Paper Source files for bankruptcy and plans to sell

Dive brief:

  • Card and gift retailer Paper Source has filed for Chapter 11 bankruptcy with a plan to sell and close at least 11 stores.
  • The company, which operates 158 stores, has a stalking horse offer from current lenders led by MidCap Financial to buy the company and provide $ 16.5 million in funding.
  • The stalking horse offer is valued at Paper Source debt obligations, including $ 16 million for a debtor-in-owner facility and $ 72.8 million for a first lien facility, according to court documents.

Dive overview:

About a year ago, Paper Source benefited from the fall of a competitor, the stationery chain Papyrus, which liquidated early 2020. At the time, Paper Source took over 30 Papyrus stores, increasing Paper Source’s store fleet by more than 20%.

Weeks after Paper Source announced the store acquisitions, the retail world went through radical upheaval as the spread of COVID-19 in the United States became alarming and discretionary retailers closed their stores by choice or by order of government.

In the widespread financial upheaval that followed, another industry specialist, the Paper Store, filed for bankruptcy and sold to a group of investors led by a real estate company.

Prior to the COVID-19 outbreak, Paper Source “enjoyed rapid expansion and sustained sales growth,” the CFO said. Ronald kruczynski said in court papers. But, along with its rival and dozens of other specialty retailers, Paper Source “has suffered serious damage to their finances and operations as a result of the ongoing COVID-19 pandemic,” the executive said.

Founded in 1983 by Susan Lindstrom, Paper Source began with a single store in Chicago to “showcase the beauty of handcrafted papers from around the world,” according to Kruczynski. Lindstrom expanded the retailer to 27 stores in 2007 before selling a controlling stake to private equity firm Brentwood Associates.

Under Brentwood’s ownership, Paper Source added nearly 25 more stores before being acquired by another private equity firm, Investcorp International in 2013. From there, the retailer’s expansion accelerated even further. by investing in its omnichannel capabilities.

Based primarily in urban and suburban retail areas – with a relatively low concentration in shopping malls – Paper Source focuses on a range of products, including books and newspapers, bath and beauty, care, kitchen essentials, arts and crafts supplies, wedding invitations and party supplies, among others, noted Kruczynski. The retailer also offers children’s art camps, skill workshops, design consultations on wedding invitations and other services. The company, which designs around 40% of its own products, also has a wholesale business.

The temporary closure of its stores in 2020 and the other effects of the pandemic caused revenue to drop from $ 153.2 million in 2019 to $ 104 million in 2020, Kruczynski said. Plus, the closings hit just the important holidays for the gift seller, including Mother’s Day and Easter.

The store closures also mean that Paper Source “never realized the benefits” of acquiring the “best leases” from Papyrus, which the company paid for with the help of an $ 8 million investment from Investcorp, Kruczynski said.

The retailer’s leases have added to the pressure during the pandemic crisis. Kruczynski said that as of its Chapter 11 filing, Paper Source The unpaid rent obligations amounted to $ 15.8 million.

The continued spread of COVID-19 and store occupancy limits in many states have negatively impacted cash flow at Paper Source, which was healthy before the pandemic but heavily in debt, Kruczynski said. Even after the loan injections, in February Paper Source “found itself again in an untenable position with minimal liquidity and significant rental debts which continued to increase each month,” according to the CFO.

Now bankrupt, Paper Source is looking to hand over the keys to the business to lenders or a higher bidder. While this is an unfortunate turn, the stalking horse offer shows that lenders still see value in the retailer.

Paper Source aims to hold an auction for its company on April 21 and an auction hearing on April 30.