A Brooks Brothers store. Photo by Alex Tai/SOPA Images/LightRocket via Getty Images

In a recent report, The New York Times NYT described three factories owned by Brooks Brothers that were at risk of shutting down because of current economic conditions. In the course of its report, the Times also revealed several interesting facts which when put together lay down a clear path to a bankruptcy filing. According to numbers seen by the Times, which Brooks Brothers disputes, the retailer will lose $69 million in 2020, will not be profitable until 2022 (earnings before interest, taxes, depreciation and amortization) and management is quoted saying it will not rule out a bankruptcy filing. Revenues have been flat for the last three years, the company has debt of less than $300 million and the the company recently took a loan of $20 million from Gordon Brothers.

While the article was focused on the implications of Brooks Brothers ending its Made In America focus, the implications of the article were much more ominous. Here is why:

Gordon Brothers, their new lender, is a fine firm run by smart people and very successful. But it is best known for expertise in bankruptcy and liquidation with extensive experience closing stores and liquidating them. Often when you see Gordon Brothers in a loan, its because no conventional bank will lend and Gordon Brothers gets first dibs on running the liquidation in the event there is one.

In an economic downturn, almost no investors or lenders will engage with a retailer losing money on that scale. With a forecast for no profitability for two more years, the uncertainty and doubt about ever reaching profitability is too great for any conventional lender.

In the circumstances the economy is in right now, the only buyers for a business like that are investors who would want a trophy brand. But the odds of such a buyer emerging in this economic environment are low. The only chance a retailer in Brooks Brothers condition has to be acquired is to file bankruptcy first and then sell the company with the proceeds going to the creditors to pay off as much of the debt as the price will allow. In that event, the current equity owners would be wiped out. It may also be possible for a stalking horse bidder to emerge where a buyer pre-negotiates to a deal subject to a bankruptcy process. It would not be surprising for a deal to also be conditioned on the closing of a certain number of stores so that only the most profitable ones remain open in the future. It is also very possible that, given the excess retail space that exists in the U.S. right now, there wont be a buyer and Brooks Brothers will liquidate.

Brooks Brothers did not respond to a request for comment.

Retail M&A Post-Pandemic

Theres a lot of talk among mergers and acquisitions bankers about what M&A activity looks like for the retail industry now. What I hear from other bankers is that consumers will return to traditional, quality brands and there will be opportunities to buy those brands at attractive values because of the downturn.

I dont believe that. Consumers move forward and they want the next thing, not the last one. Investors and acquirors want growth and profits, not history. Legacy brands that cant get to profitability get sold for scrap value.

Of course its sad when consumers have fond memories of brands and retailers that cant survive. But when you ask those lamenting consumers if they still shop in those stores and buy those brands they remember so warmly, they usually say, you know, I havent shopped there in a while.

Continue reading here:

Brooks Brothers Is Likely On The Edge Of Bankruptcy - Forbes