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Saving the Jewels
Henricks Jewelers filed for bankruptcy reorganization in November.
Despite intense pressures to liquidate the firm, its owners refused to walk away and emerged with a new plan this summer. It's a lesson in self-preservation.
SURVIVAL by Jean Gruss | Editor/Lee-Collier
Kevin Waters and Patrick Hopper have accomplished what very few others have lately: filed for bankruptcy reorganization and lived to tell the tale.
Their company, Luxury Ventures, filed for Chapter 11 bankruptcy reorganization in November. The company does business as Henricks Jewelers, a jewelry chain with two stores in Bonita Springs and Naples.
The pared-down company emerged from bankruptcy this summer, a feat that's been matched by very few other small companies lately. Their successful trip through U.S. Federal Bankruptcy Judge Alexander Paskay's courtroom holds lessons for companies that are facing financial challenges.
Waters and Hopper have the opportunity to look back now and see where they could have done things differently. Among their hindsight observations: they would have cut back on expenses more deeply before filing, filed for bankruptcy protection earlier, sought to create a plan immediately, assembled a creditors' committee from the very beginning and hired personal attorneys to look after their interests.
From Bonita to Alaska
Looking back, Waters says the company grew a little too fast, though they didn't have much of a choice.
In June 2002, Waters and Hopper formed Luxury Ventures to acquire jewelry stores. Waters is a veteran of jewelry chain stores such as Zales, having run stores from California to Micronesia, a chain of islands in the Pacific that caters to Japanese tourists. Hopper had been the chief financial officer of Little Switzerland, a successful luxury retailer in the Caribbean.
In April 2003, the duo bought Henricks Jewelers, which at one time Little Switzerland had considered acquiring. It was a single-store operation on U.S. 41 in Bonita Springs and Waters and Hopper planned to grow the chain.
Right away, the pair discovered that 45% of Henricks' business came from Naples. That's because the Naples area had only two kinds of jewelry stores: the high-end custom jewelers and the mall-based, lower-end stores. There was no competition in the middle-market, which was Henricks' strong suit.
But shortly after they purchased Henricks and unbeknownst to them, the county began a nearly three-year road expansion project of U.S. 41 right in front of their Bonita Springs store. "You couldn't see the store. They closed the whole side of the road," Waters says.
So they speeded up plans to open a second store in Naples, where half their customers were located. "The new store made money the first year," Waters says. He says the wealthier Naples customers are savvy jewelry shoppers who tend to be more careful about how they spend their money. Besides Henricks' well-established reputation (it's been in business since 1982), the lack of competition in the middle-market jewelry business in Naples benefited the firm. "There was a void," Waters says.
To balance the seasonality of the business in the slow summer months, Luxury Ventures opened two stores in Alaska to sell jewelry to cruise-ship passengers in the port cities of Juneau and Ketchikan. Hopper hired staff from Little Switzerland stores in the Caribbean from April to September, flew them to Alaska and rented homes for them.
Meanwhile, Waters and Hopper planned to open another store in Fort Myers. They had hoped to open that store for the Christmas holiday in 2006, but permitting and construction delays pushed the opening beyond that critical date. Stuck with inventory, they decided to open a temporary store in Sarasota.
But no one knew Henricks in Sarasota and rivals with huge advertising budgets outgunned them. "It was a very difficult market to go in and dominate," Waters recalls. What's more, competition included jewelry retailers in the huge markets of nearby Tampa and St. Petersburg.
It didn't help that the winter of 2006 was a soft selling season. That's because it was an unusually warm winter in northern states and fewer people came to Florida for the holidays.
By the summer of 2007, Luxury Ventures closed the Sarasota store and its lender grew nervous about the weakening economy (Waters declined to disclose the name of the lender). "That's when we got into cash [conserving] mode," Hopper says. A decent performance by the Alaska stores is the only thing that kept the company in business that summer, Hopper says.
Looking back, Hopper says, "we should have cut deeper and sooner." In particular, Hopper says he would have reduced his marketing budget to more closely match the decline in sales. But marketing is the life support of any business. "The hardest thing to cut is your marketing budget," Hopper says.
Still, Luxury Ventures cut expenses by eliminating staff overtime pay and nonessentials such as bottled water in the stores. "You need to cut the cord as soon as possible," Hopper says.
Bank pushes liquidation
By the fall of last year, Luxury Ventures' lender wouldn't advance the company money to stay in business. "The bankers wanted liquidation," Water says. "They bullied us into Chapter 11."
