The private-equity protocol of asset stripping bears fruit.
Today, premium-denim designer and retailer True Religion Apparel with 1,900 employees filed for Chapter 11 bankruptcy. Its celebrities-endorsed products are sold in its 140 True Religion and Last Stitch retail stores and in struggling brick-and-mortar department stores, including at Bloomingdale, Nordstrom, and Saks Fifth Avenue.
Bankruptcy rumors had been swirling since October when the company hired a law firm specialized in bankruptcy and restructuring – a dead-giveaway that shareholders and creditors are going to feel some pain.
As so many times in retail bankruptcies, there’s a private-equity angle. Private-equity firm TowerBrook Capital Partners had acquired True Religion for about $835 million in 2013. It took just four years of stripping out assets and piling on debt to reach this magic point.
The court document revealed that the company is now saddled with $535 million in debt, against only $243 million in assets. Asset values are estimated; no one knows what they’re really worth during a fire sale. Dogged by declining sales, the company already closed 30 stores and slashed its workforce. In its last fiscal year ended January 28, 2017, revenues had dropped to $370 million, generating a white-hot loss of $78.5 million.
The court document further revealed that this is a prepackaged bankruptcy, where TowerBrooks worked out a deal with lenders – including funds managed by Goldman Sachs, Waddell & Reed, and Farmstead Capital Management – on a debt-for-equity swap that will wipe out $350 million of its debt. In return for their loss, lenders will get 90% of the equity in the restructured company. Junior creditors and equity holders will get some crumbs of the new equity – but only if they vote to approve the restructuring plan.
True Religion has secured a debtor-in-possession (DIP) loan from Citizens Bank for up to $60 million to fund operations during the bankruptcy proceedings. The company will also use the bankruptcy to close some stores and renegotiate store leases with landlords.
It blamed its fate on the switch by consumers to online retail and on competition, particularly from casual sports clothing for outside of the gym – the “athleisure” segment. It hopes to exit bankruptcy in four months, though it will continue to face the same online retailers, athleisure, and low-price competitors. Restructuring a retailer is notoriously difficult, as American Apparel and many others found out. Most ended up being liquidated.
This latest addition to the ongoing brick-and-mortar meltdown topped off the events of June.
On June 22, Sears Holdings announced that it’s preparing to close an additional 18 Sears stores and 2 Kmart stores by mid-September. Liquidation sales at those stores began at the end of June, a spokesman said. The Associated Press, which reported the store closings, said that they’re in addition to the closing of 226 stores announced so far this year: 164 Kmart stores and 62 Sears stores. The latest bout will trim the company’s footprint to about 1,180 stores, from 2,073 five years ago.
These incessant waves of store closings are systematic steps toward what I can only interpret as the company’s goal of reaching a level of zero revenues. When Sears Holdings last reported earnings, I pointed out that over the past three years, Q1 revenues have plummeted by $3.6 billion, and that at this pace, revenues will be zero by Q1 2020.
But it won’t take that long. In July, 2015, Sears Holdings sold a number of store locations — among the most valuable real estate assets it still had — to real estate company Seritage and leases them back from Seritage. The fraudulent conveyance provisions in the US bankruptcy code come with a two-year look-back period, which expires this July. Management is incentivized to keep Sears Holdings out of bankruptcy at least until then, according to sources cited by Debtwire last December. After that point, all bets are off.
Also on June 22, Sears Canada, which was partially spun off from Sears Holdings, filed for bankruptcy protection in Canada. In the initial order from the court, it was authorized to shutter about a quarter of its stores and lay off “approximately 2,900 people across its retail network and at its corporate head office in Toronto,” it said [Sears Canada Melts Down].
On June 11, Gymboree Corp, the operator of 1,281 children’s clothing stores, filed for Chapter 11 bankruptcy, blaming lower-cost competition from other brick-and-mortar chains and the shift by consumers to online retail. Serious bankruptcy rumors started swirling in April when issues with the interest payment due on June 1 cropped up.
The restructuring plan calls for stiffing its creditors out of about $1 billion and closing up to 35% of its stores. Gymboree, which is headquartered in San Francisco, employs over 11,000 people, and layoffs loom. The company buckled under $1.4 billion in debt, but has only an estimated $756 million in assets.
The private equity angle? PE firm Bain Capital acquired the retail chain in 2010 for $1.7 billion. It then put the retailer through the PE-firm protocol of asset stripping and loading the company up with debt, even as competitors squeezed its margins and its ability to carry that debt.
To stay afloat a while longer, the company mortgaged its distribution center in 2015 and sold Gymboree Play and Music in 2016 to Zeavion Holding, a Bain investor. Now there isn’t that much left to sell.
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. The prices for those bonds have collapsed and Bain’s equity stake is essentially worthless. But surely, Bain made its money over the past seven years on this deal through fees and special dividends, and any extra it can salvage in bankruptcy via these bond purchases will just be the cream.
Gymboree’s lenders agreed to provide a DIP loan of $35 million to keep the company liquid during the bankruptcy and to invest $80 million when Gymboree emerges from bankruptcy.
On June 7, Bebe – a desperate women’s fashion retailer that had said in April it would close all its stores and get out of brick-and-mortar retail – announced that it sold its 72,000-square-foot distribution center in California for $22 million and that it would pay $65 million to get out of the store leases. It will try to keep its online business alive via a joint-venture agreement signed with Bluestar Alliance LLC last year and plans to transfer the domain name and international wholesale agreements to Bluestar. After which only the brand lives on.
Over the Memorial Day Weekend, RadioShack announced a surprise liquidation sale “before we close the stores for good.” After the weekend, it closed over 1,000 stores “for good.” By June1, it said that only 70 company-owned stores remain open, in addition to about 500 dealer-owned stores. Back in the day, it had 7,300 stores. In March, its parent company General Wireless had filed for bankruptcy.
This is another example of a retailer bankruptcy that ends in liquidation. Bankruptcy can only alleviate financial pressures; it cannot alleviate the pressures from a once-in-a-generation structural change in retail – the shift to online sales.
The meltdown of brick-and-mortar retail becomes a real-estate question. Read… The Fate of the Two Shuttered Macy’s Stores in San Francisco