based retail chain that operated under Urban Behavior,Costa Blanca and Costa Blanca X.

In the US, companies have essentially up to 210 days to accept or reject leases under the auspices of the modernized US Bankruptcy Code.

Musty jewels

Jeweler Ben Moss filed for protection under the Companies Creditors Arrangement Act (CCAA) in May on the heels of a two-year spiral which saw a weakened loonie and a faltering Western Canadian economy conspire a company already operating on thin margins.

The 66-store store jeweler had peaked at USD 4m in EBITDA off USD 86.6m in revenue in its fiscal 2014, ended 29 March 2014 before dropping progressively to a loss of USD 400,000 in EBITDA and USD 78.7m in revenue for fiscal 2016.

The company enlisted Gordon Brothers Canada to liquidate 11 of its locations in order to rationalize its real-estate footprint, while working on a restructuring plan which include a sale of the company and/or refinance its existing pre-petition debt with Salus. Initial indications of interest had been submitted on 17 June.

by Danielle Randall-Saba

Back To Top