WOLF STREET–Vitamin World plans to file for bankruptcy, Perfumania Holdings just filed. And Toys R Us… All in just two weeks.
Bon-Ton Stores, Inc., which operates about 260 department stores largely in the Northeast and Midwest under the names Bon-Ton, Bergner’s, Boston Store, Carson’s, Elder-Beerman, Herberger’s, and Younkers, has hired PJT Partners, which describes itself as “a leading advisor to companies and creditors in restructurings and bankruptcies around the world.”
Faced with falling sales and customer traffic, the company is trying to refinance debt and prepare for a possible bankruptcy filing, “people familiar with the matter” told the Wall Street Journal.
Bon-Ton had already hired turnaround firm AlixPartners to help improve its operations but added PJT to focus on the financial aspects, “the people” told the Journal.
Bon-Ton’s debt and shares found their way onto WOLF STREET for the first time in November 2015, in Capital Destruction Rages Beneath S&P 500 Tranquility after it reported crummy results, blaming the “unseasonably warm weather” and “continued weakness in overall traffic trends.” That day, its already beaten-down 8% notes plummeted well below 40 cents on the dollar, and its shares crashed 39% to $1.21.
In January 2016, Bon-Ton’s 8% notes reappeared in Defaults and Restructuring Next for Retailers, at which time they traded at 33 cents on the dollar.
Yesterday, the notes traded at 40 cents on the dollar, and the stock was down to $0.69 a share.
In May 2015, shares had traded at around $7. In May 2007, at around the peak of the boom in leveraged buyouts – when there were hopes that a private equity firm would buy out the retailer, as they had done with so many others that have now become part of the brick-and-mortar meltdown – shares had spiked to over $56. But that LBO didn’t happen.
So signs that Bon-Ton was in trouble have been out there for over two years, but in an era of unlimited liquidity and artificially low interest rates, waiting for the inevitable requires patience.
In the last quarter, Bon-Ton reported that sales fell 7% to $505 million on dropping customer traffic. Sales have been falling every year for at least three years. Its growing online sales didn’t make up for the plunge in brick-and-mortar sales. Bon-Ton generated a quarterly net loss of $33 million, on top of the $134 million it had lost over the past three years.
It reported total long-term debt of $856 million plus about $300 million in capital leases, financing obligations, and “other long-term liabilities.” Its cash balance was down to just $6.3 million, and on July 29, it still had $171.5 million available to borrow under its credit line with Bank of America – so it’s not going to run out of money tomorrow. But the day is approaching.
In its report on retailers in July, Standard and Poor’s warned about weak recovery for creditors in case of default by a slew of retailers that are headed for a debt restructuring or bankruptcy, including Bon-Ton.
And it pointed out that a number of recently defaulted retailers weren’t able to restructure and continue but instead “have largely closed shop and liquidated their assets.” Among them were The Limited, American Apparel, Wet Seal, and Sports Authority, all heroes of our Brick-and-Mortar Meltdown theme. Alas, “recovery prospects in a liquidation scenario are often dramatically lower than when a company continues to operate,” and this “is especially true in the retail sector because most retailers are asset light – meaning most creditors are highly dependent on profitability and cash flow as a source of repayment.
Indeed, what assets does a retailer have that leases its stores? Inventory to be sold off at liquidation sales. Bon-Ton lists $658 million in merchandise, which is likely worth less when sold at a fire sale. But it has $200 million in accounts payable, $856 million in long-term debt, and $300 million in other obligations, plus things like accrued payroll and benefits. So creditors are going to come up woefully short in a liquidation.
Bon-Ton is just the current episode.
On September 6, Toys R Us was said to have hired a bankruptcy law firm. The company was subject to $6.6 billion LBO in 2005, and by now, the private equity firms involved – Kohlberg Kravis Roberts (KKR), Vornado Realty Trust, and Bain Capital Partners – have stripped out cash and piled on enough debt to topple the company.
On September 5, 2017, Vitamin World, a vitamin and supplement seller with 345 stores, was said to have plans for a bankruptcy filing as early as this month, hoping to get out of exorbitant lease agreements for a number of its stores, people familiar with the plans told Reuters . CEO Michael Madden said that the agreements were negotiated by its previous owners, vitamin maker NBTY Inc. The current owner, private equity firm Centre Lane Partners acquired it last year for about $25 million.
On August 26, Perfumania Holdings Inc., a fragrance retail chain filed Chapter 11 bankruptcy with plans to reorganize around a core of its better-performing stores and shed the remainder, according to the Wall Street Journal. The company had about 336 stores before 2015. Since then, it shuttered almost 100 stores and now wants to shutter another 64, which would leave it with about 162 stores.
The company, which lost money in each of the recent years, is impacted by “many of the same macroeconomic challenges plaguing the retail industry as a whole,” CEO Michael Katz said in court papers: declining mall traffic, the shift to online retail, changing trends, and expensive leases.
Expensive leases are a common theme among failing retailers. Under the Fed’s asset price inflation efforts, commercial real estate prices have soared over the past eight years, and landlords have relentlessly jacked up rents, but that equation doesn’t work out in the real economy where brick-and-mortar retail is already struggling mightily. And bankruptcy is one way to get out of those leases – and it sounds like an increasingly common solution.