Posted on: Friday, August 30, 2002

DFS falls $18M behind on rent

By Andrew Gomes
Advertiser Staff Writer

Visitors shop at the DFS Galleria located on Kalakaua Avenue. Cory Lum • The Honolulu Advertiser

DFS Hawai'i has fallen $18.1 million behind on rent payments to the state, and is again asking for relief from terms of its contracts to sell duty-free goods at Hawai'i airports.

The delinquency is the second time in four years DFS has failed to keep current on its rent because of trouble with Japanese tourist travel to Hawai'i.

In 1998, the company fell $50 million behind on its rent following the 1997 eruption of the Asian financial crisis, but was able to repay the state in full following severe cost-cutting and a sales rebound.

This time, DFS Group Vice President Sharon Weiner flatly said that the Sept. 11 effects on duty-free sales are so great that the company cannot continue if it is held to terms of its current five-year contract with the state Transportation Department.

"There's no way we can survive and stay in business without some sort of relief from the state," she said yesterday.

DFS Hawai'i has made drastic cuts, laying off 70 full-time employees and the equivalent of 300 workers through reduced hours late last year. Along with other retail concessions at state airports, DFS' rent was reduced from September through April, saving the retailer $16 million. But Weiner said the cuts weren't enough.

Since May, DFS has paid only a fraction of its rent, Weiner said, and is negotiating with the state to adjust rent for an unspecified term.

Transportation Department officials yesterday could not be reached for comment beyond confirming DFS' rent delinquency.

After Sept. 11, the 150-store San Francisco-based DFS chain had been successful in renegotiating only about half of its contracts at airports around the world, but not in Hawai'i, the company's most important market.

DFS was among the Hawai'i retailers worst-hit with lost sales following the Sept. 11 attacks, given the company almost exclusively relied on Japanese tourists whose numbers year-to-date through July are down 21.5 percent.

Still, there is debate whether DFS — which is majority owned by LVMH Moet Hennessy Louis Vuitton SA, the world's largest luxury retailer — should be allowed to renegotiate its contract. Some say that LVMH, which expects its DFS unit to break even this year, is financially able to weather the downturn in DFS sales that has been most dramatic in Hawai'i, where receipts are still off about 30 percent.

Gov. Ben Cayetano vetoed a bill in June that would have extended relief for DFS and other airport concessionaires because he said the bill would force the state to "virtually guarantee that airport concessions stay in business at the expense of the public."

Hawai'i Attorney General Earl Anzai also has said that waiving rent for DFS could leave the state vulnerable to a lawsuit from any company that considered bidding on the duty-free contract but was dissuaded by the strict provisions.

Others argue it would be ill-advised to let such a big contributor to state coffers fail. DFS payments for its roughly 40 airport concessions typically account for two-thirds of all airport revenue. In the past 40 years, the company has paid $2.5 billion in concession fees.

DFS is obligated to pay minimum annual rent of about $70 million under a contract signed in January 2001. The minimum had been reduced from the previous year when DFS paid the state $120 million in concession fees.

Weiner declined to say how much DFS can afford and how long it expects to need reduced rent. But she said paying rent equivalent to 20 percent of sales would "at least be in the realm of possibility for us."

The DFS contract runs through May 31, 2006. If the state declares DFS in default, it could prevent the retailer from bidding on the contract for five years and keep a $45 million bond put up by the company.

Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.