DFS to pay $25 million to cover delinquent rent
By Andrew Gomes
Advertiser Staff Writer
DFS Group yesterday agreed to pay the state $25 million to cover some of its delinquent rent, and begin negotiating new terms for the company to continue operating about 40 stores in Hawai'i airports.
After a 45-minute meeting, Gov. Linda Lingle and DFS Chairman Ed Brennan signed the agreement, which gives the two sides 60 days to restructure or terminate the contract for DFS to run duty-free and traditional retail shops at airports.
"I'm pleased that we are going to be able to sit down and see if a resolution can be reached," said state Attorney General Mark Bennett, who filed a lawsuit against DFS two weeks ago to force the retailer to pay at least part of $49 million in overdue rent.
However, Bennett noted that the agreement, which puts the state's suit on hold, doesn't resolve the dispute completely.
Under the agreement, if the DFS contract cannot be mutually restructured or canceled, the retailer is free to try to get back the $25 million payment covering 2002 rent, and the state is free to proceed with prosecuting its lawsuit, which alleges DFS violated state law by repaying its owner $100 million last year when claiming to be unable to pay other debts.
Still, both sides said they were pleased with progress in the issue, which has grown more contentious as the state has struggled to close a huge budget gap.
Sharon Weiner, DFS Group vice president, said Brennan regarded Lingle as having every intention to direct administration officials to negotiate in good faith.
"It was a very positive meeting," she said.
"It went extremely well."
DFS will continue paying partial rent to the state during negotiations. The company has been paying almost $3 million a month, or about 60 percent, of its $5 million monthly obligation under a self-imposed "hardship formula."
Payments may be lower in the next few months because sales are projected to be lower because of the war in Iraq, Weiner said.
DFS said it cannot stay in business paying $60 million in annual rent for the remaining 3 1/2 years of its state contract because of reduced numbers of arrivals of Japanese tourists, who account for 95 percent of DFS sales, and because changes in airport security since Sept. 11 have restricted customer traffic.
Weiner said the company, which technically is insolvent, would lose an estimated $34 million this year, without factoring the war in Iraq, if it is required to pay $60 million in rent.
The company reported Hawai'i sales for contract year June 2001 to May 2002 of $150 million, the lowest in 20 years. From June 2002 through February, the company reported about $131 million in sales, which are projected to worsen because of the war.
Under terms for negotiations, the DFS contract will either be terminated early, leaving the state to possibly rebid duty-free and duty-paid retail contracts; or DFS rent obligations would be restructured in some other way.
Bennett said because of the pending litigation, the state and DFS agreed not to release more details of the agreement. Both sides also agreed not to make public statements about negotiations unless terminated or concluded.
Rod Haraga, state Transportation Department director, will lead negotiations for the state, Bennett said. Weiner said a negotiating team has not been formed for DFS, which is based in San Francisco and operates about 150 stores in 16 countries.
DFS has been restructuring its contracts worldwide, as well as laying off employees, closing stores and reducing operating hours in an effort to cut losses and meet a projection by majority owner LVMH Moet Hennesy Louis Vuitton to break even this year.
Earlier this month, DFS reached an agreement with the operator of Los Angeles International Airport.
Los Angeles World Airports, a city agency, allowed DFS to pay rent this year equivalent to 23 percent of sales instead of $37.5 million, unless sales exceed a certain level. In return for the restructured contract, DFS will pay last year's $37 million in rent.
If DFS sales in Los Angeles this year are the same as last year, the company would pay $17 million and save $20 million. DFS would pay more, up to $38 million, if sales are higher. Slightly higher progressive rent based on sales were agreed to in future years.
In Hawai'i, DFS had hoped to restructure its contract last year with former Gov. Ben Cayetano, whose administration in November rejected a plan analyzed by independent auditor KPMG LLP.
Weiner would not describe details of that 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 has been trying to obtain rent relief since early last year after an emergency legislative session in 2001 provided eight months of reduced rent that saved airport businesses $26 million, including $16 million for DFS.
A bill in the Legislature would mandate retroactive reduced rent for several airport concessionaires, including DFS. The Lingle administration and DFS are allowed under the agreement to continue lobbying on the measure. Lingle's administration opposes the bill and DFS supports it.
DFS and the state said their agreement is "in the best interest of all concerned" given the importance of their relationship.
The state has historically relied on DFS to pay two-thirds of the airport system operating budget, payments that have totaled $2.5 billion in the past 40 years.
DFS employs roughly 1,200 workers and in recent years has paid general excise taxes on more than $45 million of duty-paid sales.
Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.
