Cash-strapped Herbal Magic closing St. John’s location

Floundering corporation selling assets, restructuring to avoid bankruptcy

Daniel MacEachern dmaceachern@thetelegram.com
Published on July 26, 2014
The Herbal Magic location on Stavanger Drive in St. John’s will be closing as the company fights off bankruptcy. The company owes $73.2 million. — Photo by Daniel MacEachern/The Telegram

Herbal Magic is closing up shop in St. John’s while the weight-loss company fights off bankruptcy.
A notice at the Stavanger Drive location says the store — which sells weight-loss “coaching” along with herbal supplements —  is closing Tuesday, and directs customers to its Mount Pearl location.

Employees at both locations declined to answer questions, directing inquiries to the company’s head office. An employee at the St. John’s location said she didn’t know why it was closing, other than that the company is “consolidating” its locations.

But documents filed with Ontario’s Superior Court paint a bleaker picture.

The Toronto-based company has filed a notice of intention to make a proposal, a step that allows a corporation to restructure its financial assets, avoid bankruptcy, and allow its creditors to be paid at least some of what they’re owed.

According to the documents, Herbal Magic — which also has outlets in Bay Roberts, Corner Brook, Clarenville, Gander and Grand Falls-Windsor, among 247 locations across Canada — has been operating at a loss since February 2013 and has defaulted on two loans totalling more than $70 million. Altogether, Herbal Magic owes $73.2 million, with assets totalling $63.4 million.

An affidavit from Stephen Brown, the company’s chief financial officer, says Herbal Magic’s sales started declining in 2008, “triggered by the economic crisis.” A new management team started buying back franchises “in order to control operations, standardize procedures, and capture full margin.”

Brown’s affidavit also blamed its performance problems on its management team in 2012 and 2013, when the company was “facing new industry trends towards transparent pricing, greater program variety and online approaches to weight loss.”

Brown also cites “client satisfaction challenges” as a factor in declining business.

Earlier this year, Herbal Magic started contacting potential buyers, with a bid — for all inventory, contracts, files and property — eventually being accepted from a group controlled by the chairman of Herbal Magic’s board of directors, a sale that is expected to close Tuesday.

The potential sale comes none too soon for Herbal Magic, which had just $563,000 in the bank as of June 30, bringing the company dangerously close to shutting down completely, according to the affidavit.

“It appears that failing the closing of the Sale Transaction before the end of July 2014, Herbal Magic will have no cash to fund its business and will have to cease operations before the end of August — all to the detriment of its employees, landlords, creditors and other stakeholders,” reads the affidavit.

Herbal Magic, established in 1995, has 562 employees and about 7,600 customers across Canada.

An exposé by CBC’s “Marketplace” in 2010 found the company’s employees and literature made unproven weight-loss claims while charging hundreds of dollars a month to customers, and any weight loss was due more to the strict diet undertaken in conjunction with expensive supplements.

Brown did not return the Telegram’s request for comment.

dmaceachern@thetelegram.com

Twitter: @TelegramDaniel