Claire's files for bankruptcy
- Teen retailer Claire's Stores filed for Chapter 11 bankruptcy protection on Monday. CEO Ron Marshall said in a press release that the company, at the end of the court process, would be a "healthier, more profitable company, which will position us to be an even stronger business partner for our suppliers, concessions partners, and franchisees."
- The retailer went into court with a restructuring plan agreed to by a group of its largest lenders, led by Elliott Management Corporation and Monarch Alternative Capital. Under the plan, Claire's would reduce its overall indebtedness by $1.9 billion, the company said. Claire's did not say in the release if it would close its own retail locations but did note that it plans to increase its concessions business — where it sells branded products at other retailers — by some 4,000 locations this year.
- The lender group will provide debtor-in-possession financing and new capital to carry Claire's through bankruptcy. That includes $75 million asset-based lending facility, a new $250 million first lien term loan and a $250 million preferred equity investment, according to the release. Claire's said it expects to complete the Chapter 11 process by September and would exit with $150 million in liquidity.
If you have to file for bankruptcy, the way Claire's did it represents the best possible chance for success.
The retailer has reportedly been negotiating with its lenders for weeks about a Chapter 11 plan that would give lenders ownership in return for debt reduction. By the time the retailer filed, Claire's had a clear deal for debt reduction and business reorganization — that is, it had a clear path back out of bankruptcy.
Claire's has been teetering on the brink of bankruptcy for some time now. Like so many retailers snatched up in debt-fueled deals by private equity, the retailer's high debt load has become a crisis in an era defined by declining mall traffic and shifting spending patterns.
Claire's in January said it had hired investment banker Lazard to help deal with its debt, often a precursor to restructuring or bankruptcy. The move came even as the retailer has posted reasonably healthy sales, with same-store consolidated sales growth of 2.7% for the first three quarters of 2017, and improved adjusted EBITDA, which has grown $20.4 million, or 18.3%, according to a company press release. But that only highlights the difficulties for retailers with high debt loads.
Teen and tween-focused Claire's Stores calls itself a "girl's best friend," but girls and young women have plenty other options these days, among them H&M, Forever 21 and Zara, as well as discount and online players. Trying to free up cash and stem losses, the company closed 166 stores in 2016 because they were unprofitable or the lease terms weren't favorable.
For 2016, the company posted net income of $53.9 million compared to a net loss of $236.4 million in 2015. And while the company has positive cash flow, it says that much of its cash goes to paying debt, which makes it hard for any retailer to compete in the current climate.
Like many retailers in trouble, private equity ownership added to Claire's Stores' woes. Apollo Global Management took Claire's private in 2007 in a $3.1 billion leveraged buyout. The retailer has already refinanced some debt to delay interest payments. In 2017, credit rating firm Fitch Ratings listed Claire's among retailers on its "Bonds of Concern" list.
In a press release Monday, Claire's said it expected 2017 EBITDA (earnings before interest, taxes, depreciation and amortization) of $212 million, up nearly 13% from 2016. It also expects near sales of $1.3 billion — roughly flat from the year before — and net income of $29 million.
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