Montreal's Beyond the Rack files for creditor protection

Montreal eCommerce fashion retailer Beyond the Rack has filed a document in Quebec Superior Court, under the name 7098961 Canada Inc. (formerly known as Beyond the Rack Enterprises Inc.), demanding protection under the Companies’ Creditors Arrangements Act (CCAA) and appointing the Richter Advisory Group as a court appointed monitor.
The document concludes, “As a result of the Company’s deteriorated financial condition and liquidity issues, it is unable to continue operations in the near term absent (i) stay of proceedings and (ii) increased liquidity provided by an interim financing.”
Unaudited financial statements included in the document say the company lost $17.1-million in 2016. Audited statements say the company lost $29.5-million in 2016 and $11.0-million in 2014.
The document reports that Beyond the Rack’s net sales fell from $133.1-million in fiscal 2015 to $96.0-million in 2016 (unaudited).
Founded in 2009 by Yona Shtern and Robert Gold, Beyond the Rack successfully closed five funding rounds, totaling $98.6 million U.S., the most recent being a $10 million debt financing round facilitated by the Silicon Valley Bank in October 2014, and before that a $25 million Series C round led by Investissement Québec, Iris Capital and Tandem Expansion.
At the time, Iris Capital partner Alexander Wiedmer said, “As a global investor we have broad exposure to e-commerce internationally and have been impressed by Beyond the Rack’s world-class unit level economics and operations. It is ideally positioned to be an industry and market leader as e-commerce continues to expand in both Canada and the United States.”
The court document says, “Since inception, the Company has incurred significant financial losses as it engaged in aggressive and costly marketing campaigns aimed at increasing customer growth and establishing its e-commerce infrastructure. The financial losses were supported primarily through debt and private equity placements. Despite efforts deployed by Management and financial advisers, the Company was not able to raise new sources of capital and relied upon its existing investor base and secured lenders to fund operations and support its growth.”
Not too long ago, founder Yona Shtern claimed that Beyond the Rack was the number three eCommerce site in Canada behind Amazon and eBay and eagerly gunning for the number one spot, with sales topping $50 million in the company’s second year and $100 million in its third.
Beyond the Rack declared $150 million in sales in 2013.
In 2012, Shtern proudly speculated that Beyond the Rack was on track to become a $1 billion company within the next five years.
At least one ripple of trouble did present itself in recent times, however.
Last month, The Fashion Law reported that Beyond the Rack was being sued by Gucci, who filed a lawsuit in the Southern District of New York Court alleging that Beyond the Rack was selling fake Gucci bags.
And last week, an ex-employee sent a tip to Montreal radio station CJAD that he/she had been laid off without notice or severance by a supervisor citing “tough financial times”.
“He just started calling people into their offices and there were mass layoffs. It was across the board, it was our merchandising team, our tech team, our customer service,” said the ex-employee.
Only last month, Beyond the Rack appeared fit enough to be a rumored M&A target for brick-and-mortar off-price retailer Ross Stores.
Asked by Forbes to comment on the idea of a marriage between Ross and Beyond the Rack, Yona Shtern said, “We have always felt that there existed big synergies between online and offline players in off-price retail – especially when both parties served a similar customer demographic,” adding, “In the mid-market both Ross Stores and TJX would match up nicely with Beyond the Rack.”
Beyond the Rack’s actions highlight not only the challenges inherent in retail in general, but it also somewhat surprisingly calls into question the overall viability of eCommerce as an attractive investment vehicle in the tech sector, particularly given the level of hype that eCommerce receives relative to unsexier verticals such as cleantech or supply chain technology or robotics.
On the retail front, it has been a bad couple of years for high-profile physical retail fashion chains in Quebec, with Parasuco laying off half its staff and and closing stores before filing for bankruptcy last February, or Jacob closing all 92 of its retail stores in October 2014, in addition to Bikini Village and Mexx filing for bankruptcy.
The disappearance of yet another brick-and-mortar chain surprises no one these days, what with the apparent triumph of eCommerce suggesting that the physical world has effectively been “disrupted” through pressures imposed by the ephemeral convenience of online shopping.
Beyond the Rack, however, has been so regularly and consistently touted as a made-in-Quebec eCommerce success story that its failure somewhat begs the question: If Beyond the Rack can’t build a successful eCommerce fashion company, who can?

Is anyone else having difficulty with #beyondtherack lately? Items not being shipped, items not being refunded. Case emails not answered.

— Debra Hannams (@dhannams) March 29, 2016