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All Contents © 2019The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| March 29, 2019
The so-called retail apocalypse may be slowing down, but only because there are fewer stores to shutter. It’s still underway. Payless ShoeSource and Gymboree are among several retailers that have filed for bankruptcy just one quarter into 2019.
The thinning of the herd may continue. Credit-rating agency Moody’s recently identified 17 retailing names that were facing an unusually high risk of defaulting on a bond payment in the foreseeable future. The report discussing the challenges these retailers face notes, “We expect to see continued pressure on retailers that do not have the financial capacity to weather pricing pressures and the onslaught of e-commerce.” Tougher debt loads also are an issue, write Moody’s analysts Manoj Chadha and Charles O’Shea.
Firms that default on a bond are prime candidates for a bankruptcy filing, which actually can help alleviate several issues. “Companies that file for bankruptcy are ostensibly able to use the protections offered by the Bankruptcy Code to slash high debt balances and associated interest expense burdens, renegotiate lease terms, reduce headcount, and close a number of underperforming stores all at once,” Moody’s writes.
Here are 17 retailers that Moody’s believes are at risk of a credit default or bankruptcy filing. A few of these companies are publicly traded retail stocks, some are privately held. But all are familiar retail names that consumers might want to visit one more time, if only for nostalgia’s stake in case the ultimate end is near.
Courtesy strangelv via Wikimedia Commons
99 Cents Only Stores’ concept worked for years. Price tags weren’t even necessary, and expectations were reasonably low. There’s only so much any consumer expects for less than one dollar. Shoppers understood and even embraced the shtick.
But Moody’s downgrade of the company’s debt in November to Caa2, several steps below an investment-grade rating, is at least one indication that the model isn’t working any longer. Bankruptcy rumors have swirled around the retailer since 2017, and though none have become a reality yet, the company is inching toward that prospect as it and rivals such as Dollar Tree (DLTR) and Dollar General (DG) saturate the market. The dollar-store sliver of the retail industry is forecasting slower growth in 2019, and Dollar Tree recently reported that it will close as many as 390 Family Dollar locations this year.
Moody fears that an already-weakened 99 Cents Only might not be able to shrug off this headwind.
The company’s struggles, by the way, are a case of a leveraged buyout gone bad. The 2012 acquisition of 99 Cents Only Stores driven by Ares Management (ARES) and the Canada Pension Plan Investment Board ultimately left the retailer roughly $1 billion in debt, with a huge swath of it coming due this year. Of course, after booking almost $70 million in losses in 2018, even a modest amount of debt coming due at a much later date would be a problem.
When Moody’s downgraded Academy Sports + Outdoors’ debt from B3 to Caa1 in September of last year, the credit-rating agency at least acknowledged the retailer of sporting and camping gear enjoyed adequate liquidity and scale.
Moody’s also made a point of saying at the time, however, that another downgrade could occur if that liquidity were threatened for any reason – particularly if the forward-looking EBIT/interest expense ratio slips below 1.0.
That risk is always present in the hyper-competitive sporting goods industry.
Even with the absence of more than 400 Sports Authority stores (the retailer declared bankruptcy and folded in 2016), industry-leading Dick’s Sporting Goods (DKS) is struggling to keep up with Amazon.com (AMZN). Dick’s introduced private-label goods months ago to protect market share from the online giant, and opted to beef up that effort this year by expanding its Calia brand to 80 stores.
But smaller Academy Sports + Outdoors – at more than 250 stores, versus about 850 for Dick’s Sporting Goods – doesn’t have nearly the same scale, making it even more difficult to fend off Amazon.com (or even Dick’s, for that matter).
Consumers in select markets along the West Coast may still refer to it as Beverages & More, but technically speaking, the network of wine, spirits and beer stores changed its name to BevMo in 2001.
Regardless of what it’s called, the company is struggling. Despite offering a variety of valuable services such as help with planning parties, delivering where legally allowed to do so and selling its own private-label wines, nothing seems to be clicking well enough with customers.
Moody’s analyst Raya Sokolyanska wrote in the middle of last year, when downgrading the company’s already-junk-rated debt to Caa1, “We now believe that growing competitive pressure will offset the majority of savings from the implementation of BevMo’s self-distribution model, resulting in only modest earnings improvement, breakeven to slightly negative free cash flow, and constrained revolver availability over the next 12-24 months.”
