Case GLT Doc 10 Filed 05/16/17 Entered 05/16/17 02:20:07 Desc Main Document Page 1 of 9

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1 Document Page 1 of 9 IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA In re: rue21, inc., et al., 1 Case No (GLT Debtors. Chapter 11 (Joint Administration Requested rue21, inc., et al., Movants, v. No Respondent. Respondent. DECLARATION OF STEPHEN L. COULOMBE IN SUPPORT OF DEBTORS EMERGENCY MOTION FOR ENTRY OF INTERIM AND FINAL ORDERS (I AUTHORIZING THE DEBTORS TO ASSUME THE AGENCY AGREEMENT, (II APPROVING PROCEDURES FOR STORE CLOSING SALES AND (III GRANTING RELATED RELIEF I, Stephen L. Coulombe, make this declaration pursuant to 28 U.S.C. 1746: 1. I am a Managing Director at Berkeley Research Group, LLC ( BRG, which currently serves as financial advisor to rue21, inc. and its subsidiaries, the debtors and debtors in possession in the above-captioned chapter 11 cases (collectively, the Debtors. 2. BRG is a global business advisory firm that provides multidisciplinary solutions to complex challenges and opportunities. The restructuring and turnaround experts at BRG help management stabilize finances and operations to reassure all parties-in-interest that proactive steps are being taken to enhance value. BRG s professionals have a deep expertise across many 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, include: rue21, inc. (1645; Rhodes Holdco, Inc. (6922; r services llc (9425; and rue services corporation (0396. The location of the Debtors service address is: 800 Commonwealth Drive, Warrendale, Pennsylvania KE

2 Document Page 2 of 9 industries, allowing them to ascertain key issues quickly and react immediately on behalf of their clients. For clients in crisis, BRG s professionals develop liquidity forecasts, improve cash flow management, obtain and consult regarding additional financing, and guide complex debt restructuring, among other services. 3. I have approximately 20 years of experience serving as a financial advisor and providing performance improvement services to corporations, various creditor groups, equity owners, and directors of underperforming companies. I have significant experience assisting distressed retail companies with day-to-day management activities, including development of business plans, cash flow management, and implementation of liquidity and cost saving strategies, including store closing strategies. My prior retail restructuring experience includes advisory roles in chapter 11 cases, such as In re Michigan Sporting Goods Distributors, Inc., Case No (Bankr. W.D. Mich. 2017; In re Sports Authority Holdings, Inc., Case No (Bankr. D. Del. 2016; In re Quicksilver, Inc., Case No (Bankr. D. Del. 2015; and In re Radioshack Corporation, Case No (Bank. D. Del On February 17, 2017, BRG was retained to serve as financial advisor for the Debtors. Since that time, I have overseen a team of individuals that has assisted the Debtors management team with, among other things, managing and forecasting the Debtors liquidity position, evaluating store profitability on a 4-wall basis, assessing business performance and EBITDA by business segment and geography, identifying cost-saving strategies, and other financial analysis and planning. Accordingly, I am knowledgeable and familiar with the Debtors day-to-day operations, business and financial affairs, cash flow needs and projections, and books and records. I am also familiar with the Debtors supply chain and the status of the Debtors relationships with various vendors, suppliers, and service-providers. 2

3 Document Page 3 of 9 5. I submit this declaration (this Declaration in support of the Debtors Emergency Motion for Entry of Interim and Final Orders (I Authorizing the Debtors to Assume the Consulting Agreement, (II Approving Procedures for Store Closing Sales and (III Granting Related Relief (the Store Closings Motion Except as otherwise indicated herein, the facts set forth in this Declaration are based upon my personal knowledge, my review of relevant documents, information provided to me by the Debtors employees or BRG employees working with the Debtors, or my opinion based upon experience, knowledge, and information concerning the Debtors operations and the retail clothing industry. If called upon to testify, I would testify competently to the facts set forth in this Declaration. I am authorized to submit this Declaration on behalf of the Debtors. Store Closings Motion A. The Closing Stores 7. A key component of the Debtors strategy is to right-size their operations by closing unprofitable stores. Such closures will help improve profitability, increase the Debtors liquidity, and allow the Debtors to focus their efforts around a smaller footprint of more profitable stores. The Debtors and their advisors have identified 396 stores that require prompt closure (the Closing Stores and this process began prepetition, on or about April 14, In formulating the list of Closing Stores, the Debtors considered, among other factors, historical store profitability, recent sales trends, the geographic market in which each store is located, the potential to realize negotiated rent reductions with applicable landlords, and specific circumstances related to a store s performance. Many of the Closing Stores are located 2 3 Capitalized terms used herein, but not defined, have the meanings ascribed to them in the Store Closings Motion. Prior to the commencement of the sales at the Closing Stores, the Debtors closed an additional seven stores in the ordinary course of business. 3

