Another Retailer Leveraged Buyout Bites the Dust

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PE Firm Apollo Schemes to Get Unstuck as Claire’s Stores Goes over the Cliff.

Claire Stores – “the latest trends in jewelry & accessories for girls, teens, & tweens” with “must-have hair accessories, stylish beauty products, & more” as it says – has decided to start twisting the arms of its creditors, and has hired law firm Morgan, Lewis & Bockius to help in those endeavors, “sources” told Reuters.

Creditors can see the big gun pointed at their heads: if they don’t agree to a debt restructuring deal entailing a big haircut for them, the company will file for bankruptcy, which might entail an even bigger haircut.

To cut costs, the company already shuttered 150 stores over the past four quarters, and is now down to 2,831 stores in the US and Europe, as per its earnings report for the quarter ended April 30. Revenues dropped 6.4% to $300 million, generating a net loss of $38.8 million. It’s buckling under $2.35 billion in long-term debt. Interest expense amounted to $55.1 million, or 18.3% of revenues!

As so often in these basket cases, there’s a private equity angle to it.

Apollo Global Management acquired Claire’s in a $3.1-billion leveraged buyout in 2007, during the peak of the LBO bubble, when PE firms swarmed all over these retailers, including Safeway and Neiman Marcus. The idea at the time: load the companies up with debt, strip out equity, put some gloss on them, and dump them in an IPO a few years later. Those dreams collapsed during the Financial Crisis. Now these PE firms are stuck with their strip-mined retailers that are, one after the other, heading for bankruptcy.

Two months ago, Claire’s revealed that it had maxed out its revolving credit line, a sign that it would be out of options soon.

Apollo was already stirring the pot. Earlier in the year, it bought $174.4 million of Claire’s 10.5% senior subordinated notes due 2017. Then in May, it swapped those bonds for new debt that also matures in 2017, which effectively pushed back the interest payments. Moody’s Investors Service called this deal a “distressed exchange,” carried out because Claire’s didn’t have the money to fully pay its quarterly interest expense.

But there’s another theory.

Claire’s first-lien 9% notes due 2019 were recently trading at around 54 cents on the dollar, down from 73 cents three months ago, according to S&P Capital IQ LCD, which added:

As reported, Claire’s earlier this month pre-released weak second-quarter results, prompting some to question the motive behind the sudden transparency, given that the retailer has never pre-released its results before.

The subsequent drop in the company’s bond prices further fueled speculation that news of the deterioration of the company’s results was disclosed in part to push its bonds lower and facilitate an exchange at the lowest possible price, sources say.

Buying a significant portion of these bonds at the beaten-down price would give Apollo, as LCD put it, “a greater position around the bargaining table in the event of a restructuring,” so that the remaining creditors would end up with the short end of what’s left of the stick.

This marks another milestone in the saga of retailers that didn’t make it to the next stage in the relentlessly tough US retail environment of squeezed consumers, inscrutable millennials, and a brutal shift to online sales. Many of them have collapsed while in the embrace of a PE firm, or after PE firms released them from their embrace.

Here is a summary of the 12-month hail of chain-retailer bankruptcies and their PE angle:

May 4, 2016: Aeropostale, with 800 teen-clothing stores, after three years in a row of losses, filed for Chapter 11 bankruptcy. In March it had announced that it would “evaluate strategic alternatives.” Its shares, a penny stock since September, were delisted.

PE angle: Sycamore Partners owns a large stake in Aeropostale and is its main lender. But they have been embroiled in a feud. Sycamore also owns its key clothing supplier, MGF, which then refused to deliver the merchandise.

May 2, 2015: Fairway Group Holdings, parent of Fairway Market – an “iconic New York food retailer” with 18 stores – filed for a prepackaged Chapter 11 bankruptcy to “eliminate” $140 million senior secured debt. All of the outstanding shares would be cancelled. Screw those who’d bought them in or after the IPO three years earlier!

