The Private Equity Firms at the Core of Brick & Mortar Retail Bankruptcies

Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter

An astounding list of the meltdown: PE firms doomed the retailers.

One of the big forces in the brick-and-mortar retail meltdown are private equity firms that acquired retail chains via leveraged buyouts during the LBO boom before the Financial Crisis or more recently. Numerous of those retail chains have now filed for bankruptcy.
A PE firm typically borrows to undertake the leveraged buyout. But instead of carrying the debt at the firm, the debt is loaded on the acquired company, on top of the debt it had before the buyout, and it has to service that large pile of debt.
In addition, PE firms typically extract fees and “special dividends” from their portfolio companies which will fund them with additional debt. These fees and special dividends are tools with which PE firms extract profits up front. Lenders and other creditors carry the risks.
The final goal is to unload the portfolio company by selling it either to a large corporation or to the public via an IPO within a few years (seven years is a rule of thumb).
This works ok-ish in a booming industry. But brick-and-mortar retail – particularly apparel stores, shoe stores, sporting goods stores, department stores, and the like – came under withering attack from online sales in recent years, while suffocating under their debts.
Toys ‘R’ Us shows how this was done: PE firms KKR, Vornado Realty Trust, and Bain Capital Partners acquired the publicly traded shares of Toys ‘R’ Us in an LBO in 2005. In 2004, Toys R Us had $2.2 billion in cash and short-term investments. By Q1 2017, this had collapsed to just $301 million. Over the same period, long-term debt surged from $2.3 billion to $5.2 billion.
In other words, “cash minus debt” was -$112 million in 2004. By 2017, it had ballooned to -$4.9 billion.
While the PE firms were busy extracting cash, the company, cash-strapped and focused on cost-cutting, failed to create an online presence that could compete with Amazon and others, didn’t successfully make the transition to electronic devices, video games, and apps, and let its physical stores deteriorate. It should have spent the last decade investing heavily in its future. Instead, it was forced to borrow large amounts of money just to enrich its PE-firm owners. In September last year, it filed for Chapter 11 bankruptcy.
Other retailers that had been acquired by PE firms were similarly waylaid. When Amazon and others barged into their territory, they had no means to invest and fight back. They were sitting ducks, among the first to succumb in the brick-and-mortar retail meltdown.
The PE firm’s goal of exiting these companies got very difficult when it became apparent what was happening in brick-and-mortar retail. But some PE firms were still able to unload their portfolio companies before the “IPO window” closed on them, and investors paid the price.
Container Store is an example. It was acquired by PE firm Leonard Green in July 2007. In November 2013, when the “IPO window” was still wide open, Leonard Green began unloading the company at an IPO price of $18 per share. Two months later, shares peaked at $47.07. The hero of Wall Street. Then reality began to bite. On Friday, shares closed at $5.01, down nearly 90% from the peak.
Other PE-firm-owned retailers, after making it out the IPO window, collapsed under their debts and filed for bankruptcy. An example is Fairway Group Holdings, parent of iconic New York food retailer Fairway Market. It was acquired by PE firm Sterling Investment Partners in 2007 and unloaded via an IPO in April 2013. In May 2016, it filed Chapter 11 bankruptcy.
These kinds of IPOs taught investors valuable lessons about brick-and-mortar retailers that PE firms are trying to unload. And since then, numerous PE-firm owners had to scuttle their plans to exit and are now stuck with their LBO queens.
A brilliant example is Neiman Marcus, which is struggling with $5 billion in debt. Their owners Ares Management and the Canada Pension Plan Investment Board filed for an IPO in October 2015, but at the last minute postponed. In December 2015, the luxury retailer reported its first sales drop since 2009 – and a lot of red ink. And hopes of an IPO went up in smoke.
Then there’s Albertsons Companies, the product of several LBOs by PE firm Cerberus Capital, real-estate investors Klaff Realty and Lubert-Adler, REIT Kimco Realty, and shopping center owner Schottenstein Stores. They acquired Albertson’s in 2005, Safeway in 2015, and some other supermarket chains along the way.
