DFS group nears deadline
By Andrew Gomes
Advertiser Staff Writer
Duty-free retailer DFS Group has until the end of today to pay half of an estimated $50 million airport rent delinquency to avert a state effort to terminate the company's contract, and neither side gave any indication yesterday that a compromise can be reached.
State Attorney General Mark Bennett declined comment. DFS Group Vice President Sharon Weiner said there was "nothing new to report." Weiner declined to say whether she thought the company might reach an agreement before today's deadline.
The showdown between the state and a major contributor to airport system revenues looms as legislators consider passing a bill that would mandate retroactive reduced rent for several airport concessionaires, including DFS, and could negate the state's attempt to collect back rent.
Meanwhile, DFS projects to break even this year as the company reduces opening hours and restructures contracts at airports including San Francisco, where negotiations are ongoing, and Los Angeles, where rent was recently adjusted through May 2005.
Bennett has said the state is open to amending future rent obligations of DFS, but only if the company pays $25 million in unpaid rent for 2002.
Weiner said DFS agreed to pay the $25 million if assured it will receive "adequate relief" on the remaining 3 1/2 years of its five-year contract, which requires DFS to pay a minimum of $60 million for exclusive rights to sell duty-free goods to departing international visitors.
In November, Weiner noted that the administration of former Gov. Ben Cayetano rejected a rent adjustment plan analyzed by independent auditor KPMG LLP after six months of work.
Weiner has declined to describe details of the proposal, but one person familiar with the offer said it would have reduced DFS minimum annual rent from about $60 million to $28 million — an amount that could be adjusted higher in future years depending on sales.
DFS had duty-free sales in Hawai'i of $215 million for its contract year ended May 2001. More recent figures, reported to the state Transportation Department, were not being immediately released. DFS declined to reveal revenue figures, but estimates April sales will be down 50 percent, compared with the same month in 2001.
In Los Angeles, several months of negotiations with airport operator Los Angeles World Airports, a city agency, resulted in an April 1 agreement in which DFS will pay last year's $37 million in rent.
Under an amended contract, DFS was relieved of paying minimum rent of $37.5 million this year, and instead will pay 23 percent of sales unless sales exceed a certain level.
DFS duty-free sales at its 12 Los Angeles airport shops from 1997 to 2000 were between $104 million and $141 million, but dropped to $92 million in 2001 and $73 million last year.
If DFS matched last year's sales this year, it would pay $17 million in rent, saving $20 million. If 2003 sales reach $115 million, DFS would pay about $26 million. The company also would pay $5 million to $10 million on top of percentage rent if sales exceed $116 million.
DFS percentage rent at the Los Angeles airport rises from 23 percent this year to 27 percent next year and then 28 percent to 39 percent for the five months through May 2005, when a deferred $5 million payment is also due.
In addition, DFS agreed to pay a $3.75 million fee for marketing to travelers, including $1 million designated for advertising to Japanese tourists.
Weiner cautioned against using the Los Angeles deal as a basis for a compromise in Hawai'i because she said DFS has higher operating costs here, including rent for the company's off-airport store in Waikiki. Also, a significantly greater percentage of DFS sales in Hawai'i come from Japanese visitors — about 95 percent here, compared with more than 50 percent in Los Angeles.
Weiner said the company agreed to pay 2002 rent in Los Angeles because DFS was confident that airport administrators would negotiate a restructured contract in good faith, an assurance she said government officials in Hawai'i have not made.
Many concessionaires at Hawai'i airports are behind on rent payments, according to state Airports Administrator Davis Yogi, who could not immediately say if demand and default notices have been sent to concessionaires other than DFS.
Bennett said he was not aware of any other airport concessionaires receiving demand notices such as the one his office sent DFS.
If DFS fails to pay its 2002 rent delinquency, Bennett said the state will amend a March 28 lawsuit to include breach of contract allegations, and will move to terminate the DFS contract and recover a $45 million performance bond from the retailer.
DFS stores, however, would not immediately be closed or taken over by the state, Bennett said.
In a separate strategy, Bennett is suing DFS for repaying a $100 million debt to majority owner LVMH Moet Hennesy Louis Vuitton last year, during which time DFS failed to pay $25 million in rent to the state.
The state's suit alleges it is illegal under the state Uniform Fraudulent Transfer Act for DFS to pay off LVMH while claiming to be unable to pay other debts. DFS maintains the payment was legal.
DFS claims to be insolvent, with $500 million in debts, including $350 million it still owes LVMH.
DFS, which employs about 1,200 people, has said it has done all it can to slash costs, including cutting the equivalent of 370 jobs in Hawai'i following the Sept. 11 terrorist attacks. Earlier this month, DFS announced another 25 job cuts and a reduction of hours for hundreds more workers.
Weiner said she couldn't predict whether additional employee reductions would be necessary, though she said such cuts are always a last resort.
Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.
