Lunya's commitment to physical stores led to its financial collapse
Messy Path to Bankruptcy: Lunya's Expansion into Physical Retail
For numerous small, direct-to-consumer (DTC) businesses, stepping into the brick-and-mortar retail arena can be a significant milestone - one that many brands have been aggressively pursuing after the restrictions imposed by the COVID-19 pandemic were lifted.
However, the path to physical stores isn't always smooth sailing. Lunya, a DTC sleepwear brand focused on high-end men's and women's pajamas, became a cautionary tale of the perils of venturing into retail. In June 2022, Lunya filed for Chapter 11 bankruptcy.
New York City's SoHo neighborhood recently welcomed hair care brand Cermonia's first permanent store, while clothing brands Tentree, Reformation and On expanded their footprints with new stores. But for Lunya, opening physical stores proved to be more of a company's downfall than a lifeline.
Lunya, founded by entrepreneur Ashley Merrill in 2012, made a name for itself by selling "thoughtfully designed" sleepwear exclusively through its online website for five years. Rapid growth came in 2019 and 2020, aided by a massive increase in demand for lounge and sleep apparel due to the pandemic, a boom in e-commerce, and highly efficient customer acquisition through ads on Facebook and Instagram.
But the trends that powered Lunya's growth soon reversed, causing declining revenue and forcing the brand to reassess its strategies. Here's Lunya's tumultuous journey to bankruptcy and the hefty price it paid for entering the retail space.
Trend Reversal Hits Hard
Apparel demand lessened in Lunya's sector despite the brand's expectations that its impressive growth would continue. Furthermore, Apple's iOS 14 update in 2020 had a catastrophic impact on the brand's ability to target advertisements on Facebook and Instagram, which had been the primary sources of new customers and revenue.
Blair Lawson, Lunya's CEO who joined the brand in May 2021, revealed that prior to implementing substantial changes in 2022, Lunya had been placing orders with its manufacturers nine to 12 months prior to delivery, based on the assumption that growth would remain robust. In 2020, the brand ordered about 60% more inventory than was needed to support 2021 sales.
The Costly Push for Retail
A majority of Lunya's revenue came from its e-commerce channel, accounting for 83% of its $35 million revenue in 2022 - a 30% decline from its peak of about $50 million the previous year. Lunya entered into several retail leases in expensive and large locations like San Francisco and Los Angeles, leading to an average monthly loss of $135,000 on its physical retail network.
The brand's owned retail stores (seven in total) and wholesale each represented only 8% of last year's revenue. The company's website currently lists just three retail locations. Despite inquiries from Retail Dive for more details, Lunya did not respond about the store closures.
Lunya's finance team also struggled to close the brand's books in a timely manner, meaning that Lunya lacked a clear and accurate weekly cash flow model, leading to a chronic lack of visibility to monthly performance compared to budget and cash flows projections.
Lunya has implemented various strategic changes over the past year to improve its financial situation, including reducing its corporate workforce and focusing on expanding wholesale distribution. However, the "drag of the unprofitable retail stores" persists, and the brand is still unable to pay its vendors, pushing it into bankruptcy.
As part of its bankruptcy filing, Lunya has requested to reject leases and executory contracts with companies, impacting leases in Atlanta, Houston, and San Francisco, as well as contracts in cities like Chicago. According to the rejection request filing, Lunya has "ceased all operations" at the spaces related to the leases with Leap, a retail platform that partners with brands, including Lunya, to help them enter brick-and-mortar retail. Leap has worked with mall operator Simon Property Group to secure leases and assist in store design and operations.
- The trend of increased demand for lounge and sleep apparel due to the pandemic, a boom in e-commerce, and highly efficient customer acquisition through ads on Facebook and Instagram propelled Lunya's growth in 2019 and 2020.
- In 2020, the Apple iOS 14 update had a significant impact on Lunya's ability to target advertisements on Facebook and Instagram, which had been the primary sources of new customers and revenue for the brand.
- Lunya's rapid growth reversed, causing declining revenue and forcing the brand to reassess its strategies in 2022.
- The brand's expansion into brick-and-mortar retail stores in expensive and large locations, such as San Francisco and Los Angeles, led to an average monthly loss of $135,000 on its physical retail network.
- Lunya's finance team struggled to close the brand's books in a timely manner, resulting in a chronic lack of visibility to monthly performance compared to budget and cash flow projections.
- As part of its bankruptcy filing, Lunya has requested to reject leases and executory contracts with companies, impacting leases in Atlanta, Houston, and San Francisco, as well as contracts in cities like Chicago.
- Despite the hefty price it paid for entering the retail space, Lunya's tumultuous journey serves as a cautionary tale for other DTC brands considering venturing into physical retail.
