This is What Happens after PE Firms Get Through with a Retailer

At least, they didn’t blame China.

Thursday afterhours, the Container Store, former LBO queen and IPO hero with 77 stores around the country, reported third quarter “earnings” – in quotes because those “earnings” were a loss.

Consolidated net sales for the quarter ending November 30 rose 3.3% to $197.2 million. But cost of sales rose 5.3%. CEO Kip Tindell blamed their new “$75 free-shipping service.” It’s “driving sales” and is “absolutely a good thing, but of course it’s a headwind to gross margin,” he said. That’s how Amazon leaves its mark.

Selling, general, and administrative expenses jumped 8.6%. “Disappointing,” Tindell called it. CFO Jodi Taylor blamed the “complexity of our transformational TCS Closets initiative,” plus higher payroll, healthcare, and storage expenses. Stuff happens in real life.

Stock-based compensation, pre-opening costs, and depreciation and amortization also rose. So income from operations plunged 87% to $1.8 million. And after $4.2 million in interest expense and a tax benefit of $694,000, there was a net loss of $1.7 million. It brought the net loss for the nine months to $4.3 million.

The company had lost money in fiscal 2013 and 2014 and had made a little in fiscal 2015. All hopes are resting on fiscal 2016 as the big profit year. But the company had some more news:

It cut its sales projections for fiscal 2016 at the midpoint by about 2% to $785-$795 million. It slashed its earnings projections from 30-38 cents a share to 10-13 cents. It projected that sales at established stores – stores open at least 16 months, plus online sales – would fall 1% to 1.6% for the year, and 3% to 5% for the fourth quarter.

All heck broke loose. Before the announcement, shares had closed at a new low of $7.06. In afterhours trading, they got pummeled. And on today, shares crashed 41% to close at $4.21.

As so many debacles, this one too has a private equity angle.

The Container Store, founded in 1978, was acquired by PE firm Leonard Green in July 2007, at the peak of the LBO frenzy. In November 2013, the “IPO window” – that brief period when anything can be sold at ludicrous prices and then get pumped up even higher as exuberance and hype rule – was wide open. And it was time to unload. The IPO price was set at $18 per share. Overnight, Wall Street machinations doubled the price behind closed doors. The first trade took place at $36 per share. The company became the hero of Wall Street.

So forget the losses it had been cranking out.

The stock then soared to $47.07 in two months. But early 2014, the hot air began hissing out. Today it’s down 88% from when it first started trading and down 91% from its peak two months after its IPO. This is how IPOs function as wealth-transfer machines.

Tindell tried to do the best he could. During the earnings call (via Seeking Alpha), he talked about “a choppy retail environment and softer than planned November,” his euphemism for the Thanksgiving shopping debacle.

And the rest of the shopping season? “The start to the fourth quarter has also been more challenging, which we have reflected in our revised outlook,” he said – his euphemism for the Christmas shopping debacle.

After going through how they’ve been spending more than planned, and how “disappointing” those expenses were, Tindell then pointed to the future, not the immediate quarter whose projections he’d slashed, but the more distant future, when the “greatest impact” of their efforts would be felt,  namely “in 2016 and beyond.” In brick-and-mortar retail these days, the good times are always in the distant future.

The Container Store isn’t the only one. Other brick-and-mortar retailers are struggling, particularly those that have been bought out by PE firms that piled debt on these companies and paid themselves fat fees and special dividends. Now these retailers have trouble borrowing more money at reasonable costs. They’re junk-rated, and at the lower end of the spectrum, credit is drying up. Risks that everyone refused to see are suddenly getting priced in. They’re suffocating on interest costs. Some already ran out of liquidity last year and defaulted, and more will in 2016.

They’re facing a very tough retail environment. American consumers are strung-out. But for brick-and-mortar retailers, the problems are worse: sales have been shifting to the internet. And then there are the Millennials, the Holy Grail for retailers.

