Aeropostale, Inc., a specialty retailer of casual apparel and accessories targeted at teen consumers, has announced that they file for Chapter 11 bankruptcy and will be closing 113 stores in the United States and another 41 stores in Canada. The goal of the teen targeted store is to “achieve financial long-term stability.” Aeropostale, like so many other teen focused stores, has hit on hard times. Even teen favorites like American Eagle and Abercrombie & Fitch report their earnings are also down.
Critics argue it’s much more then the inherent cyclical cycle of teen fashion or becoming the “out of fashion” store. It’s also about families not having as much discretionary income and the higher prices of certain stores. More than that, however, competition in the teen market has also grown, allowing teens more options to mix and match from a variety of retailers.
At issue is also the speed at which teen fashion is moving. Players such as Forever 21, H&M, and Zara have met the challenge with more success, responding with new fashions more quickly than other retailers like Banana Republic and American Eagle. Certain retailers like Forever 21 are also able to beat most retailers on prices, a critical factor for teen buyers with limited funds.
Aeropostale Filing Chapter 11 and restructuring debts
Under the recently announced Chapter 11 filing, Aeropostale has secured $160 million financing from Crystal Financial LLC. Currently holding $354 million in assets and debts exceeding $390 million, the company will attempt to restructure their debts in the next six months, eliminate certain contracts, and resolve a dispute with a former investor Sycamore Partners.
Aeropostale has also not given up hope that they may be sold. In fact, the company announced they will continue to “shop” their store to potential buyers. Unfortunately, the decline of Aeropostale sales has been ongoing for some time. The store has offered steep discounts for months, but despites their efforts, sales plummeted a whopping 16% in the most recent quarter, leading to the need to file for bankruptcy protection.
What does Chapter 11 allow companies to do?
Chapter 11 bankruptcy can be expensive and time-consuming, but it is the only option available for partnerships, corporations and limited liability companies who want to restructure their debt and continue their business operations.
Companies, like Aeropostale, who choose to file Chapter 11 bankruptcy, are allowed to restructure their debt and create a debt reorganizational plan to reduce certain debt obligations or restructure their debt repayment plans. Although the debt plan must be approved by the bankruptcy court, if approved, it allows businesses to rebalance their income and expenses, hopefully becoming profitable again. In many cases, the company will also decide to sell some of the assets to repay certain debts.
Although Chapter 11 allows businesses to restructure their debts, with the additional appointment of a special committee, additional filing reports and trustee oversight it can be expensive and difficult. Whether Aeropostale can emerge from Chapter 11 bankruptcy is yet to be seen.
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