PE angle: In 2007, Sterling Investment Partners purchased an 80% stake in the company, loaded it up with debt, stripped out assets, and pushed it into a big expansion drive to make it look pretty for that IPO that would allow Sterling to cash out.

April 16, 2016: Vestis Retail Group, the operator of sporting goods retailers Eastern Mountain Sports (camping, hiking, skiing, adventure sports), Bob’s Stores (family clothing and shoes), and Sport Chalet (general sporting goods), filed for Chapter 11 bankruptcy. It said it would close all 56 stores and stop online sales.

PE angle: It’s owned by Versa Capital Management LLC.

April 7, 2016: Pacific Sunwear of California, clothing retailer with nearly 600 stores and derailed ambitions of skate-and-surf cool, filed for Chapter 11 bankruptcy.

PE angle: Golden Gate Capital was a lender to the company. It then agreed to convert over 65% of its loan into equity of the reorganized company and add another $20 million in financing.

March 2, 2016: Sports Authority filed for Chapter 11 bankruptcy, saying that it would close 140 of its 450 stores. But restructuring has been abandoned. Now the company is getting plowed under in a messy liquidation.

PE angle: In 2006, Sports Authority was taken over in a leveraged buyout by a group of PE firms led by Leonard Green & Partners.

February 2, 2016: Hancock Fabrics filed for Chapter 11 bankruptcy, for the second time. It closed 70 of its retail sewing and crafting stores. Its inventories are being liquidated with going-out-of-business sales at the remaining 185 stores.

January 16, 2015: Wet Seal, teen fashion retailer, filed for Chapter 11 bankruptcy.

October 2015: American Apparel filed for Chapter 11 bankruptcy, after years of all sorts of sordid turmoil and losses since 2009.

PE (hedge fund) angle: In 2014, hedge fund Standard General entered into a deal with the company’s “controversial” founder and ex-CEO Dov Charney. The deal raised his stake to 43% but gave the hedge fund a big block of the shares as collateral. The hedge fund and some other investors also owned a big part of its bonds and thus controlled the bankruptcy negotiations. The hedge fund expected to emerge owning about a quarter of the restructured company’s debt and about 5% of its new equity.

September, 2015: Quiksilver, surfwear retailer, filed for Chapter 11 bankruptcy. In January, 2016, it emerged from bankruptcy.

PE angle: It’s now controlled by Oaktree Capital – so that it can start all over again.

And malls are getting hit as previously “pent-up” real-estate demand from retailers is expected to “fizzle.” Read… Mall Owners Begin to Feel the Pain of Brick & Mortar Retailers

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  27 comments for “Another Retailer Leveraged Buyout Bites the Dust

  1. July 28, 2016 at 10:32 pm

    When Tony Soprano does it, its called a “bust-out,” and people can go to jail. When PE does it, its called “debt restructuring,” and people go to the country club to celebrate.

    FWIW: This indicates why it should be illegal for a company to pay dividends or “buy-back” stock with borrowed money.

    • Jillian
      July 29, 2016 at 2:21 am

      I am no analyst, but borrowing money to pay out dividends doesn’t make sense to me. Dividends should come from prodit. As if future profits are guarenteed and these so called profits can only actually realise on exit of the investment. I also see PE funds making use of valuation techniques to inflate the value of their investments way above what they had paid for it just after 1 years purchase.

      • chris Hauser
        July 30, 2016 at 9:52 pm

        surely you jest.

        should, yes, generally. is, no.

        inflating values to get money? imagine that.

        as to claires stores, they’ve been keeling over for 3 years.

    • Chip Javert
      July 29, 2016 at 5:20 pm

      George & Jullian

      I’m in general agreement that NET BORROWED MONEY should not be used for dividends; however:

      Apple just did something that looked sort of (but not exactly) like that. Why (I’ll probably get a couple numbers wrong, but you’ll get the general picture)?

      1) Apple has tens of billions of cash outside the USA (on which it has paid required local taxes: over 60% of Apple revenue comes from outside USA)

      2) Apple does not want to use off-shore cash in USA to pay dividends (costs additional 25-35% to bring off-shore profit into USA).