Millennials make up the largest age demographic, and their earnings power is increasing. But they’re smart and have ideas of their own and refuse to be roped in massively with the usual tricks and devices. Instead they’re inexplicably frugal when it comes to things like clothes. But they love to blow their money on experiences, such as restaurants and going places, and on their electronic lives, their smartphones, gadgets, broadband bills, and Netflix accounts. And they do much of their shopping online.

More and more brick-and-mortar retailers are now admitting that they haven’t figured out how to get the attention of these folks.

That’s the reality brick-and-mortar retailers face. PE firm Leonard Green was able to exit from the Container Store in time – a disaster for those who wittingly or unwittingly (in their retirement nest eggs) ended up with these misbegotten shares.

But many of the retailers are still owned by PE firms, such as Neiman Marcus, Albertsons, J. Crew Group, 99 Cents Only Stores, Bon-Ton Stores, Claire Stores, and a slew of others. Exits were planned and IPOs were lined up, but the stock market got the jitters, and the IPO window closed on them. For these over-indebted, junk-rated brick-and-mortar retailers, it’s going to get much tougher. Read…  Defaults and Restructuring Next for Retailers

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  21 comments for “This is What Happens after PE Firms Get Through with a Retailer

  1. Lee says:

    Here in Australia as well:

    Dick Smith just went belly up. Similar story: bought by a PE firm, floated, and now in administration.

    Read all about it here:

    • Bone Idle says:

      The firm was floated with some financial shenanigans by the PE firm. This should be looked at by APRA.
      The Superannuation funds and banking financiers should have done a due diligence before piling in hundreds of millions of dollars.
      There should be jail time for perpetrators of this ponzi scheme.

      • aussiekiwi says:

        Go to jail? lol, never going to happen, this is not Iceland.

      • Lee says:

        Well, when I lived in Japan I thought that I’d seen it all in markets being manipulated and rigged, but Australia, IMO, is the worst I’ve ever seen.

        The share market here is manipulated, rigged, and many companies to put it plainly are designed to ripoff the average shareholder and enrich the pockets of insiders and those that support them.

        Capital raisings, insider trading, nominee shareholdings, bid ask spreads, algo trading, and on and on.

        IMO nothing will happen in the DS saga other than that shareholders will end up with nothing and those gift cards holders, unless extreme pressure is put on the company, will be likewise.

  2. PIGL says:

    So why can’t we admit that the problem is not retail as such nor consumer preferences nor those wicked slack-jawed millennialis, but rather the institutionalisation of fraud, piracy and robbery?

    But no, TINA. And so the true road to serfdom reveals itself.

  3. Petunia says:

    I like the container store but it is over priced and not any more innovative than the cheaper stuff at the close out store. Their custom closet line is extremely overpriced for a do it yourself line. Its biggest problems, other than the price, is that renters don’t renovate their closets and rich people don’t do it themselves. Overall they need to concentrate in the very upscale malls and forget about everywhere else.

    Overall, the quality of the merchandise in the upscale stores has fallen. I don’t even mind not being able to buy most of the stuff they sell.

  4. Petunia says:

    Regarding millennials, we have to remember that these were the kids that saw their parents lose everything. They have a lot in common with the people who lived through the Great Depression. I know some of my son’s friends have been kicked out at 18 because the parents couldn’t afford to have them at home anymore. These kids have experienced lose of all kinds and hunger too. They are good kids experiencing bad times. It’s no wonder they have a different attitude about life.

    • william says:

      I see single parents of adult children having to pay extra for 2-bedroom apartments instead of 1-bedroom to house they’re boomerang children, while the children borrow tens of thousands in school loans.

  5. Crazy Horse says:

    We really missed out when we failed to elect a President who really understood PE. If Mitt Romney had been our Chief Thief he could have overseen the private equity takeover of the military industrial complex and all the management fees for driving it into bankruptcy would be safely ensconced in Grand Cayman.

    Added benefit: the Imperial Armies of Freedom would no longer have been free to ravage the world.

    When God wishes to punish America he sends earthquakes, tornadoes and floods down upon the land. When he wishes to punish other countries he sends Americans. (just ask anyone from the formerly richest country in Africa, Lybia)

  6. VegasBob says:

    Cerberus owns Albertsons which has owned Safeway/Vons for nearly a year now.