Luxury Ventures filed for reorganization in November, but Waters and Hopper say they should have filed earlier with a well-prepared plan in advance. "The mistake we made was to not file [a plan] up front," Waters says. They also should have created a creditors' committee right away to counter the bank's influence.
Instead, they let the bank dictate what they should do. The bank hired a liquidation firm that pushed for huge discounts during the busy holiday season that Waters thought were unnecessarily high. "I fought with them every week," Waters says. The 18-week "going-out-of-business" sale generated $11 million.
One of the sore points was that the liquidation firm was selling its own merchandise right alongside Henricks' inventory at a premium. Waters successfully argued that his suppliers should have been given preference. "You want to help the unsecured lenders," Water says, because those are the people who will help you when you emerge from bankruptcy protection.
One of the problems was the attorneys they hired to represent Luxury Ventures in bankruptcy had a track record as creditors' attorneys. Looking back, Waters says they should have hired attorneys who specialize in helping debtors.
Furthermore, Waters says they should have hired their own personal attorneys. That's because the company's interests sometimes diverged from their own. "Early on, when you file, you need someone to represent you," Waters advises. They also wished they had purchased directors' and officers' insurance to protect their investment.
Besides filing earlier, Waters says the company should have been ready with a reorganization plan on day one. "If you hold out too long, everyone gets fatigued and doesn't want to save the business," Waters says. "Do it at the beginning, because it gets everyone thinking about reorganization" instead of liquidation.
Waters and Hopper kept the business alive through sheer determination, though. "They knew we were going to fight to keep the business," Water says, adding, "We were very vocal about trying to save the business."
Emerging with a plan
Waters and Hopper emerged with a plan that included a $500,000 capital infusion from Kairos Capital Partners, a Boston-based private equity firm that specializes in funding retailers.
But Waters and Hopper also had to make painful cuts. They had to give up their Alaska stores and laid off 50 employees. They now have 22 employees in their two remaining stores in Bonita Springs and Naples.
Most of the remaining employees have been loyal to Henricks because of the working conditions, Waters says. The stores are closed on Sundays and close at 6 p.m. during the week, unusual in retailing these days. "It was important not to burn our staff out," Waters says. One employee has worked for Henricks for 21 years, he says.
Waters and Hopper say the tough times aren't over, as the economy on the Gulf Coast remains weak. What's more, many customers thought the company had gone out of business. To counter that, Henricks is planning a "we're back" advertising campaign.
With lower overhead, good terms from suppliers who were treated fairly during bankruptcy and Kairos' capital infusion, Waters and Hopper are confident they will have a good winter season. They have a list of 50,000 customers and they're planning to price jewelry below competitors'. "We are aggressively buying back market share," Waters says.
Among other tactics, the firm plans to offer to buy back jewelry customers bought in the past for what they paid in the hopes they will buy new jewelry. They're also planning to sell brands that aren't sold in this area, though they won't disclose their names for competitive reasons. "This go around, we have the right capital structure," Hopper says.
Looking back, however, Waters and Hopper wonder if they should have filed for bankruptcy reorganization at all. They spent over $1 million in attorneys' fees and other expenses to survive the ordeal. "That tells us we shouldn't have been there in the first place," Waters chuckles ruefully.
REVIEW SUMMARY
Company. Henricks Jewelers
Industry. Jewelry retail
Key. Prepare a reorganization plan before filing for bankruptcy protection.
Lessons learned
Companies contemplating bankruptcy reorganization may want to consider the lessons learned by Kevin Waters and Patrick Hopper of Henricks Jewelers. They've been there and survived to tell the story. Consider:
• File earlier rather than later to have a better shot at reorganization instead of liquidation.
• Prepare a plan in advance of filing for reorganization. That will get everyone focused on the eventual emergence from bankruptcy, not liquidation.
• Purchase directors' and officers' insurance to protect your investment.
• Hire a law firm that specializes in helping debtors, not creditors.
• Establish a creditors' committee right away and protect your unsecured suppliers so they will help you when your company emerges from bankruptcy.
• Hire personal attorneys to represent you because your interests may be different from your company's.
• Cut expenses as quickly and as deeply as possible to lower overhead and improve the chances of a successful reorganization.
• Hold on to loyal veteran employees. They'll help you be successful when you exit bankruptcy.
• Seek outside capital to emerge from bankruptcy well capitalized.
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