      3) Apple borrows $8B in US markets at 2-3% to pay USA dividends, thus legally avoiding the USA corporate tax hit (among the highest in the industrial world).

      In this circumstance, Apple will use borrowed money to pay dividends – but it will not be NET BORROWED MONEY, so I’m ok with what they’ve done.

  2. Curious Cat
    July 28, 2016 at 10:45 pm

    Thus we have the accomplishments of a million MBAs graduated since the mid 80s, none of whose programs included a course in ethics.

    It’s like something right out of my corporate strategy course.

    • Jonathan
      July 29, 2016 at 6:04 am

      Yeah, as if ethics means anything other than lip service PR in some corporate mission statement somewhere for the guys you mentioned.

    • brine master
      August 13, 2016 at 5:42 am


  3. Marty
    July 28, 2016 at 11:06 pm

    No, you people don’t understand. This is simply unlocking value. It’s exactly how mom and pop landlords buying rentals with mortgages. That’s what Portly Porter Stansberry told all his subscribers.

    • night-train
      July 29, 2016 at 4:04 am

      Thanks. Unlocking the value. It was right there in front of me the whole time. I have to get into that house flip flopping business. No point in letting not knowing anything about it hold me back. Maybe I’ll get one of those TV shows too. 😃

    • Kevin Beck
      July 29, 2016 at 6:33 am

      What “value” is being unlocked? Sell some real estate, convert all the company’s assets to payouts and liabilities, arrange for “better” lease deals on what’s left, give yourself a big paycheck for supposedly taking on the additional risk, then file Chapter 11. I have rarely seen a case when these work out, because retail is not a high-margin business; instead, it’s a high-inventory business where you don’t get paid until you sell the junk that’s clogging up your floor space. I’d rather be the seller every time in these deals.

  4. nhz
    July 29, 2016 at 6:35 am

    US PE firms are causing huge damage in Europe and destroying the retail landscape. Often after a few years the tax office and pension funds are saddled with huge losses (unpaid tax / contributions) while the PE firms rake in the billions and move to another company that they can destroy. Effectively there is a huge transfer of EU taxpayer/worker money to the criminal PE mob.

    Interesting detail is that many EU unions invest their pension money in such PE firms, because that profitable (just like investing in gambling, weapons production etc.) contrary to investing in useful production. So the unions are often helping to kill the sector / companies where they are working. Which apparently isn’t an issue, because they represent the people with gold-plated pensions and those who are near retirement, not the younger workers in the sector ;-(

    apparently the unions learned something from PE.

  5. Markar
    July 29, 2016 at 8:50 am

    Wake me when we see this kind of capitalism working on Wall St.

    • jrroberts
      July 29, 2016 at 3:25 pm

      We will wake you up when the S&P falls below $1000. That will probably be a first possibility sign that capitalism is working on Wall St.

  6. Petunia
    July 29, 2016 at 8:57 am

    Read an interesting article in the Miami Herald yesterday about a mobile nail salon that comes to you. The owner did it as a way to avoid paying high rent, and it turns out they can probably franchise the idea. Total investment was 90K. This is another mall killer because one of the few things still attracting traffic to the malls is beauty services, hair and nails. Food trucks now this.

    RE: Claire Stores, it was a good idea at the time, but now similar merchandise is found everywhere, even Nordstroms and NM. The real problem with these chains is that they really make their money, from their inception, by raising it on Wall St. When they hit the brick wall of competition the owners cannot hide the lack of cash flow. You can probably say the same thing about most of the chains in the malls.

    • Chicken
      July 29, 2016 at 10:06 am

      The mobiles services business model is interesting.

    • Mary
      July 29, 2016 at 11:11 am

      I wonder if the mobile nail salon isn’t a way to avoid officials trying to enforce health and safety regulations. Those women bending over your hands as they give you a manicure are breathing in all kinds of toxins. Everything from bad asthma to liver damage results.