    One of the things I’ve noticed, since I buy my own groceries, is that when a chain is bought by a private equity firm, the new owners seem to raise prices almost immediately. Perhaps they need the additional cash flow to pay the interest on all the money they borrow for their acquisitions.

    On the other hand, independent regional chains seem to have much more reasonable pricing on groceries.

    • CrazyCooter says:

      We have a Safeway here and I only buy very specific things, usually because I can’t get them in other stores or occasionally they have competitive prices on certain quality products (and movies since our BlockBuster went under recently). I spread my shopping around quite a bit, if I must be honest.

      I shop quality and do a lot of atypical redneck cooking; Mexican, Thai, etc. I like my special produce and other ingredients for savories. Blue cheese stuffed olives. Dried chilies in variety. Alaska spot prawns (50% with eggs – om nom nom) or fresh tuna. Pork bones or organic chickens. Okra. Galangal. Fresh salmon heads. Collards. Smoked meats. Quality cheeses. Tomatoes. I was a vegetarian before I moved to AK, so I rock both sides of the house in the kitchen. That said, every store here has a niche, so around around my money goes. If I lost any of them, I would lose something.

      That said, we turned over half our big grocery stores here in about a year (excluding the Costco/Walmart type stuff). Not sure that is a good sign for future prices. But maybe it is dumb investors who will sell out pennies on the dollars and lower overhead. Toss up I guess. Still have Costco, Amazon, a good vacuum sealer, a big freezer for volume, and whatever I can shoot/catch/barter if things go to hell. Pinch that buffalo nickle til it s**ts!

      Food cost (and fresh produce if I must be honest) is just one of the prices paid for living in AK. It is anything but cheap. I don’t know how parents feed teenagers here. A quality gallon of milk is 7 bucks. My smaller appetite is a hell of a price tag, but I eat well.

      Yet, the open trees/grasses are covered in hoar frost lately and the sun was out the other day. Stunningly. Beautiful. It is one of those things that is spiritual in a way, but won’t fit on a camera.

      Priorities. All about ones priorities. To each his/her own!



    • Petunia the geek says:

      They tell me Winn Dixie in South Florida is on a campaign to lower prices on many items. I guess they noticed that many retired people here are now on food stamps and can barely afford to eat.

  7. Ptb says:

    These guys own Safeway and that has been the beginning of the end for them. Prices too high and selection not so good. Luckys of trader joes get the run off

    • Wolf Richter says:

      And there is a Trader Joe’s across the street from our Safeway!

      The problem is that Trader Joe’s has only limited merchandise, so for a lot of things, you need to go somewhere else.

  8. AsYouLikeIt says:

    “…storage expenses.”

    Laf! The Container Store is having storage problems. Laf!

    The unintentional self-parody never ends.

    • Wolf Richter says:

      Yeah, they rejiggered their distribution hub and automated some of it, and things went awry and inventories ballooned, and they had to pay for warehousing some of their merchandise elsewhere….

  9. TheDona says:

    Albertsons will be the next to crash. They don’t really bring anything to the overcrowded Grocery Store party. Too much competition in the more affluent or denser areas. Within a five mile radius from me, there are at least 15 Grocery stores including 2 Whole Paychecks, Sprouts, Trader Joes, Fresh Market, 2 Targets, 2 Walmarts plus a 3rd grocery only store, 2 Krogers, Sun Fresh, Market Street and Central Market (HEBs upscale and my personal favorite).
    In Texas, HEB rules the less dense areas (along with Walmart and Fiesta) and Brookshires has the tiny town market. Brookshires and HEB are privately held, buy locally and cater to the specific area.

    Albertsons has no niche or personality. They should have studied the rise and fall of Food Lion because history is repeating itself.

  10. william says:

    Bond prices of 99 Cents Only Stores, Bon-Ton Stores, Claire Stores, and others are drifting lower with yields over 10%.

Comments are closed.