Dwindling margins, $3.6m a year rent on vacant building, Sears deal blamed for TravelBrands move

Dwindling margins, $3.6m a year rent on vacant building, Sears deal blamed for TravelBrands move

MISSISSAUGA, ON — TravelBrands put the blame on three factors for its decision to seek creditor protection – dwindling margins, lease obligations at 75 Eglinton East and the Amended Sears Agreement.

In an affidavit from CEO Francesco DeMarinis, he said “there has been a dramatic shift in the Canadian leisure travel industry whereby wholesale margins have faced increasing pressure based on the pricing of direct suppliers (i.e. cruise lines, hotels, airlines).

“Furthermore, the trend of online purchasing has eroded the viability of a store-front travel sales operation. Collectively, industry-wide changes have materially impaired the company’s margins over the past several years.

“In most cases, revenue and margins generated by each TravelBrands’ business unit have declined year over year. This has resulted in predominantly a loss of margins across the board for most TravelBrand business units. The company forecasts that profitability will continue to decline over the 2015 fiscal year. In fiscal year 2014, the company’s net operating loss was $4.5 million. The company’s forecast for fiscal year 2015, assuming the status quo, is a net operating loss of $11.6 million.”

When Red Label, the parent company of TravelBrands, bought Thomas Cook Canada it assumed the obligations of a 20-year lease of an 80,000 square foot office building in midtown Toronto that expires in 2029. But it moved the employees to its offices in Mississauga and the building has remained basically vacant, with a few sub leases, since late 2013.

TravelBrands is currently paying $3,666,015 a year in rent on this empty building.

TravelBrands manages a Canadian retail online and store-front leisure travel agency business under the Sears Travel brand.

With sales declining TravelBrands negotiated an amended agreement to reduce its advertising commitments; adopt more flexible store hours; reduce the annual percentage of gross revenue payable as royalties; reduce its minimum annual commission payments by 27%; and reduce annual lease payments for common area charges by 13%.

But sales have continued to decline.

The affidavit says gross sales and net margins through Sears Travel retail locations have faced an ongoing decline. This reflects, among other things, the closure of various Sears locations, a corollary reduction in the number of customers using Sears credit cards to make purchases from Sears Travel, the conversion of certain Sears stores to outlets and an industry-wide shift towards purchasing travel online.

“The expense of operating a store-front operation, coupled with the decreased revenue associated with such operations, has caused a significant strain on TravelBrands’ profitability.

“Furthermore, as noted above, store-front operations, like Sears Travel, are not a core part of TravelBrands’ business due to their high operating costs coupled with intense price competition across the Canadian leisure travel industry.”

TravelBrands shoulders substantial commission and royalty payments under the Amended Sears Agreement, as well as rent and operational costs related to the staffing of 88 Sears Travel retail locations.

The company’s fixed costs are payable regardless of the revenues achieved under the Sears Agreement and the Amended Sears Agreement.

The decline in revenues commencing in 2011 has been dramatic, with an overall 27% decline between the years 2011 and 2014. A further 10% decline is projected for the fiscal year 2014 revenues.

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