      • nhz
        July 29, 2016 at 11:51 am

        plus a sure way to avoid paying taxes ;-)

        my previous hairdresser was always happy to cut my hair at home at my preferred time if I wanted that, without any extra charge – that doesn’t make sense unless the income isn’t reported (in Europe this means the hourly cost can be almost half the price, depending on health of the business).

        Also, need I mention that some mobile businesses exist because of ‘other’ deliveries instead of the official products/services. e.g. pizza delivery? drug.

        • Petunia
          July 29, 2016 at 1:01 pm

          The nail place I frequented in Florida owned a tanning and massage place next door. I once saw a black guy leaving which I thought was funny, but I digress. Asian massage places in Florida are known to be mostly prostitution sites. I’m pretty sure there was prostitution and human trafficking involved in the businesses. Last year at Xmas the girls told me they had a Xmas party in a hall for over 1000 employees and the entertainment was a big star flown in from Vietnam. All this for a local chain of nail salons.

    • jrroberts
      July 29, 2016 at 3:30 pm

      If a major jihadist event occurs in a large U.S. shopping mall, all retail might as well mark their products 20% off across the board. It will be very painful; and we want open borders???

      • Mary
        July 30, 2016 at 11:21 am

        Over the past few years, Jihadists haven’t bothered trying to cross our borders. They just sit back and take occasional credit for the mass shootings that occur on an almost weekly basis in this country. We are so efficient at slaughtering each other, why should anyone else bother?

    • chris Hauser
      July 30, 2016 at 9:55 pm

      hmmmm, nail trucks. not a bad idea. if you can put in enough booths, it’ll be like the beauty parlor….conspicuous consumption, leisure and socializing all at once. hmmmm.

    • Jonathan
      July 31, 2016 at 10:17 pm

      Yeah, why pay big rent for a fixed location when you can move a business around for much cheaper in a vehicle? Isn’t that how free market capitalism is supposed to work? But, no that isn’t a healthy economy because now our favorite rent seeking parasites won’t be able to get their hands in the pork barrel.

      Any middle finger shown to those scum brings a smile to my face.

    • brine master
      August 13, 2016 at 5:47 am

      It’s great idea, however the “health code hoops” that need to be jumped in many places, (cities/counties) are pretty tough to get through. At the end of the day… Most “brick n mortar” malls will be gone/abandoned ships. They’ll have gang tags all over the outsides of the structures, weeds in the parking lots, along with huge cracks in the tar. Basically, they’ll all look like Detroit.

  7. Chicken
    July 29, 2016 at 10:01 am

    Yep, malls are dead as Kelsy’s nuts. Not sure if Apollo (AINV?) knew that was coming and is just playing the role of catfish cleaning the scum from the bottom?

    Not defending or criticizing Apollo b/c I have no idea of the detailed strategy unfortunately but someone has to do the cleanup on isle 9 of the mall mess and it could be profitable, no?

  8. roddy6667
    July 29, 2016 at 7:52 pm

    How the heck can Claire’s lose money? They buy a trinket for a quarter in India and sell it for $8-$12 in an American mall? Some real mismanagement here.

    • Jonathan
      July 31, 2016 at 10:07 pm

      As if the cost of goods is the only thing incurred and all the other stuff like rent, wages, legal and various overhead just simply disappeared.

      I bet you also believe the cost for running a Mcdonalds is just the raw food alone.

      Granted the retail business is mostly a bust now but can people really be *this* naive?

  9. thejerkstore
    August 1, 2016 at 4:52 pm

    I owned 4 GNC stores over 18 yrs 98-16 one being in a mall location all other in strip centers. During my 18 yrs we were bought out 4 times, one of them was the above mentioned Apollo. They didn’t load us with debt but instead flipped us within 18 mos (?) I believe, to a Canadian pension funds, for a hefty $800 MM profit. They then went on to buy up Zales and Linen N Things who then went belly up not long after. Bigger bunch of dicks you couldn’t find. FYI I sold back my final 2 stores Apr 28th after having a record yr, brick and mortar is dead.

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