Standard & Poor’s agrees. The rival credit-rating agency lowered its opinion of BevMo’s creditworthiness from B- to CCC+ (equal to Moody’s Caa1) in December, explaining, “BevMo’s soft performance trends will remain under pressure as it works to fully implement its self-distribution and other improvement efforts amid an intensely competitive operating environment.” Standard & Poor’s is looking for “strained profitability amid intense industry competition, resulting in weak credit metrics and constrained liquidity.”
Courtesy Bluestem Group
Investors might not be familiar with the name Bluestem Group (BGRP, $0.51). But many people might recognize at least one of its 14 operating entities, which include Fingerhut, Appleseed’s, Bedford Fair, Draper & Damon’s, Blair, Gettington and Sahalie, among others.
The depth of diversity may not be helping; in fact, the organization’s complexity may be adding to its woes. It’s already difficult enough to compete against bigger rivals (online or off) under one moniker. Aiming to operate multiple business ventures may get in the way of achieving much-needed scale.
Bluestem broadly seems to understand that concept, as it announced in January of this year that it would shed six of its brands. But the company just named a new CEO, Bruce Cazenave, in March. Cazenave recently resigned from exercise brand Nautilus and is joining a company whose brands include jewelry, women’s fashion and gourmet food. It may take him a while to get a good feel for what Bluestem is, and isn’t, which could delay a turnaround bid.
Moody’s isn’t impressed by either development. The rating agency’s downgrade of Bluestem’s debt to Caa1 in mid-2018 has yet to be altered or updated. And a debt-maturity time bomb is ticking toward 2020, with few paths to a feasible refinancing.
When May Department Stores bought David’s Bridal in 2000, David’s was North America’s biggest retailer of bridal gowns and related items. Presumably, May figured David’s would continue to grow, unaware of just how disruptive the internet was about to make the business. Although wedding gowns still require a personal touch and alterations, the advent of the web has actually made the industry more fragmented, not less.
In 2006, Federated Stores – which acquired May – sold David’s Bridal to Leonard Green & Partners, which wasn’t able to make much of a go of it either. In October 2018, David’s failed to make a payment due on some of its loans, and in November it officially filed for Chapter 11 bankruptcy protection.
David’s Bridal and its creditors came to an accord this January, with ownership of the company transferred to Oaktree Capital (OAK) accompanying a $450 million reduction in total debt. Some new growth initiatives such as expanded size options and price cuts have also been put in place, but Moody’s still sees difficulties even post-bankruptcy emergence, and has a Caa2 rating on David’s debt.
Courtesy Meverbeaver via Wikimedia Commons
Abel Porter, CEO of grocery store chain Fairway Markets – which competes with the likes of Trader Joe’s and Whole Foods – told Bloomberg in November 2018 that “we’ve moved dramatically quickly to be able to compete.”
Moody’s doesn’t appear to be convinced, though. Perhaps it doesn’t recognize any game-changing improvements after Fairway came out of Chapter 11 bankruptcy proceedings in 2016.
Fairway Markets is a 15-store grocery chain that caters to the New York City market and some select nearby areas. Although well-loved by loyal shoppers, it’s much smaller than Whole Foods and Trader Joe’s, and struggling due to its lack of scale in a market where scale can make a world of difference.
The 2016 restructuring of debt extended key maturities by five years, buying the company much-needed time to better equip itself to compete. But Moody’s describes that restructuring itself as a “distressed deal” that may only delay the inevitable.
In November, Moody’s analyst Mickey Chadha wrote, “Despite the lower debt burden following the company’s emergence from bankruptcy in 2016, and the recent amendment to extend maturities of its term loans we believe Fairway’s capital structure remains unsustainable given weaker than anticipated operating performance.” Chadha continued, “Fairway is facing an extremely promotional business environment, and with competitive openings in its markets expected to continue, the ability to improve profitability at a level sufficient to support the current capital structure looks highly suspect, rendering a further debt restructuring highly likely in our estimation over the next 12-18 months.”
Courtesy Thomas Hawk via flickr
Guitar Center has painted a mixed picture over the course of the past couple of years. In 2017, there were doubts that the company as we know it would survive 2018 thanks to an S&P debt rating of CCC- that indicates “default imminent with little prospect for recovery.” But in 2018, it committed millions of dollars toward renovating stores and even opened a handful of locations. It spent $5 million alone overhauling a flagship store in Hollywood.
