Off-price retailer Tuesday Morning is readying itself to be auctioned off to a new would-be owner that can help it emerge from Chapter 11 bankruptcy after shedding more than half of its U.S. stores last month, a move that's expected to keep about 200 stores operational throughout 25 states.
The Dallas-based retailer's bankruptcy auction, scheduled for Wednesday at a law firm's office in downtown Dallas, comes after Tuesday Morning handed back hundreds of keys to landlords as it shuttered more than half of its U.S. stores after filing for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Texas, Fort Worth division. In trimming its real estate footprint, Tuesday Morning's executives said the retailer auctioned off 30 of its real estate leases to landlords and other retailers including Five Below, Dollar General and Michaels.
"One of the debtors’ largest expense categories is the cost of leasing the stores," said Phillip Hixon, the company's executive vice president of store operations and real estate, in a declaration to the court. In looking to bring funds to the estate, Tuesday Morning marketed 263 of its leases for sale, with 30 of those leases receiving successful bids and, in some cases, backup bids.
In all, the lease auction produced $1.64 million in gross proceeds to the estate, less the cure costs, such as owed rent to landlords. The retailer also had to pay fees to A&G Realty Partners, which ran and managed the auction. The net proceeds to the Tuesday Morning estate totaled about $660,000, Hixon told the court.
"The only alternative to the auction was rejecting the leases, which likely would have resulted in the landlords filing rejection damages claims," Hixon said in his declaration to the court.
During a lengthy hearing Thursday, Tuesday Morning asked Judge Edward Morris, who is overseeing the case, to approve the auction results so landlords or other retailers could have access to the properties once leased by the home decor retailer. But not everyone was happy with the auction results.
An attorney on behalf of a California retail center landlord told the court Five Below was unable to operate within its property because restrictions specified in leases with two other tenants, Trader Joe's and DXL, in the center. The lease restriction specifically excludes a "dollar-type store," from being a neighboring tenant. In providing testimony to the court, Steve Sanders of Vintage Properties was asked to pick his favorite tenant in the Modesto, California, shopping center, of which he chose Trader Joe's because it paid the highest rent of roughly $2 million a month and brought in shoppers to the center.
If Five Below was deemed to be a "dollar-type store," it could mean the grocer's rent could be cut in half or they would have the ability to exit its lease, Sanders, who referenced Trader Joe's lease, testified to the court.
Ron Masciantoni, a senior vice president and general counsel at Five Below, testified to the court the discount retailer has similar product offerings as a Tuesday Morning, catering to the teen and pre-teen consumer with products at multiple price points. Masciantoni said the retailer could also manage its in-store merchandise for whatever shopping center a store might reside to ensure it abides by co-tenancy clauses. Sanders later retorted under oath that the retailer was "no Tuesday Morning."
Tuesday Morning requested the judge insert language in what it hopes will be a court-approved sublease to protect the landlord with language defining Five Below as being a discount retailer, but not a "dollar-type store," which is restricted in the center's leases with other tenants. Judge Morris, who had yet to hear about another contested landlord matter, continued the hearing to Tuesday afternoon.
In continuing the hearing, Judge Morris told the court he wanted to look closely at the declarations filed with the court as evidence and review rulings made by prior courts, such as a ruling for a sublease made in the Toys R Us bankruptcy case, which could serve as precedent in this matter. For Five Below to take over the Tuesday Morning lease, it must be approved by the judge.
Judge Morris gave verbal approval Thursday of the uncontested subleases, which exclude the proposed subleases in Modesto, California, and Phoenix, Arizona. Landlord entities bought out the Tuesday Morning leases in eight of the 30 properties that were successfully auctioned off. Here's a list of the remaining 22 locations, grouped by successful bidder, including the two contested leases:
Five Below: 9150 Baltimore National Pike in Ellicott City, Maryland; 1915 S. Hurstbourne Parkway in Louisville, Kentucky; 975 Savannah Highway in Charleston, South Carolina; 454 Ohio Pike in Cincinnati, Ohio; 905 East Big Beaver Road in Troy, Michigan; 18040 Chatsworth St. in Granada Hills, California; 245 E. Bell Road in Phoenix, Arizona; 3250 Dale Road in Modesto, California; 195 Goodman Road W. in Southhaven, Mississippi; 2529 Whiskey Road in Aiken, South Carolina; 1355 N. McDowell Blvd. in Petaluma, California; 1555 East New Circle Road in Lexington, Kentucky; 1377 Wendy Court in Spring Hill, Florida; 13069 Hwy. 9N in Milton, Georgia; 7525 Westheimer Road in Houston, Texas; 501 SE Washington Blvd. in Bartlesville, Oklahoma; 5637 Barnes Road in Colorado Springs, Colorado.
Dollar General: 902 W. Kimberly Road in Davenport, Iowa; 2661 S. Woodland Blvd. in Deland, Florida.
Michaels Stores: 1620 Montclair Road in Irondale, Alabama; 6450 N. Desert Blvd. in El Paso, Texas; 2008 S. Caraway Road in Jonesboro, Alabama.
Tuesday Morning's ongoing battle with its debtor-in-possession lenders is expected to continue into next week's auction of the retailer, with lengthy negotiations proving to be unsuccessful, attorneys on behalf of the lenders told the court. Judge Morris told the court he wasn't happy with the non-resolution of the parties as Tuesday Morning gets closer to its Wednesday auction date.
"We will all hold our breath and hope things continue to move in the right direction to a bigger, concrete non-cracked foundation and agreement between all parties," Judge Morris told the courtroom. "Let's hope we have a good sales process with good robust bidding."
Next week's auction will be a pivotal moment for not only the retailer's ongoing business, but its remaining 200 retail leases and its Dallas headquarters lease. In a filing by the landlord of the office campus where Tuesday Morning's headquarters is located, the filing contends the cure amount for the lease is more than $645,000, rather than the monthly rent of $72,273.16. Tuesday Morning has yet to respond to the filing.