Loves says warehousing and logistics issues were at the core of its financial problems

The start-up retailer holds out hope of reopening some stores following liquidation

WARREN, Mich. — When Loves Furniture and Mattresses opened its first seven stores at the end of August, the initial consumer feedback was positive.

“Customers lauded the stores, the merchandise and the customer-centric method of selling,” the retailer said in a court document.

But behind the scenes, Loves’ problems in the warehouse and delivering furniture were mushrooming. The customer reviews quickly turned negative and things only got worse from there. The retailer filed for Chapter 11 bankruptcy protection last week, seeking approval to liquidate all stores, including the remaining 12 that were not already in the process.

In a declaration filed in U.S. Bankruptcy Court this week, interim CEO Mack Peters and Jeff Love, president of private equity owner US Assets, detail the progression from a promising start to ultimate collapse and they do so with only two references to the Covid-19 pandemic. Instead, much of the blame is pinned on warehouse and delivery flubs and on Penske Logistics Services, which it hired to manage its warehouse operations.

In his statement, Peters said, “the warehousing and logistics related to Loves’ initial inventory and sales was disastrous, causing Loves loss of substantial sales and serious damage to Loves’ reputation.”

But it wasn’t the retailer’s only problem. Here’s the lead-up to the bankruptcy drawn from Peters’ and Jeff Loves’ statements.

Early last year, STORE Capital and Essential Properties approached Texas-based US Assets about leasing several stores that had been occupied by Art Van Furniture, the Warren, Mich.-based Top 100 company that had filed its own Chapter 11 petition in March. The two were landlords of the properties and believed the leases at issue would soon be rejected by the liquidating retailer. This led to discussions about creating a start-up furniture chain in 26 former Art Van and related Levin Furniture locations.

Initial financing for the venture was expected to come from US Assets supplemented by STORE, according to the document, and Loves eventually entered into master leases for a total of  27 locations. On the same day, May 4, it signed an asset purchase agreement in bankruptcy court to acquire the inventory at the store locations, borrowing about $5.3 million from STORE to do the deal.  Loves then hired sales consultant Planned Furniture Promotions to liquidate the inventory and ended up receiving about $7 million from the sales.

As Loves expanded its portfolio of stores, it hit snags along the way. Many of the locations need updates. Some were out of code. Fixtures that were supposed to remain in place had been ripped out, creating damage and the need for repair in some cases. Covid-19 barriers needed to be installed. All told, the cost of refurbishment was nearly $4.1 million, a sum that had not been fully paid at the time of Loves’ bankruptcy filing.

On the merchandising side, Loves ordered from a total of 81 sources for an aggregate landed cost of more than $60 million, according to Peters’ declaration.  Of that, it received about $38 million worth of goods. “The rest was either canceled by the manufacturer due to non-payment or sold to another retailer,” he said in the court document.

Loves paid about $17.2 million toward that inventory, and about $22.5 million remains unpaid. The retailer estimates it holds more than $10 million in inventory at its main Warren warehouse and $6.4 million at 12 remaining stores.

After Loves opened its first handful of Detroit-area stores in late August, the feedback from customers, including from social media reviews, was positive, Peters said. But, “Reviews shortly turned negative as Loves experienced issues delivery retail inventory,” he said.

“As customer merchandise could not be located, frustrated customers canceled orders. This also resulted in negative comments related to Loves’ ability to deliver merchandise on social media, which also resulted in diminished traffic to the stores.”

In an appendix to Peters’ declaration, Jeff Love elaborated on the warehouse and delivery issues, starting with the delay in getting into its own facility. Before Loves could sign a lease on the former Art Van corporate office and giant distribution center in Warren, another Top 100 company American Signature had purchased the related inventory there and the right to conduct a liquidation sale where the product was kept through Sept. 30.

This left Loves in need of temporary warehouse space at least until Oct. 1, and a vendor to manage the operations. It ultimately selected Penske, and Penske, in turn, located a warehouse in Burton, Mich, with 413,000 square feet of storage space Loves could lease temporarily.

But that wasn’t enough space. Loves ended up taking an additional 177,000 square feet in Allen Park, Ill., from Evans Distribution Systems and then 100,000 square feet from Evans in Lincoln Park, Ill.

As the stores prepared to open in mid-August and as the initial orders of merchandise flowed into the warehouses, Loves informed Penske and Evans about what goods would be needed at which locations, and they, in turn, were responsible for finding this product in their warehouses and delivering it to the stores.

“Although Evans had no issues in doing so, Penske had trouble identifying goods and sent goods to the wrong stores so that one store would get two of everything and another store received no goods,” Jeff Love said in the court document.

When that happened, Penske’s warehouse management system required the merchandise to be trucked back to the warehouse and re-entered as inventory before being sent out again to the correct store.  Loves, meanwhile, was charged by Penske for all the extra trips, Jeff Love said.

In addition, the Burton and Evans systems weren’t talking to each other, which resulted in hundreds of delayed deliveries and cancellations. When Loves finally did take possession of the Warren warehouse, and after all the merchandise had moved over to the facility by early December, “Penske continued to have difficulty finding goods to fulfill orders … or provide accurate counts,” Love said.

Peters, in the declaration, said “Loves’ defective inventory and logistics system was also staggeringly expensive.” To date, the retailer has paid $8.3 million to Penske alone, and Penske claims it’s still owed more than $1.8 million, an amount Loves disputes. According to a court filing, Penske is Loves’ fifth-largest unsecured creditor — larger than any single furniture industry-related creditor — with a $1.61 million claim. (For a list of the industry’s largest creditors see this story.)

Loves continued to pay Penske, including a portion of the amount that was late, until Dec. 4, when it didn’t have the cash to do so, according to the declaration. Penske gave notice it would walk off the job within 10 days if it wasn’t paid immediately and threatened an “immediate sale of Loves’ inventory.”  Loves ended up making a $401,000 payment, and Penske stayed on the job.

Meanwhile, with new CEO Peters in place, Loves took steps to cut expenses and consolidate to a more manageable go-forward business. That included the transfer of five Pennsylvania stores and inventory to the newly established Levin Furniture in early December and, more recently, the move to liquidate 13 other locations, leaving it with 12 according to the court documents.

But the steps didn’t prove enough to stave off bankruptcy. On Dec. 29, after Loves told Penske it couldn’t make another payment, Penske removed its employees and trucks from the 1 million-square-foot Warren warehouse and refused to permit Loves to use its warehouse management systems. As a result, customer deliveries that had not already been pulled were suspended and Loves canceled future deliveries. That led to “significant numbers of customer demands for refunds further negatively impacting Loves’ available cash and the viability of the business,” Peter said.

The company filed for protection Jan. 6. Penske filed suit against Loves on the same day for its past-due balance and filed a motion for a temporary restraining order and emergency hearing seeking to stop Loves from moving or delivering goods from the warehouse.

In its four months in business, the retailer had delivered about $40 million in furniture, Jeff Love said. It’s seeking approval to hire PFP and Hilco Merchant Resources to liquidate the remaining stores and inventory, though Peters suggested this isn’t necessarily the end for the business.

The liquidation is needed, among other things, to maximize the value of the inventory, but also, “to determine if sufficient funds can be raised to effect a restructuring of up to 12 stores after the sales,” Peters said.

“While it may seem contradictory that the debtor seeks to conduct liquidation sales events to reorganize a core of its business operations, it is not,” he said in the document.

“In fact, the only route to a reopening of any store locations is the accumulation of sufficient proceeds from the sales to fund a reopening.”