DirectBuy Home Improvement, Inc. – Home Furnishings Company dba ZGallerie, Bought Out of Bankrupty by CSC Generation Holdings, Inc. in 2019, Files Again; Will Pursue Going Concern Asset Sale; Lines Up DIP Financing from CSC Affiliate, ZG Lending | Daily Bankrupt Company Updates

October 17, 2023 – DirectBuy Home Improvement, Inc. (dba ZGallerie; “ZGallerie” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of New Jersey, lead case No. 23-19159 (Judge Stacey L. Meisel). The Debtor, a contemporary home goods retailer with 21 retail locations in 9 states, is represented by Michael D. Sirota of Cole Schotz P.C. Further Board authorized appointments include: (i) Sherwood Partners Inc. as financial advisors, (ii) Stump & Company as investment bankers and (iii) Stretto as claims agent.

The Debtor’s lead petition notes between 200 and 1,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $50.0mn and $100.0mn (funded debt of $19.9mn). Documents filed with the Court list the Debtors’ three largest unsecured creditors as: (i) Federal Express ($1.3mn trade claim), (ii) AT&T ($1.2mn trade claim) and (iii) Terreno 139th LLC ($719k trade claim). The Debtor had @$126.0mn in combined sales in fiscal year 2022.

Petition Date Highlights

• Contemporary Home Goods Retailer with 21 Retail Locations in 9 states Files for Bankruptcy with Over $50.0mn in Liabilities
• For Distressed Asset Turnaround Specialist CSC Generation Holdings, Inc., Which Bought Debtor’s Assets Out of Bankruptcy for $20.3mn in 2019, Another Failed Portfolio Company with Subsidiary AmeriMark on Cusp of Concluding Its Own Bankruptcy
• Debtor Cites Underperforming Retail Stores, Adverse Macroeconomic Trends, COVID-19 and Supply Chain /Import Costs as Precipitating Filing
• Will Pursue Going Concern Asset Sale with Liquidation as Fall Back Option
• Recent Purchaser of Prepetition Debt ZG Lending (a Presumptive Insider Sharing an Address with CSC) to Provide $1.1mn of DIP Financing

Goals of the Chapter 11 Filing

The Fetterman Declaration (defined below) provides: “The Debtor intends to retain Stump & Company…as its investment banker in the chapter 11 case to market the Debtor’s assets. Additionally, the Debtor also intends to file a motion proposing an efficient, public, and flexible auction process in connection with its sale efforts. If the Debtor is unable to implement a going-concern transaction, the Debtor will turn to an orderly liquidation of its remaining assets, close its stores in the coming months. In addition to marketing a going concern transaction, the Debtor will also be simultaneously initiating ‘soft’ sales in its retail locations to monetize its inventory.”

Events Leading to the Chapter 11 Filing

In a declaration in support of first day filings (the “Fetterman Declaration”), Robert Fetterman, the Debtor’s Chief Financial Officer and Interim Chief Executive Officer commented: “…the Debtor is suffering under severe liquidity constraints brought on by a confluence of underperforming retail stores, adverse macroeconomic trends, and industry specific headwinds, including the lasting impact of COVID-19 on the retail industry. Specifically, supply chain and import costs significantly increased in late 2021 and into 2022, severely impacting the brands profitability and cash position. With interest rates increasing based on inflationary pressures, and mortgage rates increasing to some of the highest rates in approximately a decade or longer, new home purchases and the housing market has slowed significantly, which is a major driver of business for the brand. Needless to say, macroeconomic trends have significantly impacted the Debtor’s business in the second half of 2023 and has had negative consequences for many in the Debtor’s line of business.”

Drilling down, Fetterman adds: “Between the purchase of the business in 2019 and now, a confluence of factors contributed to the Debtor’s need to commence this chapter 11 case. 