Now, we wait to see whether those expenditures will help the company dig out of trouble or make matters worse.
Guitar Center, like most other retailers, has felt the full brunt of Amazon and other online options. Revenue has been edging lower for the past five years, and nicer stores aren’t guaranteed to be a draw for guitar enthusiasts. Consumer interest in the guitar is deteriorating – electric guitar sales plunged by a third between 2007 and 2017 – driven by a myriad of other distractions and shifts in musical tastes.
The retailer still is struggling under the weight of $1 billion in debt, and while the bond-rating agency has upped its opinion of Guitar Center’s credit a couple of different times last year, Moody’s Caa1 rating still is well below investment-grade and indicates significant risk. Guitar Center also has two big swaths of bonds coming due in 2021 and again in 2023.
Back in the 1990s, before the internet was a means of shopping, J. Crew was on top of the world. It operated what arguably was the most respected brand name in mail-order apparel.
The world was on the verge of sweeping change, however. While the establishment of what has become a network of more than 500 J. Crew, Madewell and J. Crew factory stores seemed like a brilliant growth strategy at the time, the venture turned into a major liability. Although J. Crew has regrouped several times in recent years, including 2011’s go-private deal led by private equity firms TPG and Leonard Green, nothing seems to have helped the company change course.
J. Crew already was $1.7 billion in debt as of mid-2018 (and that debt has required renegotiation). The company now faces another hurdle it might not be able to clear. In November 2018, after just 17 months on the job, CEO Jim Brett stepped down.
No replacement has been named yet, but it might not matter who takes over. Neil Saunders, managing director of GlobalData Retail, wrote of Brett’s resignation, “If the departure of Jim Brett hails the return of these unrealistic attitudes (that its merchandise was more marketable than it actually was), J Crew is going to slip back and undo all of the progress made to date. Given the precariousness of its financial position, this is a mistake it cannot afford to make.”
Department store Neiman Marcus was handed a much-needed lifeline in early March – after Moody’s report detailing the 17 troubled retailers. With a wide swath of its nearly $5 billion worth of debt (which incurred $300 million worth of interest costs) coming due this year, most of its creditors agreed to extend the maturity debts on those loans by another three years. Insisting on collecting now would almost certainly destroy the organization by making a liquidity crisis even worse.
Even so, many investors also have bet against the company using credit default swaps, which would gain in value should the company default on its loans, arguably incentivizing those who influence Neiman Marcus to work against the benefit of shareholders. Dan Kamensky, founder of hedge fund Marble Ridge Capital, described the terms of the renegotiation as a “spectacular Devil’s bargain.”
Kemensky, a bondholder, is biased, to be fair, and opted to not accept the company’s proposal to its debtors. That doesn’t make him wrong, however.
Neiman Marcus’ overwhelming debt burden manifested as a result of a couple of different (and now, seemingly ill-advised) leveraged buyouts. Ares Management and Canada Pension Plan Investment Board bought the company from other private equity firms in 2013, in anticipation of a rebound in luxury shopping and plans to make the retailer a premier name in the business. Those plans didn’t pan out, but the buyout bill that CPPIB and Ares handed Neiman Marcus still had to be paid.
People all over the world see their pets as part of the family; Americans alone are expected to spend $86 billion on critter care this year, according to researcher Packaged Facts. Grand View Research estimates that global pet-driven spending could swell to more than $200 billion by 2025.
This backdrop seemingly would bode well for companies such as PetSmart, which operates approximately 1,500 pet product stores. It commands more than one-fourth of the United States’ pet supply revenue, making it the biggest in the business.
But PetSmart has learned the hard way that being the biggest in the business doesn’t necessarily translate into significant, sustained profits.
Mike Corry, vice president of sales at data and advisory firm Edge by Ascential, wrote last year that Amazon was a key reason for the headwind. The e-commerce giant launched private-label brand Wag in May 2018, helping Amazon drive a 40% increase in pet product revenue last year. Unlike its established brick-and-mortar pet retailing rivals, “Amazon’s pet food sales are likely to experience a lot more growth before leveling off.”
