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"Pop-Up" Liquidation Strategies Approved in Bankruptcy Court

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Ben T. Nicholson

President

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At a Glance

"Pop-Up" Liquidations are an effective inventory monetization strategy used by bankruptcy professionals and their debtor/creditor clients, financial institutions, landlords and REITs, and wholesale merchandisers.

When executed effectively, "Pop-Up" Liquidations can yield average returns to the beneficiaries from net profits over 48% free-and-clear of all expenses.

In the third quarter of 2021, a motion was granted from the Bankruptcy Court in the Eastern District of Pennsylvania that secured precedence for the use of “Pop-Up” Liquidations as an inventory monetization strategy in Chapter 11 Bankruptcy.

The situation leading to the motion is arguably common to professionals in the secured lending and bankruptcy universe. The debtor was a well-known local retailer. During an expansion, the debtor had been over-aggressive in projecting sales and the operating expenses were inordinately high for the location, including rent for a space too large for the type of business and price point. There was simply not enough customer demand to reach critical mass. Additionally, the debtor was already sitting on inventory in a large warehouse and basement at the main location, some of which were specialty items. Therefore, core product had to be purchased to get the new store stocked, which added new vendor debt. As cash flow tightened, the debtor took on a secured loan against the inventory and building of the main location, thereby folding the challenges from the new location into an otherwise solvent business. Unfortunately, the strategy did not work. After several missed rent payments at the new location the landlord bolted the door. To preserve the original location’s business, the debtor filed Chapter 11 with a strategy of liquidating the inventory and shuttering the new location.

The liquidation strategy was executed successfully, and the new location was cleared out in the agreed upon timeframe. However, given the extent of the liabilities, the debtor needed to generate additional cash to continue to fund the bankruptcy plan. To do so would involve selling through the inventory from the warehouse and basement of the main location. Although strategies had led to increased sales volume at that store, unfortunately, there was simply not enough capacity to accommodate the volume of inventory that needed to be sold.

Other monetization options were reviewed, none of which would yield an adequate return. After careful consideration, it was determined that the most positive path forward would be to increase the square footage of sellable space through the addition of two “Pop-Up” liquidation locations.

The mechanics involved…

The professionals recognized that getting approval from the court for the “Pop-Up” liquidation stores would be a heavy lift. No one had seen it done before. To not only ensure success of the strategy but to also prepare for potential pushback, the following boxes needed to be checked:

 

  • Locations meeting a specific criteria.

  • Comprehensive weekly cash flow and P&L projections detailing sales and operating expenses with cash distributions funneling into the capital structure.

  • A post-petition, debtor-in-possession (DIP) loan funded by the liquidating agent to capitalize each store and cover the start-up expenses - and show “skin-in-the-game.”

  • A point-of-sale system funneling all proceeds to a DIP account under the debtor’s control.

  • Licenses and insurance for new businesses with a new name to ensure separation from the debtor’s business.

  • A new logo and signage designed specifically for branding the new businesses, and the execution of a highly effective, liquidation-focused marketing program utilizing multi-level social media and email campaigns.

  • A mix of high-value/volume and low-value/volume merchandise to stock the stores.

  • All operating expenses, including staffing, budgeted for maximum efficiency.

 

With minimal direct examination from the judge, the motion sailed through the court with a nod to the comprehensiveness of the preparation from the professionals involved. The stores were open and operating within a month with the only delay being inspections from the respective municipalities.

Profitable returns, free-and-clear…

Considerable progress has been made since the original conversation around “Pop-Up” liquidations was introduced here. Short-term, “Pop-Up” stores are ultimately fully functioning start-up businesses each with their own challenges, yet taking the steps cited consistently produces successful outcomes. The strategy proves beneficial to organizations seeking recovery from inventory that include financial institutions, landlords and REITs, wholesale merchandisers, and now bankruptcy professionals and their debtor/creditor clients.

When the stores are mapped out efficiently and cost-effectively, the results can be considerable. Naturally, the product being sold, the time the store is open, seasonality, and location affect the range of returns; however, average returns to the beneficiaries are from net profit margins consistently over 30% free-and-clear of all expenses with one location so far exceeding 48%.

There must be a record to beat for the next location, right?