DFS stores owe state $29M

By Andrew Gomes
Advertiser Staff Writer

Resort retailer DFS Hawai'i has fallen behind on another quarterly rent payment to the state, raising its delinquency to $29 million.

The DFS Galleria, located in Waikiki, features various shops, a juice bar and coffee shop. The retailer has fallen behind in its quarterly rent payments to the state Eugene Tanner • The Honolulu Advertiser

DFS made a $3.7 million payment Tuesday, equivalent to around 18 percent of its sales, instead of the $15 million due for the three-month period under its five-year contract to operate duty-free and regular retail stores at Hawai'i airports, the state said.

The retailer first defaulted on rent payments in May when it began paying only a fraction of its rent based on a percentage of sales for the June-August period and owed $18 million in back rent.

DFS Group Vice President Sharon Weiner was traveling and could not respond to a request for comment yesterday and Wednesday. Weiner said in late August that the company was trying to negotiate a rent adjustment with the state.

On Wednesday, Transportation Director Brian Minaai said the department has had only preliminary discussions with DFS officials, and has not agreed to any kind of specific rent relief.

DFS was among Hawai'i retailers worst-hit with lost sales following the Sept. 11 attacks more than a year ago, given the company almost exclusively relied on Japanese tourists whose arrivals year-to-date through August are down 21.3 percent.

Minaai said the number of Japanese visitors to the Islands continues to improve, but sales have not moved as much for DFS, which in August said receipts were down 30 percent from a year earlier.

DFS previously said that the prolonged sales drop has had such an effect that the company cannot stay in business if it is held to current contract terms.

Some observers say it would be ill-advised to let DFS Hawai'i fail, because the company's roughly 40 airport concessions typically account for two-thirds of all state airport revenue. In the past 40 years, DFS Hawai'i has paid $2.5 billion in concession fees.

But others argue that DFS Hawai'i's majority owner — LVMH Moet Hennessy Louis Vuitton SA, the world's largest luxury retailer — is financially able to cover DFS losses and fulfill its rent obligations. In a second-quarter earnings conference call, LVMH projected that its DFS Group unit, which operates about 150 stores in 16 countries and has renegotiated rent with about half its airport landlords, will break even this year.

Hawai'i Attorney General Earl Anzai 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.

Legislation passed earlier this year provided rent relief to DFS and other airport concessionaires, but Gov. Ben Cayetano vetoed the bill in June, saying it would force the state to guarantee that airport concessions stay in business at the expense of the public.

The veto followed an eight-month emergency rent reduction that ended in April for airport retail concessionaires, including DFS, which saved $16 million.

DFS, which also made its own drastic cost cuts, such as laying off 70 full-time employees and the equivalent of 300 workers through reduced hours late last year, said the savings were not enough.

DFS is obligated to pay minimum annual rent of about $60 million under its contract, signed in January 2001 and running through May 31, 2006. Minimum rent had been reduced from the previous year when DFS paid the state $120 million in concession fees.

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

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