The same trend is also part of why Moody’s is concerned enough to rate PetSmart’s debt at a subpar Caa1. Moody’s Mickey Chadha explained of last May’s downgrade that it was “a reflection of PetSmart’s continued weak operating performance in its core brick and mortar business, which is well below our expectations.” He added, “We do not expect its credit metrics, already weakened by the Chewy acquisition, to demonstrate any meaningful improvement in the next 12 months.” Matters haven’t changed enough in the meantime to change Moody’s view.
In its prime, Pier 1 Imports (PIR, $0.78) was a top-notch home goods venue. As has been the case for countless other retailers, however, the world changed in a way that left Pier 1 Imports and its in-store experience less than thrilling for today’s most coveted shoppers.
Shania Khan, CEO of FLP Consulting Group, suggests the core problem might be that consumer-facing companies like Pier 1 “aren’t creating enough incentive for the customers to come in.” She goes on to explain that there are “no exciting experiences being created in store for the customer to want to patronize the store. No social media moments, pop up shops, supporting local artists, et cetera.”
Khan might be on to something. Moody’s grades the company’s overall credit at a lackluster Caa1, while its senior secured bonds are rated at an even-worse Caa2. In December, Moody’s lowered its outlook on Pier 1 Imports to negative.
Analyst Raya Sokolyanska explained at the time, “Pier 1’s third-quarter fiscal 2019 results indicate that its turnaround will be more challenging and protracted than previously anticipated. We expect overall liquidity to be adequate in the next 12 to 18 months, supported by the large revolver and lack of near-term maturities, however liquidity will weaken over time if earnings do not recover.”
Deep discount grocery chain Save-a-Lot is doing all it feasibly can, but it just doesn’t have the scale it needs to effectively compete in the age of the internet. Aside from the convenience and low prices that Amazon.com offers, Kroger (KR), Aldi and Walmart (WMT) are price-conscious as well. There’s little to no edge in “discount” groceries any more.
Moody’s has been watching that deterioration from its very beginning. In August, the company’s senior secured term loan was lowered from B2 to B3 (both junk ratings), and in November those same loans were downgraded to Caa2.
Moody’s Mickey Chadha explains, “The company’s operating performance is expected to remain weak for the next 12 months as management initiatives will take time to gain traction as improvements in revenue and profits will be difficult to achieve in the increasingly competitive hard discount grocery space.”
As is the case with so many other retailers, Save-a-Lot’s unwieldy debt is ultimately the result of financial engineering that offloaded liabilities from a former parent company. In this case, SuperValu’s spinoff of Save-a-Lot in 2016 required the latter to issue at least $400 million in long-term debt.
Courtesy John Phelan via Wikimedia Commons
When Moody’s expressed its concern about Savers, Inc. earlier this year, the corporate credit-rating agency’s worries were legitimate. The retailer was running out of cash it needed to make its interest payments in full.
But its liquidity problems have been resolved. In fact, Moody’s has withdrawn any negative rating of the bonds in question, as that risky debt no longer exists. It was swapped out for equity, which carries no obligation of regular interest payments to be made by the company.
Savers isn’t a universally known name. But investors and shoppers alike will understand what the company is by comparing it to the two giants in the same sliver of the retailing industry: Goodwill and Salvation Army. Aside from Savers, parent company Evergreen Acquisition also operates Value Village, Unique and Village des Valeurs across U.S., Canada and Australia, selling donated goods at roughly 300 different locations. Unlike Salvation Army and Goodwill stores, though, Evergreen Acquisition aims to turn a profit.
As recently as October, the picture was grim, with Moody’s suggesting the organization’s weak liquidity upped its default risk. Its overall credit grade was already rated a junk-level Caa2, while its probability-of-default rating was an even-worse Caa3. Moody’s was particularly concerned in late 2017 about the increased risk that a restructuring of debt could end up being a distressed exchange.
Matters are much different now. As was whispered, private-equity owners TPG and Leonard Green ended up selling to rival PE firms Ares and Crescent Capital in late March, restructuring the company’s first-lien loan at better terms, while owners of its senior notes have agreed to exchange their debt for equity in the company. All told, Savers has reduced its debt burden by 40%. The new debt load should be more manageable relative to Savers’ current operations.
