New Economic Realities   //   June 30, 2023

DTC sleepwear startup Lunya has filed for Chapter 11 bankruptcy

Direct-to-consumer startup Lunya has filed for a Chapter 11 bankruptcy in the hopes of reorganizing its business.

Specifically, Lunya filed for Chapter 11 under the subchapter V provision on June 16. The provision is geared toward small businesses with unsecured debts of no more than $7.5 million, and is designed to help them move through the Chapter 11 process — the goal of which is to allow a company to reorganize and remain in business —  more quickly and cheaply.

Lunya’s Chapter 11 filing provides a window into the major problems plaguing DTC brands right now: namely, Apple’s iOS 14 changes have hurt brands that were heavily reliant on digital marketing to drive sales through their own website. And while some brands have been able to return to growth by opening more retail stores, others are getting dragged down by expensive leases.

In a statement to Modern Retail, Lunya CEO Blair Lawson said that she’s been working to improve Lunya’s profitability since taking over the top job from founder Ashley Merrill one year ago. “We have dramatically reduced our operating expenses, streamlined our team, optimized inventory, and improved marketing efficiency,” she wrote.

She added that Lunya filed a Chapter 11 under subchapter V as “a final step to making Lunya a profitable and self-sufficient business. This filing will allow us to continue to operate the business as usual while clearing some old liabilities and expensive retail leases. I’m very optimistic about Lunya’s future. Our Subchapter V filing will allow us to turn the corner to profitability and focus on Lunya’s mission to elevate rest.”

According to a declaration from Lawson as part of the Chapter 11 filing, Lunya’s revenue peaked at just over $50 million in 2020 and 2021. By 2022, its revenue had fallen to just $35 million. Trouble for the company began in mid-2021. That year, Lunya significantly increased its inventory levels, believing that Covid-induced e-commerce growth would continue.

But starting in June 2021, Lunya’s “monthly revenues began to decline over the prior year,” which the company blamed on Apple’s iOS 14 changes. Lawson wrote that this “severely impaired the brand’s ability to effectively target advertisements to social media users based on their interests and proclivity to purchase.” In turn, “team members ordered approximately sixty percent (60%) more inventory than was ultimately needed to support 2021 sales.”

That wasn’t the company’s only issue. Lunya opened a handful of stores between 2020 and 2022, and now operates seven owned retail stores in total. But, in this “effort to diversify channels, the team entered into a number of retail lease agreements for retail locations that were too large and with rents that were too high for the size of Lunya’s business.”

Lunya’s network of stores has lost $135,000 per month, on average, for the last 12 months. And despite these efforts, in 2022, about 83% of Lunya’s revenue came from e-commerce, while retail stores and wholesale accounted for 8% of sales each. Revenue further declined by 29% during the first quarter of 2023, compared to the first quarter of 2022.

According to the declaration from Lawson, her job was to turn things around when she became CEO in June 2022. That included cutting down on seasonal product launches and instead focusing on the company’s best-selling items, as well as expanding wholesale distribution and cutting unnecessary expenses. But, according to the filing, “our work is not yet complete as the Debtor remains unable to pay its vendors in full in accordance with the terms of their respective agreements.”

Lunya was founded in 2012 by Merrill, and is known for selling sleepwear like silk pajamas, bathrobes and sleep skirts. In 2019, Lunya introduced a men’s business called Lahgo, which previously operated as a separate brand but is now sold on the Lunya website.

The company employs about 40 people. Some of the creditors Lunya owes include Leap, a platform that brands use to operate stores, and alternative financing provider ClearCo.