Aldo files for bankruptcy protection in the midst of transformation

COVID-19 caused a dramatic loss of revenue and increase in losses that put the retailer's plans off the rails.

Aldo Group has filed for creditor protection, becoming the first major Canadian retailer to buckle under new pressures brought on by the COVID-19 crisis.

The Montreal-based company has obtained an initial order under the Companies’ Creditors Arrangement Act from the Superior Court of Québec and has applied for similar protection in the United States and Switzerland.

Aldo, Call It Spring and Globo will continue to sell online during the proceedings. Its stores – which closed in mid-March due to COVID-19 – are expected to reopen when it is declared safe to do so in their respective regions, according to the company’s statement. Between its banners, Aldo currently operates 287 stores in Canada and 300 in the U.S., on top of 1,400 franchise stores globally.

However, according to filings by EY, which has been appointed monitor for insolvency proceedings, Aldo will need to drastically reduce expenses in order to restructure its operations and “survive the economic and financial crisis” brought on by the pandemic, which means the company “must terminate a number of leases in the U.S. and Canada” and focus on online sales. Aldo told strategy in 2017 that ecommerce accounted for roughly 20% of its total sales; in 2018, it told fashion industry outlet Draper’s that bricks-and-mortar made up just over half of its total revenues.

David Bensadoun, CEO of Aldo Group, said in a statement that the company has “a solid track record” of growth and profitability since it was founded in the 70s, and had made “strong progress” with transformation plans meant to address the challenges and changes experienced by the retail industry in recent years.

As a private company, Aldo does not release public financial reports, but industry estimates and statements from the company have put revenue above $1 billion for each of the last several years. However, according to the filings, Aldo has not been profitable for “a few years” and have experienced consolidated operating losses. For the fiscal year ending in Feb. 2020, the company had $108.1 million in operating losses, 8.5% of its sales volume of $1.28 billion.

The company had been in the middle of a restructuring plan that included decreasing the share of business represented by brick-and-mortar sales, while increasing ecommerce, wholesale and franchise channels. This transformation was “on track and delivering as expected” – until the COVID-19 crisis.

For the two months ending April 4, Aldo had an additional $44 million in operating losses, 37.4% of its sales volume of $117.8 million, a downward trend it expects to continue. By comparison, in the first two months of last year, Aldo had a $18.9 million sales loss, 9.5% of its $199.8 million sales volume.

Filings also estimate that store traffic had already decreased between 50% and 75% in the two weeks leading up to the full closure of Aldo’s stores. Beyond store closures, the company has also seen a decrease in revenue from wholesale customers and franchise partners as a result of the pandemic, keys areas of focus in its transformation. EY notes that all of its assets – such as its stock and store locations – are likely overvalued in the current environment. It has merchandise that had been ordered for spring that is unsold and will likely need to be liquidated, and production and delivery of fall merchandise from Asia is likely to be delayed. Rent on stores in the U.S. and Canada has not been paid for the months of April and May, which means some properties may need to be disclaimed, with stores vacated and stock liquidated.

The loss of bricks-and-mortar sales has created an unstable situation for retailers that were already struggling to adapt to challenges in the industry. Earlier this week, Reitmans offered a grim outlook for its future, saying that already disappointing results combined with new pressures brought on by the pandemic meaning it will likely need financing if it is to continue as a going concern.