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Diesel USA Files for Bankruptcy as Turnaround Fails

Even though denim as a category is said to be on a resurgence, it wasn’t enough to help the business operations of the U.S. arm of Italy’s Diesel SpA, which filed for bankruptcy court protection on Tuesday.

The company largely owed the filing to high overhead costs at some of its stores and a failed strategy by the prior management team.

The voluntary Chapter 11 petition was made in a Delaware bankruptcy court, where Diesel USA is incorporated. A reorganization plan was filed at the same time. The company expects confirmation of its plan of reorganization by April 11. While some stores with high overhead costs are expected to shutter, the company believes it can grow the business with more smaller format stores in different locations.

Mark G. Samson, chief restructuring officer of Diesel USA Inc., said in a court filing, “Since its creation in 1978, Diesel has experienced extraordinary growth and has evolved from being a leading pioneer in denim into the world of premium casual wear, becoming a true alternative to the established luxury market.”

Diesel USA has been the exclusive distributor of the Diesel brand in the U.S. market, buying merchandise from the partner and other third-party suppliers for resale at its full-price stores, factory outlet doors, e-commerce platform and wholesale channels. According to Samson, while sales have declined “precipitously” since 2014, the losses were concentrated at its full-price brick-and-mortar stores. Moreover, certain long-term strategic decisions by prior management to effect a post-recession turnaround and the high cost of certain store leases have impacted the business, he said.

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Samson said the brand in the U.S. market still has a loyal customer base, and noted that some U.S. stores are profitable, as are the wholesale and online operations. The U.S. division has a new management team in place that includes Stefano Rosso as chief executive officer since June 2017. Rosso is the son of Renzo Rosso, Diesel’s founder. According to the chief restructuring officer, the team has a strategic plan for the next three years to return the brand to its “pre-recession profitability” and preserve “hundreds of jobs in addition to creating new ones through opening new stores.”

While the reorganization plan involves closing some underperforming locations, the company said it can open new stores in smaller, more cost-effective sites. It also said it has a new marketing initiative to relaunch its position as a “5 Pocket” market leader, including an expansion of the marketing to include female customers.

Diesel USA operates 28 retail stores, which include 17 full-price doors and 11 factory outlet locations. Net sales in 2018 were $72.5 million, or $38 million from the full-price business and $34.5 million from the outlet operation. That’s compared with volume of $125 million, or $83 million at full-price at $42 million at the factory doors, back in 2014. The online business, run by a third-party vendor, generated sales of $12 million in 2018. Samson said in the court filing that the wholesale network includes more than 200 retailers. Retailers include department stores, specialty retailers and boutiques, and online sites. While the wholesale channel had volume of $19 million in 2018, that’s significantly lower than the $61 million in volume in 2014.

Today, the Diesel brand includes not just denim, but also an offering of premium casual apparel and accessories for men, women and children. Product purchased outside the U.S. is shipped to the debtor by an international freight forwarding firm. Excel Inc., which does business as DHL Supply Chain (USA), handles the domestic logistics and warehousing at its DHL warehouse in Keasbey, N.J. Diesel leases part of the space. From the warehouse, DHL makes the deliveries to Diesel’s U.S. retail doors and wholesale partners.

Diesel staff includes 380 employees, with 75 at the corporate level. The balance are employed at the store level. Court documents said 250 are hourly wage earners, with the balance of 130 considered salaried employees.

As Samson noted, the company also owes roughly $7.4 million in unsecured trade obligation, but has been paying all trade vendors and is current with respect to those obligations. The company sustained operating losses from 2015 through 2018, due in part to failed strategy decisions by the prior management team to try to effect a turnaround. Those decisions included nearly $90 million in capital expenditures for certain stores during a period that was ill-timed and excessive, given the economic downturn and impact of the recession on the retail industry.

While the prior management team also shifted its wholesale accounts as it tried to get back to “premium” status, Samson said the business was also hurt by the “substantial amount of ‘chargebacks’ issued by the Debtor’s wholesale customers.” The chief restructuring officer said the mounting amount of chargebacks caused the company to reduce its wholesale activities, and that’s why it saw wholesale net sales fall to $19 million last year from $62 million in 2014.

And if all that wasn’t enough to hurt the balance sheet, Samson said the firm was the victim of multiple incidents of theft and fraud over the course of three years, leading to losses of about $1.2 million. Incidents of theft include a cash theft from a store by a former employee and cyber-fraud through spoofing, the practice where fake vendors submitted false invoices totaling $300,000 that the company paid.

Diesel’s old management team tried to effect a reorganization outside of a bankruptcy filing, but failed, Samson said. The new team also was unable to garner either concessions or better terms from its landlords. The team expects its reorganization plan to return Diesel USA to stand-alone profitability by 2021. And that plan presumes certain store closures. Diesel USA’s distribution license with Diesel S.p.A. is set to expire on Dec. 31, 2019, though Samson said Diesel S.p.A. is prepared to provide certain concessions in a new licensing agreement, as well as funding of $36 million to help the company fund its reorganization plan. The company, according to Samson, expects to pay its “trade vendors in full.”

Bloomberg reported that the Chapter 11 petition listed assets of up to $100 million and liabilities of up to $50 million.