Now struggling with $12 billion in long-term debt, Albertsons is facing a price war in the stagnating grocery business, Amazon-Whole Foods, and German deep discounter Aldi that is aggressively expanding, even as Kroger, Target, Walmart, Costco, and others are fighting for their share. Albertsons traffic and same-store sales have declines for five quarters in a row despite promos and price cuts. And IPO hopes have evaporated.
Other PE owners, unable to unload their LBO queens, let them buckle under their debts and fall into bankruptcy. Below is a long list of those retailer bankruptcies in 2016 and 2017 that I have covered (there were others that I have not covered) – astounding results of cash-stripping and over-leveraging in an industry that has come under structural attack.
And if some of the same names of PE firms – such as Sun Capital – keep cropping up, it’s because they did this serially.
Toys ‘R’ Us was acquired by PE firms KKR, Vornado Realty Trust, and Bain Capital Partners in 2005 and filed Chapter 11 bankruptcy in September 2017.
Vitamin World, with 345 stores, was acquired by PE firm Centre Lane Partners in 2016 from vitamin maker NBTY when it was already in trouble and filed for bankruptcy in September 2017.
Gymboree, with 1,281 children’s clothing stores and 11,000 employees, was acquired by Bain Capital in 2010 and filed Chapter 11 bankruptcy in June 2017
True Religion Apparel, a denim designer and retailer, was acquired by PE firm TowerBrook Capital Partners in 2013 and filed Chapter 11 bankruptcy in July 2017.
Payless ShoeSource was acquired by PE firms Golden Gate Capital and Blum Capital Partners in 2012 and filed for Chapter 11 bankruptcy in April 2017.
Rue21, teen apparel chain with once 1,179 stores in the US, was acquired by PE firm Apax in 2013. The LBO was troubled from the beginning when JPMorgan, BofA, and Goldman Sachs had trouble selling the junk debt they pledged to sell to fund the buyout. Less than four years later, in May 2017, it filed for bankruptcy.
Marsh grocery store chain, once with 116 supermarkets and 154 convenience stores, was acquired by Sun Capital in 2006 and filed Chapter 11 bankruptcy in May 2017. It has been liquidated.
Gordmans Stores, a department store chain with over 100 locations in 22 states, was acquired by PE firm Sun Capital in 2008 and filed Chapter 11 bankruptcy in March 2017.
Gander Mountain was acquired by Gratco (a holding company controlled by Gander CEO David Pratt) and Holiday Station stores in 2010 and filed for Chapter 11 bankruptcy in March 2017.
BCBG Max Azria, fashion retailer with once 570 boutiques globally, obtained a $200 million loan from PE firm Guggenheim Partners in 2006. In 2015, Guggenheim took equity in exchange for reducing debt. In March 2017, BCBG filed for bankruptcy.
Eastern Outfitters – the parent of Bob’s Stores and Eastern Mountain Sports – was acquired by PE firm Versa Capital in 2016 and filed for bankruptcy in February 2017. Versa had ended up with Eastern Outfitters after Vestis Retail Group went into bankruptcy in April 2016. The Sports Chalet chain, owned by Vestis, was liquidated in that 2016 bankruptcy.
HHgregg, an appliance and electronics retailer, was acquired in 2005 by PE firm Freeman Spogli and filed for bankruptcy in March 2017. It has been liquidated.
Limited Stores, women’s apparel chain, was acquired by Sun Capital in 2007 and filed for bankruptcy in January 2017. It has been liquidated.
Claire Stores was acquired by Apollo Global Management in 2007 and filed for bankruptcy in July 2016.
Aeropostale, in which Sycamore Partners acquired a large stake in 2013 (the remaining shares were publicly traded), filed Chapter 11 bankruptcy in May 2016.
Pacific Sunwear of California, clothing retailer with nearly 600 stores, obtained a loan from Golden Gate Capital in 2011 to stay afloat a while longer, and two Golden Gate executives joined the board. In April 2016, the company filed for Chapter 11 bankruptcy. As part of the restructuring, Golden Gate Capital agreed to convert part of its loan into equity of the reorganized company, lent it some more money, and ended up with the whole company.
Sports Authority was acquired by a group of PE firms led by Leonard Green & Partners in 2006 and filed for Chapter 11 bankruptcy in March 2016.
Wet Seal, teen fashion retailer, was acquired by Versa Capital in April 2015, after it had filed for bankruptcy in January 2015. Under this new ownership, Wet Seal filed again for bankruptcy in February 2017 and was liquidated.
It’s not just retailers. PE firm Apollo made $2.4 billion “on paper” on the IPO of its portfolio company ADT on Friday, but investors get crushed. Read…  $10-Billion IPO of Leveraged Buyout Queen Flops, Investors Bleed

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