Lunya Company:
Pandemic Whiplash

 

 

June 23, 2023

 

On June 16, 2023, Lunya Company, a direct-to-consumer luxury loungewear company founded in 2012, filed a voluntary petition for relief under subchapter V of chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Subchapter V is specifically designed for small businesses, like Lunya, with unsecured debt of no more than $7.5 million. Subchapter V is a faster, more cost-effective and efficient alternative to a standard Chapter 11 filing, which can help small businesses, like Lunya, reorganize while continuing operations in the ordinary course of business. The company aims to reorganize its operations while continuing to sell high-quality, sustainably made loungewear for women and men.

 

Financial Position and Debt Structure

 

As of the petition date, Lunya has no secured debt but owes over $500,000 to a third-party logistics supplier and approximately $6 million in unsecured debt, mainly comprising trade and credit card debt.  Through its chapter 11 case, Lunya seeks to continue operations, address past liabilities, and terminate costly store leases. Key operational changes already implemented include:

 

• Reducing investments in seasonal product launches

 

• Developing a markdown and liquidation strategy for excess inventory

 

• Reducing full-time staff from 46 to 28 employees

 

• Eliminating non-essential consultants and expenses

 

On the petition date, Lunya filed a motion to reject real property leases and contracts with companies including Leap, a retail platform that assists direct-to-consumer brands with expanding into brick-and-mortar retail.  The requested relief could affect retail leases in Atlanta, Houston, and San Francisco.

 

Pandemic Whiplash

 

Court filings indicate that the COVID-19 pandemic initially boosted Lunya's business due to increased demand for loungewear. In 2020 and 2021, Lunya's gross revenue peaked at $50 million, driven by home-office dwellers prioritizing comfort and fashion. However, this boom was short-lived. By 2022, Lunya's gross revenue had dropped to $35 million.

 

In the Declaration of Blair Lawson in Support of First Day Relief [Docket No. 13], Lunya’s CEO explained that many trends that aided company growth have since seen a "complete reversal" which has contributed to Lunya’s declining revenue. One significant factor was the changes to Apple's iOS 14 in 2021, which hampered Lunya's digital marketing efforts by making it harder to use targeted ads. These changes, aimed at protecting user privacy, made tracking conversions and attributing them to specific campaigns much more difficult, according to Digiday.

 

Simultaneously, Lunya faced inventory management problems. The company had increased inventory levels, expecting continued e-commerce growth. However, as revenues began to decline in June 2021, the excess inventory became a burden. Lunya's CEO noted that the iOS update "severely impaired the brand's ability to effectively target advertisements," leading to over-ordering inventory by about 60%.

 

Retail Setbacks

 

Like many direct-to-consumer businesses, including Warby Parker and Allbirds, Lunya invested in brick-and-mortar stores, opening locations in San Francisco, Los Angeles, New York City, and Boston between 2020 and 2022. Lunya’s founder explained in Forbes, "Though we trust the power of video and the written word, it's hard to truly understand the magic of the world's best textiles without touching them firsthand."

 

However, these retail locations proved too costly. Lunya's chain of stores lost approximately $135,000 on average per month in the year leading up to the Chapter 11 filing. In 2022, owned retail and wholesale segments each accounted for only 8% of Lunya's total sales. This trend mirrors other DTC brands' experiences, with many now re-evaluating their physical retail strategies. According to ModernRetail, Allbirds plans to close a third of their stores in 2024, and Outdoor Voices has shut all their retail locations.

 

Implications for the Direct-to-Consumer Industry

 

Lunya's bankruptcy highlights several challenges facing direct-to-consumer brands:

 

• Vulnerability to rapid market shifts

 

• Impact of technology changes on digital marketing effectiveness

 

• Risks associated with rapid expansion and channel diversification

 

• Importance of robust financial management and inventory control

 

This case serves as a cautionary tale for other direct-to-consumer brands, emphasizing the need for adaptable strategies and strong financial oversight in a rapidly evolving retail landscape.

 

For more details, you can find Lunya's docket here.  Below are the initial motions filed in Lunya’s chapter 11 case: