(For the article on Penske’s lawsuit against Loves–the article was written after this article first appeared–please go here. )
A startup Midwestern furniture retailer has filed for Chapter 11 bankruptcy protection less than a year after it began hiring management staff, and it is mostly blaming Penske Logistics for the company’s collapse.
While Pennsylvania-based Penske Logistics isn’t the largest creditor of the company — it’s fifth on the list of the largest 20 unsecured creditors — it is the company that Loves appears to fault for its collapse, though a reading of the bankruptcy petition reveals other issues the company had in its short life.
It also reveals how a startup retailer ran into a problem that many other people looking for floor space can sympathize with: a tight market for warehouses to put their merchandise.
The case was filed earlier this month in the U.S. Bankruptcy Court for the Eastern District of Michigan. A spokesman for Penske said the company already had filed suit against Loves in Oakland County Circuit Court in Michigan but that it had no further comment on the allegations against it in the Loves bankruptcy filing. FreightWaves was unable to obtain the Penske filing by publication time.
The details of the difficulties of Loves and the strained relationship between the retailer and Penske Logistics are contained primarily in an appendix to a filing made by Mack Peters, who describes himself as a “major shareholder” of MP Furniture, a furniture retailing consulting firm. He also brokers deals between furniture manufacturers and retailers. Peters was hired by Loves to make his submission.
The Peters review of the short life of Loves Furniture says a company called US Assets, which is 94% owned by Jeff Love, established the Loves Furniture retailer by setting up shop primarily in spaces abandoned by Art Van, a shuttered furniture retailer. “Loves was created at the kitchen tables of its first employees,” the Peters filing says.
The bankruptcy documents recap how Loves obtained financing and moved into former Art Van outlets, many of which are described as being in less than stellar condition. It went into business in a big way, ordering furniture from 81 different manufacturers at a “landed cost” of about $60 million, receiving about $38 million of that inventory. “The rest was either canceled by the manufacturer due to non-payment or sold to another retailer,” the Peters filing says.
Things went well in the beginning but inventory problems resulted in “frustrated customers cancel[ing] orders” and poor reviews on social media. This was not all because of Penske; Peters describes Loves inventory and logistics system as “defective” and “staggeringly expensive.”
Loves has paid about $8.3 million to Penske with about $1.8 million listed as the outstanding debt in the list of top creditors. But Loves stopped paying at the end of December because of a cash crunch and Penske severed all ties and stopped making deliveries. The Penske suit was filed Jan. 6.
The warehouse squeeze can be seen in Peters saying Loves though it had space lined up, lost it to somebody else and didn’t actually have its own warehouse space until Oct. 1. But it continued to grow; it opened up its final new store as recently as Dec. 19, less than a month ago.
With inadequate space to store its own merchandise, “Loves sought a vendor to manage its warehouse and to provide cartage services for goods moving from the warehouse to the stores,” the Peters filing said. It chose Penske Logistics and the relationship started in July.
The lawsuit says the first problem is that Penske Logistics “insisted” on using its own warehouse management system rather than Storis, a software system used in the furniture industry. Penske also leased space for Loves at a warehouse in Burton, Michigan, which, the lawsuit says “quickly became clear … was not large enough to hold all of Loves incoming orders.” Loves contracted with a company called Evans Distribution Systems for additional space at an Evans warehouse in Michigan.
The heart of the dispute, laid out after that introduction to the point where Loves started operating, are some of the charges which a Penske Logistics spokesman said the company “strongly refutes” before saying it could not comment further.
The lawsuit says Evans was able to take in orders and move inventory out to the Loves 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,” the lawsuit said. The merchandise would then be returned to the warehouse, put back into inventory and then sent out to the correct store, Peters said, slowing the delivery process.
Half-filled trucks were sent out at times, according to Peters. There was no coordination between the Penske Logistics system for the Burton facility and the Evans facility. “As a result hundreds of deliveries were delayed or ultimately canceled because the merchandise needed to fulfill a customer’s order could not be located within the Burton warehouse,” Peters writes.
As a result of this confusion, “sales fell significantly in light of Loves’ difficulty locating, obtaining and delivering merchandise to its customers,” Peters writes.
One online headline from a Michigan TV station, in the heart of Loves’ service area, said that “customers of Loves Furniture report lengthy delivery delays,” while another asked, “Will Loves Furniture’s brief story end in heartbreak?”
Peter said sales of the chain in four months totaled about $40 million.