• First, internal factors, including the liquidity needs of the Debtor to support its significant operating expenses, and disruptions to management initiatives, have impaired the Debtor’s liquidity. In particular, the available liquidity of the Debtor was constrained by a confluence of macro reduction ins sales, large rent and other selling, general, and administrative costs, mounting accounts payable from past operations, and the Debtor’s requirement to pay B. Riley upon loan maturity without another source of funding.
• Second, macroeconomic trends, the impact of the COVID-19 pandemic, and the shift in competitive landscape impacting the retail industry generally has led to a decrease in sales. More specifically, inflationary pressures, which have led to higher inventory and operating costs, have significantly impacted the Debtor’s revenue, and were contributing factors behind the Debtor’s performance shortfalls. In addition, supply chain and import costs significantly increased in late 2021 and into 2022, severely impacting the brands profitability and cash position. With interest rates increasing based on inflationary pressures, and mortgage rates substantially increasing, the housing market has slowed significantly, which is a major driver of business for the brand. These macroeconomic trends have continued to have a negative impact on the business in the second half of 2023.
• Third, as liquidity tightened, supply chain vendors began to place pressure on the supply chain cost structure. Some of the Debtor’s vendors are unwilling to release new product absent payment in full. This in turn worsens the Debtor’s ability to generate revenue from sales, creating a negative feedback loop decreasing liquidity. Without the flow of fresh inventory, the Debtor’s retail business will effectively starve. Additionally, the Debtor has no available liquidity under its prepetition credit facilities to resolve these challenges. The flow of fresh inventory is the lifeblood of retail sales and ensuring the uninterrupted flow of inventory to the Debtor’s customers is of the utmost importance.
• Fourth, following the 2019 acquisition in the Prior Chapter 11 Cases, Z Gallerie continued to maintain a large store footprint and substantial operating expenses, but revenue and profitability have lagged, due in significant part to negative cash flow at many of its retail locations. Given the cash flow issues, the Debtor has incurred substantial past due rents, which have resulted in landlords threatening or in some cases taking affirmative steps to remove the Debtor from its locations.
• Finally, the Debtor underestimated the impact that the Prior Chapter 11 Cases would have on the customer’s perception of the company’s brand and, the Debtor believes resulted in a decline in confidence in the company. As a result of the foregoing, the Company experienced a decline in store traffic. The shift in customer’s perception of the business shortly following the Prior Chapter 11 Cases eroded the company’s liquidity forecast following emergence. In response to the foregoing, the company’s management team engaged in excessive promotional activity which further exacerbated the deterioration of the company’s performance, as gross profit margins declined and fixed costs remained relatively unchanged, causing EBITDA degradation.”

DIP Financing

The Debtor has lined up $1.1mn ($400k interim) of no interest, new money debtor-in-possession (“DIP”) financing from prepetition secured lender ZG Lending SPV,
LLC (“ZG Lending”). ZG Lending shares an address in Merrillville, IN with CSC and was listed as an insider in the AmeriMark cases.

Prepetition Indebtedness

The Debtor is party to a June 2019 credit agreement which initially had KeyBank National Association serving as agent. Proposed DIP lender ZG Lending acquired the entirety of the debt issued under the related prepetition credit facility and is “now the sole lender and Agent under the Prepetition Credit Agreement. As of the Petition Date, approximately $19,867,504.50 million was outstanding.” 

About CSC

The Debtor is 100% owned by CSC Generation Holdings, Inc (“CSC”) of Merrillville, Indiana; which although claiming to have experience turning around assets bought out of bankruptcy, is garnering no small amount of bankruptcy experience from placing its portfolio companies into bankruptcy. CSC’s wholly-owned subsidiary AmeriMark on the cusp of having its cases dismissed after an asset sale process.

CSC bought the assets of the present Debtor (with DBHI being the acquisition entity) out of bankruptcy in July of 2019 for $20.3mn.

Notwithstanding recent setbacks, CSC notes as to itself:  “We acquire and transform retailers into high performing, digital first consumer-centric businesses. As of May 2023, we have nine brands [not any more, AmeriMark about to have its own Chapter 11 cases dismissed] that are part of the CSC family. We expect to keep growing and adding more companies to our portfolio….Those retailers often have a strong brand recognition and customer following but have run into financial difficulties. Our mission is to transform them into high performing, digital first, consumer centric businesses. We stand out from the rest of the retail industry with our strong marketing intelligence, supply chain and distribution channels, outstanding customer support and experience in brick-and-mortar stores, online and catalog sales.”

CSC was founded as a joint venture between the famously reticent entrepreneur Justin Yoshimura (interesting background piece here) and Chinese private equity firm China Science & Merchants Investment Management Group in 2016.

Beginning in 2017, CSC has built up a portfolio of brands largely acquired in the bankruptcy context, including DirectBuy, Z Gallerie, One Kings Lane (from bed Bath & Beyond), Sur La Table and Home Consignment Center. In a slightly unusual “Investors“ section on its website, CSC notes, inter alia, Khosla Ventures, Panasonic and Altos Ventures as investors and adds the smiling endorsements of “family office” investors including Niraj Shah of Wayfair and Christian Friedland of Build.com.

About the Debtor

According to the Fetterman Declaration  “Z Gallerie is a specialty retailer focused on unique style, customizable fashion, and art-inspired home décor and home furnishings. The Debtor is headquartered in Gardena, California where it also operates a distribution center. Z Gallerie currently operates in 9 states, and its products are sold in 21 retail stores located in lifestyle centers, shopping malls, and street level shops. In addition to its physical footprint, Z Gallerie maintains a significant online presence. Customers can seek out the latest home décor trends, explore customizable options for a vast array of different furniture and décor styles.

Corporate Structure Chart

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