4 Document Page 4 of 9 in geographic markets that the Debtors have made a strategic decision to exit (or to consolidate multiple stores in the region, have experienced poor or negative sales trends, and no longer fit within the Debtors business plan. The liquidation of the assets in the Closing Stores is expected to yield approximately $37 million in net proceeds. 9. In order to maximize value for their creditors, the Debtors may need to close additional stores during these chapter 11 cases (such stores, the Additional Closing Stores, and together with the Closing Stores, the Stores. The decision to add any Additional Closing Stores will be made by the Debtors in the exercise of their reasonable business judgment and in consultation with their advisors based upon continued evaluation of performance and whether the Debtors are able to negotiate rent concessions. Although the Debtors do not currently have any plans to close any Additional Closing Stores, they continue to evaluate their retail footprint on a store-by-store basis, and may close stores whose performance falls below benchmark performance metrics during these chapter 11 cases. B. Store Closing Procedures 10. Based on my experience with other retail chapter 11 debtors, I believe that implementing the Store Closing Procedures attached as Schedule 2 to Exhibit A to the Store Closings Motion will provide the best and most efficient means for the Debtors to sell the assets in the Closing Stores (the Store Closing Assets to maximize their value to the estates (such sales, the Store Closing Sales. I believe that completing the Store Closing Sales will continue until at least June 11, 2017 (which date may be extended for any Additional Stores. The Debtors have also determined that the leases for the Closing Stores are not marketable and have determined to reject those leases upon completion of the Store Closings. 11. I believe that the conduct of the going out of business sales at the Closing Stores in accordance with the Store Closing Procedures will provide an efficient means for the Debtors 4

5 Document Page 5 of 9 to dispose of the assets in the Stores. Any interruption or delay in the Debtors ability to implement the Store Closing Procedures at the Closing Stores will cause serious and irreparable harm to the Debtors estates. As noted, the Closing Stores are a significant financial drain on the Debtors estates in the aggregate. The sooner the Closing Stores are closed and the inventory at the Closing Stores liquidated, the more cash the Debtors will save for the benefit of their estates. For this reason, the Debtors proposed postpetition financing agreement includes a budget that assumes the continuation of store closing sales at the Closing Stores. 12. In addition, immediate approval of the Store Closing Procedures and the assumption of the Consulting Agreement is required so that the Consultant can immediately begin preparations and advertisements for the Store Closing Sales, with the aim of maximizing the value of the inventory in the Closing Stores. The Debtors expect that the announcement of a Store Closing Sale will result in difficulty retaining employees at those stores. 4 In short, the longer the delay in continuing the Store Closing Sales, the more difficult it will be for the Debtors to maximize the results of the Store Closing Sales. 13. The relief requested in the Motion, with respect to the Store Closing Procedures is integral to maximizing the value of the Debtors estates and, based on my prior experience, is a routine part of chapter 11 cases involving retail debtors. It will permit the Debtors to continue the store closing sales at the Closing Stores, resulting in a helpful boost to the Debtors liquidity, and it will establish fair and uniform store closing procedures to assist the Debtors and their creditors through the Debtors transition to a smaller, more profitable enterprise. 4 The announcement of these chapter 11 cases is also expected to cause increased customer interest in attending the Store Closing Sales during the first week of these chapter 11 cases, although the impact of any sales increase caused by the filing of these chapter 11 cases is difficult to quantify or predict. 5

