Brick & Mortar Retail Meltdown, March Update

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Wolf Richter,

And private equity firms are at the helm.

March was a busy month for the brick-and-mortar retail meltdown which kicked off in 2015 and has since picked up speed. We’ve followed this progression from the early days. This year, there was a brutal January, an even more brutal February, and here’s March.

Southeastern Grocers, parent of Winn-Dixie, filed for bankruptcy on March 28. It’s buckling under its debts. Its creditors have agreed to restructure some of this debt in return for equity, which will reduce the debt by $500 million. The company has also secured new financing once it emerges from bankruptcy. In the Chapter 11 filing, it said it plans to continue operating over 580 stores in Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, and South Carolina. On March 14, when the company initially had announced bankruptcy plans, it also said that it would close 94 of its stores.

Michaels Companies, largest US crafts retailer with about 1,300 stores in the US and Canada, announced on March 22 that it would shutter all its 94 Aaron Brothers framing and art supplies stores. It will offer custom framing in its Michaels stores. The whole thing should be wrapped up by July 31.

Claire’s Stores filed for Chapter 11 bankruptcy on March 19, suffocating under $1.9 billion in debt. The youth-oriented jewelry and hair accessories retailer has 7,500 stores that also offer ear piercing, which was supposed to be its strategy to fight off online sales, but it wasn’t enough. Mall traffic had fallen 8% year-over-year, the debt was too high, and interest expenses ate up $183 million a year, chief financial officer Scott Huckins lamented in the court papers.

This is a “prepackaged” bankruptcy filing where the company has reached an agreement with its creditors – which include PE firms Elliott Management, Monarch Alternative Capital LP, and Apollo Global Management – to restructure its debt, meaning that ownership will be transferred to creditors in exchange for some of the debt. This group of first-lien lenders will also provide $575 million in new capital, including a $250 million first-lien loan.

The private equity angle: Apollo acquired the company in a leveraged buyout during the LBO boom in 2007. At the date of the bankruptcy filing, Apollo owned 98% of the shares and about 28% of three types of the company’s debt. In bankruptcy proceedings, creditors take control, and Apollo is well-placed.

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Toys “R” Us filed for liquidation, it announced on March 15. The toy retailer, which had filed for Chapter 11 bankruptcy last September, will close all its 735 stores in the US and liquidate their inventory. The prospects of liquidation started becoming clear earlier in March. Shuttering the US operations will destroy about 33,000 jobs over the next few months. And it puts a lot of retail space on the market that may be worth “little or nothing,” and holders of Toys “R” Us commercial mortgage backed securities are bracing for losses [read…  What Are Zombie Retail Stores Really Worth: Answers Emerge].

Bon Ton stores faces liquidation if it cannot find a buyer, according to its bankruptcy court proceedings on March 12, in which the company set out the rules for an auction of its business as a going concern. The regional department store chain based in Pennsylvania had filed for bankruptcy in February, after discussions with its creditors about restructuring its debts had collapsed. Now the bondholders are clamoring for asset liquidation, hoping to get some of their money back. If there is no bid that satisfies the court and the creditors, Bon Ton will likely be forced into liquidation.

Guitar Center is buckling under its debts. The company calls itself “the largest musical instrument retailer in the world,” and opened as it says “its 262nd location” with its Times Square flagship store in Manhattan in 2014 while it was still in PE-firm driven expansion mode. In addition, it operates 120 stores specializing in band and orchestral instruments.

In early March, it announced that it is trying to push creditors into a debt exchange. On March 14, Moody’s said if this debt exchange succeeds, it will constitute a “distressed exchange” and will count as an “event of default.” And this debt exchange, as bad as it may be, is going to be the better outcome than any alternative.

If it succeeds, it will give the company some “financial flexibility,” but will add $50 million to its indebtedness, and this total indebtedness, Moody’s said, “remains a key credit concern, particularly given Moody’s opinion that there continues to be a relatively limited revenue visibility regarding the retail environment for musical instruments.”

The private equity angle – a familiar name in the recent flurries of LBOs that collapsed into bankruptcies, including iHeartMediaToys “R” UsGymboree: Bain Capital acquired Guitar Center in an LBO during the boom in 2007, whereby the acquired company took on a large amount of debt to fund its own acquisition, and then took on more debt to expand further. This expansion drive and debt pile-up then got hit by the brick-and-mortar meltdown.

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Sears Holdings is reporting ever more horrid quarters. On March 14, it reported results for Q4, ended February 3, which covered the crucial holiday sales period. Revenues plunged 28% year-over-year to 4.4 billion. According to my projections and my beautiful chart, at the rate of declines over the past four years, revenues will drop below zero in 2020, even as CEO and hedge-fund owner Eddie Lampert is still touting “progress” in SEC filings. This thing is cooked and waiting to be carved up.

Signet Jewelers, whose brands include Kay Jewelers, Zales, and Jared, announced on March 14 that it would close 200 Stores over the next 12 months after same-store sales dropped 5.2% year-over-year. “Path to brilliance,” as the company calls its new plan to save $85 million in costs in 2018 and $100 million in 2019. It’s also trying to whittle down “non-customer” facing costs in sourcing, distribution, warehousing, and corporate and support functions. Meanwhile, its shift to online sales is proceeding too slowly, accounting for 11% of its total quarterly sales, up from 7% a year earlier.

Foot Locker, with over 3,300 stores globally, announced on March 2 that it plans to close about 110 stores this year, after having closed 147 stores and opened 94 stores in 2017. CEO Richard Johnson explained that Foot Locker was trying to reduce its exposure to “deteriorating” malls. “The disruption that has characterized the retail industry recently is not going away,” he said. But unlike others, Foot Locker will be able to hang in there for a while: It escaped a rumored LBO in 2006 by KKR and Apollo, so it hasn’t been strip-mined for cash, and its shares are still publicly traded, and it still has access to funding.

Bankruptcy is becoming an increasingly common “exit” for PE firms. And the pension obligations? Read…  PE Firm Cerberus Capital’s “Rollup” Collapses into Bankruptcy


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