DFS rent now Lingle's issue
By Andrew Gomes
Advertiser Staff Writer
Current leaders of the state Department of Transportation have ended negotiations over the rent delinquency of DFS Hawai'i and will pass the issue to the administration of Gov.-elect Linda Lingle.
DFS is facing another $15 million due to the state on Sunday under its contract to operate duty-free stores in Hawai'i, bringing the company's balance to $41.6 million.
The resort retailer had been negotiating with Transportation Department officials in hopes of reducing its obligation for the next 3 1/2 years of a five-year contract that requires DFS to pay a minimum of $60 million for exclusive rights to sell duty-free goods to departing international visitors.
Transportation Department officials would not characterize the negotiations, but earlier this week said negotiating would be taken up by the new administration.
DFS Group Vice President Sharon Weiner said a detailed proposal studied by independent auditor KPMG LLP was on the table, and DFS was stunned that current administration officials did not sign it.
"It's regrettable that we couldn't solve this over the last six months," she said. "We are deeply disappointed."
Weiner would not describe the proposal other than to say it was "complex" in form and ramifications. One person familiar with the negotiations said the state proposed reducing the minimum annual payment for DFS from about $60 million to $28 million an amount that could be adjusted higher in future years depending on sales.
Cayetano, through a spokesman, did not comment on the proposal or end of negotiations.
Lingle said she will need to study the issue, but she is not inclined to forgive past-due rent.
"They promised to the people of Hawai'i they would make certain payments, and they should live up to that," she said.
"The more difficult issue, I think, is going forward. I know they want to renegotiate. ... I think that's a more complex matter and I need to understand not just the situation in Hawai'i but how it's being dealt with in other places.
"Because I represent the people of Hawai'i, I have to make some value judgments on whether or not people get more by forcing the company into bankruptcy and end up maybe getting 10 cents on the dollar versus some reductions going forward."
Lingle said she and Cayetano have discussed the issue one she regards as serious because it involves a major source of airport operating revenue. She also said she had yet to meet with DFS representatives.
Weiner said DFS has only made initial contact with Lingle officials, and looks forward to discussing the issue in detail. In the meantime, Weiner said DFS will continue paying what it can.
DFS is required to make quarterly payments of about $15 million. Instead, it has been paying monthly installments it calculates on a "severe hardship formula" since June, when Cayetano vetoed a bill that would have granted rent relief to DFS and other concessionaires at state airports.
The last payment DFS made was $2.7 million on Nov. 1. Another $15 million bill for December-February rent is due Sunday, though Weiner said the company anticipates making a partial payment that day.
Weiner said sales year-to-date are down about 35 percent compared with the same period in 2000, which is a more accurate picture of business instead of 2001 when sales were harshly skewed after the Sept. 11 terrorist attacks.
If DFS is held to current lease terms, Weiner said, the company cannot survive. "The alternative is we don't stay in business," she said. "That is an alternative that is pretty grim for everybody."
The state could potentially recover a $45 million performance bond put up by the retailer. But there would be other ramifications.
DFS employs about 1,200 people in Hawai'i, and with roughly 40 airport concessions contributes the bulk of all airport concession fees that typically account for two-thirds of all state airport revenue.
Weiner said the company has already made "every cut we could." In the past year, DFS has laid off 70 full-time employees and the equivalent of 300 more workers through reduced hours. The company also cut inventories, asked vendors to extend payment terms and reduced office space.
The state also made an eight-month emergency rent reduction that ended in April for all airport concessionaires, including DFS, which saved $16 million.
If the minimum annual rent is reduced for DFS from $60 million to $28 million, it would follow a similar reduction from the last year of the previous contract when DFS paid the state $120 million in concession fees.
If forced to pay the back rent, DFS would repeat a situation it encountered in 1998, when the retailer fell $50 million behind on rent after the Asian financial crisis and repaid the state in full following severe cost-cutting and a sales rebound.
This time, some retail and tourism experts believe Japanese travel to Hawai'i has fundamentally changed and will not rebound to previous levels a blow to DFS, which almost exclusively relies on Japanese tourists who are also spending less.
DFS is a unit of San Francisco-based DFS Group, operator of about 150 stores in 16 countries, and is majority-owned by the world's largest luxury retailer LVMH Moet Hennessy Louis Vuitton SA. DFS has renegotiated rent with about half its airport landlords.
Advertiser staff writer Lynda Arakawa contributed to this report. Reach Andrew Gomes at firstname.lastname@example.org or 525-8065.