6 Document Page 6 of 9 C. Consultant and Consulting Agreement 14. Upon BRG s review of the Debtors business and store footprint, it became evident that the Debtors would have to close certain of their stores in order to right-size their operations. Accordingly, BRG and the Debtors other advisors advised the Debtors of the need to hire a liquidator to assist with the Store Closing Sales. The Consultant is one of only a handful of companies capable of conducting an orderly liquidation of this scope and magnitude. 15. The Debtors determined that the Consultant was the best liquidator to assist with right-sizing its store base because of the Consultant s extensive expertise in conducting retail store closing sales, including the orderly liquidation of inventory, furniture, fixtures, equipment, and other assets. Additionally, the Debtors were familiar with the Consultant, and the Consultant likewise had knowledge of the Debtors business due to past dealings. Accordingly, the Debtors and the Consultant entered into the Consulting Agreement attached as Schedule 1 to Exhibit A to the Store Closings Motion, which will govern the terms of the Consultant s engagement. I was involved in the Debtors negotiations with the Consultant regarding the terms and conditions of the Consulting Agreement and I believe that they were conducted in good faith, and at arm slength. I also believe that the Debtors entry into the Consulting Agreement was a sound exercise of the Debtors reasonable business judgment and in the best interests of their estates. 16. The Consulting Agreement generally provides that the Consultant will advise the Debtors with respect to the sale of their Store Closing Assets. Specifically, the Consultant will, among other things: (a provide the Debtors with qualified supervisors as independent contractors to oversee the management of the Closing Stores; (b determine the appropriate pricing for the Store Closing Assets, staffing levels for the Closing Stores, and advertising for the Store Closing Sales; (c coordinate with the landlords and any other tenants or subtenants, as necessary; (d maintain housekeeping standards, including safekeeping and oversight of the 6

7 Document Page 7 of 9 stores; and (e clean the premises to broom clean condition at the conclusion of the store closing process. 17. Under the terms of the Consulting Agreement, in consideration of the services to be rendered, the Debtors will provide the Consultant with a fee equal to a percentage of the gross proceeds of all sales of Merchandise during the Sale Term, capped at 1.5 percent of such Gross Proceeds (the Incentive Fee. The Consultant may also sell certain furniture, fixtures, and equipment ( Offered FF&E in the Stores at the direction of the Debtors, and will receive a commission equal to 20 percent of the gross sales of Offered FF&E, net only of sales tax (the FF&E Commission. In addition, the Debtors will reimburse the Consultant for certain reasonable out-of-pocket expenses incurred in connection with the sale or other disposition of the Store Closing Assets, subject to a cap. 18. Based on my experience with liquidation consultants and liquidation consulting agreements approved in other retail chapter 11 cases, I believe the terms proposed under the Consulting Agreement are reasonable. I believe that the Debtors selection process has ensured that the Incentive Fee, FF&E Commission, and any other fees agreed to by the Debtors are reasonable and market based. D. Basis for Assumption of the Consulting Agreement 19. Given the number of Closing Stores that need to be simultaneously closed, only national liquidators, such as the Consultant, with significant experience with large-scale liquidations can ensure a smooth liquidation process that will maximize the value of the Store Closing Assets. The Consulting Agreement will enable the Debtors to use the experience, skills, and resources of the Consultant to effectively and efficiently conduct the Store Closing Sales and, thus, significantly improve the potential value to be received through the Store Closing Sales for the benefit of all stakeholders. Given that the closing of the Closing Stores were 7

8 Document Page 8 of 9 commenced by the Consultant prior to the Petition Date, I believe that any interruption of the Store Closing Sales, or any attempt to transfer the supervision of the Store Closing Sales to an alternate liquidator would be disruptive and value destructive to the Debtors estates. Value realized in the closing of the Stores will inure to the benefit of the Debtors estates, which will more than offset any expenses incurred by reason of the assumption of the Consulting Agreement. Further, the Consultant s fees are based on the results of the Store Closing Sales, ensuring that the Consultant is incentivized to maximize value for the Debtors estates. Conclusion 20. Based on the foregoing, I submit that the relief requested in the Store Closing Motion is reasonable, necessary, and should be granted. 8

9 Document Page 9 of 9 Pursuant to 28 U.S.C. 1746, I declare under penalty of perjury that the foregoing statements are true and correct. Boston, Massachusetts Dated: May 15, 2017 /s/ Stephen L. Coulombe Stephen L. Coulombe Berkeley Research Group, LLC 9