Moody’s is satisfied too, with lead analyst Raya Sokolyanska commenting immediately after the deal was completed, “Notwithstanding the unsecured notes exchange, Savers’ at par refinancing of its $669 million term loan and revolver borrowings is indicative of both the company’s fundamental value and the meaningful amount of junior debt supporting the term loan in the original capital structure.”
Editor’s note: This section has been edited to reflect significant changes to Moody’s outlook.
Retailer Shoes for Crews supplies a wide array of shoes for industries where footwear matters. From slip-resistant soles for restaurant employees to steel-toed boots for construction workers to shoes that protect the wearer from electrical shock, Shoes for Crews has solutions. It sells work-minded socks too, mostly online, but also through two retail locations.
It’s another shtick, however, that simply can’t stand up to the breadth and depth that Amazon.com brings to the table. In fact, Shoes for Crews are available via Amazon, as well as at Walmart.com. Working with its biggest rivals rather than against them simply hasn’t helped enough.
Moody’s downgraded the organization’s overall credit rating from Caa1 to Caa2 in October, noting “Shoes for Crews’ weak operating performance, very high leverage and weak overall liquidity due to modest free cash flow and tight covenant cushion.”
The report continued, “While debt maturities do not begin until October 2021, substantial earnings improvement and or debt reduction is needed to improve leverage to a refinanceable level which in our view is challenging. Thus, the probability of default, including a distressed exchange, is high over the next couple of years. Its capital structure is currently unsustainable, with lease-adjusted Debt/EBITDAR remaining above 10 times.”
Courtesy The Fresh Market
The Fresh Market is yet another grocer being squeezed from too many directions. And its future is on thin ice given Moody’s doubts about TFM’s ability to handle its $800 million debt load.
In mid-2018, the credit-rating outfit lowered the grocer’s debt from Caa1 to Caa2, explaining that “pricing pressure from larger and better performing competitors in the company’s geographic footprint will make it very challenging to meaningfully improve profitability in the next 12 months.” The Caa2 rating puts The Fresh Market’s debt into the lower end of the non-investment grade scale.
The Fresh Market has some scale in terms of units, operating more than 160 stores in 22 states. But its locations are smaller-footprint shops and may be missing the mark with modern consumer expectations. Although farm-fresh foods sold in an old-school environment worked well at one point, time and convenience have taken precedence.
The latest chapter in the saga that will only drain the company of time and money: Just a few days ago, the law firm that handled the leveraged buyout of The Fresh Market was sued by TFM shareholders, who argue the sale to Apollo Global Management (APO) and CEO Ray Berry was a “sham auction.” Shareholders also are claiming the board of directors breached their fiduciary duty by agreeing to a transaction that may not have been in investors’ best interests.
Toms Shoes is a brand name of casual footwear, though it also operates 10 stores of its own. Both sides of the business are struggling; Toms as we know it might not survive without a major restructuring of its debt.
The company was founded in 2006 to great acclaim, and it got off on (no pun intended) the right foot. Not only were its styles in demand, but consumers loved the fact that founder Blake Mycoskie was just as interested in charitable giving as he was in growing the company’s top and bottom line. Its future was so promising, in fact, that in 2014, Bain Capital shelled out $313 million for a 50% stake in the promising brand.
But it was a poorly timed investment. Earnings are now roughly half of what they were when Bain became involved, thanks to a combination of online and offline competition that offers more selection and lower prices. The company’s deteriorating performance prompted Moody’s in 2017 to downgrade Toms’ debt to Caa3 – well down the ladder of sub-investment-grade debt – where it has been ever since.
Courtesy Jim.henderson [CC0] via Wikimedia Commons
Indra Holdings is the parent company of Totes and Isotoner: arguably the most recognizable brand name in gloves, umbrella, rainwear, slippers and more.
With the exception of outlet/liquidation locales and an online presence, Totes doesn’t operate stores of its own. Moody’s still is worried all the same, however, that the deterioration of the retail industry could take an irreversible toll on the company. The bond-rating group grades its debt at only Caa3, which makes it tough and expensive to secure the credit it needs.
Totes and Isotoner’s stumbling blocks are familiar: the advent of the internet, a growing preference for less mainstream brand names and the search for more specialized functions have all put the company’s products in a proverbial no-man’s land. Shania Khan of FLP Consulting Group explains that Totes and other companies like it might be losing relevancy with consumers because “no lifestyle is being created by these brands anymore. They aren’t aspirational or cool.”
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