Cosmetics retailer Beauty Brands LLC received court approval Tuesday for a Chapter 11 sale of 23 stores, but warned the court that errors in its inventory procedures will lead to administrative insolvency next month.
During a hearing in Wilmington, debtor attorney Gregory A. Taylor of Ashby & Geddes PA said the sale of 23 stores as a going concern to Absolute Beauty LLC was the best offer available to Beauty Brands, but that a disagreement with the buyer over inventory shipped to the go-forward stores had caused a $350,000 reduction in the $4.65 million purchase price.
Beauty Brands has been operating on slim margins since filing its Chapter 11 case in January, and when its debtor-in-possession financing received court approval Jan. 30, Taylor told the court there was only a $50,000 cushion in the budget.
The debtor and buyer reached an agreement where some inventory at the go-forward stores would be sent to other locations that are being liquidated while other merchandise would be returned to Beauty Brands’ distribution center, with the buyer having the option to purchase it at a 50 percent discount.
“The resolution allows the transaction to proceed, but it does have a negative impact on the sale proceeds the debtor can expect to receive at closing,” Taylor told the court.
He said the price adjustment eats up the $50,000 budget cushion and then some, and, combined with an unbudgeted sales tax liability, affects the budget to the tune of $450,000 and leaves the debtor’s estate administratively insolvent post-closing. Taylor said the estate will have enough money from the proceeds of the sale to administer its case through March 16.
U.S. Bankruptcy Judge Christopher S. Sontchi said the news was troubling and asked why Beauty Brands wasn’t just liquidating the stores included in the go-forward sale and having Hilco Merchant Resources conduct store closing sales like those being run at 10 “orphan stores” not being purchased.
Taylor said that despite the budget problems, the Absolute Beauty transaction would provide $1 million more in cash proceeds over the Hilco liquidation offer for the 23 stores at issue, and that the buyer is also assuming liabilities of about $1 million.
Lucian B. Murley of Saul Ewing Arnstein & Lehr LLP, representing the official committee of unsecured creditors, told the court his clients were still supportive of the Absolute Beauty sale because it provides a net benefit to the estate and would preserve existing vendor relationships at the go-forward stores and would keep hundreds of workers employed.
“We’re very disappointed with this new revelation of administrative insolvency,” Murley said.
Absolute Beauty attorney Joshua A. Sussberg of Kirkland & Ellis LLP told the court that the prospect of administrative insolvency was never far off in this case and that the transaction should go forward as proposed.
“At the end of the day, when you compare apples to apples what a liquidation bid looks like versus a going-concern bid, it’s not just the budget in play but the liabilities being assumed as part of this bid as well,” Sussberg said.
Judge Sontchi said he had been satisfied at prior hearings that the estate would remain solvent by a small margin, but was now less confident that would happen. Left with alternatives to the sale that would see a pivot to a full liquidation of all 33 stores, or conversion of the case to a Chapter 7 liquidation or dismissal of the case altogether, he said none were very attractive.
“We’ve gone a long way down this road so it’s hard to sort of end everything now this close to the finish line,” he said. “I do prefer a going-concern sale and the preservation of tax bases, jobs and vending relationships, but I have to worry about the return to the estate and sometimes it makes more sense to liquidate than to reorganize. I don’t believe that’s the case here.”
Judge Sontchi approved the sale, which is slated to close Feb. 19, and said he would hear from the parties at a hearing on Feb. 25 about how they envision the case moving forward.
He said the only thing the debtor could do now was to spend as little money as possible on professional fees.
Beauty Brands filed for Chapter 11 protection in January, citing declining sales and rising costs associated with doing business as a primarily brick-and-mortar retailer. Founded in 1995, the Kansas City, Missouri-based Beauty Brands operates specialty beauty stores that sell products and provide spa and salon services.
The company reached an agreement with Hilco to liquidate 23 of the debtor’s stores while Beauty Brands searched for a going concern buyer for its 33 remaining locations. Absolute Beauty emerged as a stalking horse bidder for 23 of those remaining stores, and the other 10 were folded into the Hilco liquidation deal.
The company’s debt includes $7 million in prepetition obligations, largely made up of defaulted-upon borrowing under a $25 million revolving credit agreement with PNC Bank NA. PNC also provided a $9 million debtor-in-possession loan to the company, including a roll-up of Beauty Brands’ prepetition debt to the bank. Another $11 million is owed to unsecured creditors.
Beauty Brands is represented by Gregory A. Taylor, Stacy L. Newman, Katharina Earle and David F. Cook of Ashby & Geddes PA.
The committee of unsecured creditors is represented by Mark Minuti and Lucian B. Murley of Saul Ewing Arnstein & Lehr LLP, and Eric R. Wilson, Jason R. Adams and Lauren S. Schlussel of Kelley Drye & Warren LLP.
Absolute Beauty is represented by Domenic E. Pacitti of Klehr Harrison Harvey Branzburg LLP, and Joshua A. Sussberg and Gene Goldmintz of Kirkland & Ellis LLP.
The case is In re: Beauty Brands LLC et al., case number 1:19-bk-10031, in the U.S. Bankruptcy Court for the District of Delaware.