Report: Rue21, lenders in talks ahead of possible bankruptcy

Dive Brief:

  • Rue21 Inc. and its lenders are in negotiations as the company mulls a bankruptcy filing, which could come as early as this week, unnamed sources told The Wall Street Journal. The retailer just last month began shuttering about a third of its U.S. store fleet, nearly 400 stores. 

  • The teen apparel retailer has been seeking a junior bankruptcy loan since last month and is in discussions with its term-loan lenders to raise some $50 million, though those talks are ongoing, according to the report. The apparel retailer has missed interest and amortization payments and is seeking new lenders, although the company may not be able to take on any more debt, Debtwire Associate Editor Reshmi Basu told Retail Dive last month.

  • In a statement emailed to Retail Dive on Tuesday, a rue 21 spokesperson said the company is working with its creditors: "We continue to work with our lenders and bondholders to find the best solution to the company’s need for more capital and for a business model with less debt, in order to ensure that we move forward as a stronger and more sustainable enterprise.”

Dive Insight:

Rue21 may soon be next in line for bankruptcy as mall-based apparel retailers struggle to deal with declining foot traffic. "Way too much leverage and declining mall traffic trends are just the death knell," Basu told Retail Dive last month, calling rue21 a "poster child" for mall-based apparel retail.

Already this year we've seen several retailers — including fellow teen apparel retailer Wet Seal and women's apparel retailer The Limited — succumb to bankruptcy. The number of retailers who have filed for bankruptcy this year — 9 at last count at the end of March — has already equaled the total number of retail bankruptcies for 2016 and is on pace to for the highest year on record since the recession. Rue21 has been taking steps to turn things around, with plans to revamp its girls' in-store experience, in alignment with the girls' merchandising transformation led by Chief Merchandising Officer Nina Barjesteh, who joined rue21 from Target after the abrupt departure of Kim Reynolds in October. 

That was just one executive change amid a shake-up instituted last year by the retailer’s private equity owner, Apax Partners, shortly after credit ratings firm Fitch Ratings warned rue21 could slip down the slope to bankruptcy. The company replaced Reynolds as well as CEO Bob Fisch, who together had run the company for some 15 years. Keith McDonough, who had been CFO for 13 years, has since served as interim CEO while the board of directors continues its search for a permanent chief executive. Dirk Armstrong, who has been with rue21 for five years, was promoted to chief operating officer in January. The shakeup may have come too little too late, although Debtwire notes that the company has signaled that same-store sales in already revamped stores have risen 6%, with wider gross margins and lower inventory levels.

Still, credit rating agency Fitch’s blunt report last fall singled out rue21 as one of seven retailers with tenuous futures. “The lack of proprietary products in many categories leaves retailers vulnerable to permanent traffic decline resulting from the rise of competitors (for example, discounters and online-only players),” Fitch said, pointing out that mall-based apparel brands in particular can quickly become irrelevant as consumer sentiment changes. In January, rue21 appeared in another Fitch report citing retailers most likely to default on their loans

Most of the retailers listed in that report are owned by private equity firms, and some of rue21’s troubles may stem from its private equity ownership. Often, private equity ownership means big debt loads without enough time and resources spent on retail fundamentals. Apax Partners took rue21 private after buying it for $1.1 billion in 2013

In recent years, rue21 expanded its number of stores, despite having negative same-store sales, Basu said. “That can be pretty lethal,” she said. But one area where struggling mall-based retailers have some hope is in renegotiating leases, she said, because landlords are under the gun as retailers shutter underperforming stores (or all stores)

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Filed Under: Corporate News
Top image credit: rue 21