After years of asset stripping by private equity firms and hedge
funds.
This morning, luxury handbag retailer Michael Kors Holdings, which had had
stellar sales through 2014, revealed in its Q4 earnings report that it would
close up to 125 retail stores and take a $125 million charge, to save $60
million this fiscal year.
Sales plunged 11.3% year-over-year in Q4, and the company lost $27
million, or 17 cents a share. It doused investors with a gloomy outlook for
its fiscal year 2018, with revenues expected to drop over 5% to $4.25
billion, and with same-store sales plunging “in the high-single digit range.”
The company was dogged by heavy promotions, a “difficult retail
environment,” and a “product and store experience” that didn’t “sufficiently
engage and excite consumers,” CEO John Idol said. So the company needs to enhance the store
experience “to deepen consumer desire and demand for our products.”
Despite a “new $1 billion stock repurchase program” – funded with the
money the company is losing, so to speak – share plunged 8.5%.
Other retailers aren’t so lucky.
On June 1, Gymboree, a children’s clothing retailer, will
face an interest payment on its debt that it is unlikely to make. So a
bankruptcy filing could be next. Serious bankruptcy rumors started swirling on April 11 when issues with the interest
payment cropped up.
On May 4, “people familiar with the matter” told the Denver Post that Gymboree was looking to close 350 of its
1,200 stores as part of a broader restructuring in bankruptcy court. Buckling
under its debt, the company has been in talks with its lenders. According to
the Wall
Street Journal, the company has contacted firms known for liquidating
inventories and other assets during store closures.
Inevitably, there is a private equity angle. PE firm Bain Capital acquired
the retail chain in 2010 for $1.7 billion, stripped out assets, and loaded
the company up with debt – by now $1 billion, an amount company founder Joan
Barnes described to Bloomberg as “horrendous.” Meanwhile, Walmart,
Children’s Palace, and online retailers have put the squeeze on sales and
margins.
To raise cash and stay alive and carve out a niche online, the company
mortgaged its distribution center in 2015. In 2016, it sold Gymboree Play and
Music to Zeavion Holding, a Bain investor. But in its fourth quarter, the
company lost $325 million, and the CEO was sacked.
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Bain Capital has been buying up Gymboree’s beaten-down bonds to have more
leverage during the bankruptcy and participate in what Bain hopes will be
Gymboree’s revival, “a person familiar with the matter” told Bloomberg. As of April, prices for those bonds collapsed
to 4 cents on the dollar. Bain’s equity stake is essentially worthless.
This has become a common PE game in the run-up to a bankruptcy filing:
buying the bonds to get more leverage and possibly, as part of the
bankruptcy, exchange those bonds for equity, and regain ownership after much
of the debt has been shed, only to start all over again.
On May 25, Sears Holdings announced that quarterly sales
had plunged another 20% year-over-year. They were down 46% from Q1 2014 and
63% from Q1 2007. The plunges are accelerating, and given the endless store
closings, cuts in advertising, and so on, revenues are now projected to drop to zero by Q1 2020. In theory. In
practice, a bankruptcy filing is on the horizon. It’s hard for a highly
indebted retailer run by a hedge fund manager to keep going when sales just
disappear:
On May 15, Rue21 filed for bankruptcy. The teen apparel chain, which once
had 1,179 stores in the US, has already started closing 400 stores in April
and may close more stores. During the bankruptcy process, “Rue21 expects to
continue normal business operations,” it said.
This came after “people familiar with the matter” had told Debtwire in April that Rue21 had missed principal and
interest payments on its debt and was preparing to file for bankruptcy.
Once again, there is a private equity angle: the company was acquired
by PE firm Apax in 2013 for about $1 billion. Back in September 2013,
problems were already piling up when JPMorgan, Bank of
America, and Goldman Sachs had trouble selling the junk debt they pledged to
sell to fund the buyout. It took less than four years to blow up the company.
But Apax might still come out ahead. This is a prepackaged filing: the
company said it had entered into a restructuring agreement with lenders
holding 96.8% of the company’s secured term loan and 60.2% of the company’s
unsecured notes. Apax is part of that deal.
On May 11, Marsh grocery store chain in Indiana and Ohio
filed for chapter 11 bankruptcy. At its peak in 2006, it operated 116
supermarkets and 154 convenience stores.
And the private equity angle: During the LBO boom that year, the Marsh
family sold the chain to PE firm Sun Capital for $325 million. Sun Capital
then did what PE firms do: cut expenses, close stores, strip out assets, and
load the company up with debt. It took the PE firm 10 years to get through
with this.
At the time of the bankruptcy filing, Marsh was down to 67 stores. In the
filing, it said it already sold its in-store pharmacy business to CVS
Pharmacy. It’s trying to find a buyer for the stores and proposed an auction
on June 12. If a buyer doesn’t materialize, the stores will be shuttered.
When the company notified the Indiana Department of Workforce Development
that it may have to lay off 1,535 workers, it blamed “unexpected difficulties and increased
competition.”
On May 4, Central Grocers filed for bankruptcy
protection, after General Mills, Coca-Cola Co., and other suppliers filed an
involuntary Chapter 7 liquidation petition for the grocer, claiming it owed
them $1.7 million, according to the Wall Street Journal. Other suppliers too have gotten cold
feet as the company has run out of liquidity to pay them.
The cooperative of grocery wholesalers in the Midwest sells its
Centrella-branded products to independent retail chains. It also owns and
operates three regional chains, Strack & Van Til, Ultra Foods, and Town
& Country Markets. The company is trying to sell some of the more viable
stores and close the rest. Inventory at its distribution center is being
liquidated.
This concludes the May installment of brick-and-mortar retail meltdown.
Here’s the prior installment… I’m
in Awe of How Fast Brick-and-Mortar Retail is Melting Down.
And what’s going to happen to the malls? Read… Retail
Meltdown Demolishes Mall Investors
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