Claire's posts sales gains as lenders fight over its future
UPDATE: June 26, 2018: A federal bankruptcy court on Friday set a deadline of Aug. 31 for all bids for Claire's Stores assets. The deadline is about a month later than some stakeholders, including Oaktree Capital Management, wanted. But Judge Mary Walrath determined there was sufficient time and publicity for potential bidders, who would be competing against Claire's existing agreement with lenders to buy the retailer out of bankruptcy. "The debtor does have a bird in the hand, and at this point should not let it go," Walwrath said, according to a recording of the hearing.
- Claire's on Wednesday reported that first quarter net sales rose 3.8% year over year to $311 million, a bump due to increases in concession and company store sales, according to a press release. Same-store sales in North America actually increased 5.4%, but European comps fell nearly 10%, making for a total decrease in comps of 0.4%. Adjusting for exchange rate changes, net sales would have fallen 1%, the company said.
- Claire's posted Q1 operating income of more than $20 million but a net loss of $11.6 million, a result of $10 million in expenses related to its Chapter 11 bankruptcy filing this spring and $25 million in interest expenses. According to the release, Claire's added more than 4,200 concession stores between February and May, after saying it planned to open thousands of concession stands in CVS stores around the country.
- On Wednesday a federal judge ordered Claire's and its attorneys to extend a process to market and possibly sell the company to parties beyond those it already has an agreement with to buy the retailer out of bankruptcy, according to a recording of a bankruptcy court hearing. One of Claire's lenders, Oaktree Capital Management, which has opposed Claire's reorganization agreement with another group of lenders, has been pushing for the extended sale process.
If you are a bankrupt retailer, there are worse things than to have a lender in court argue that you aren't being valued highly enough as an operating company.
In the cases of Bon-Ton and Toys R Us, just the opposite occurred. A group of lenders to Bon-Ton saw more value in the department store chain in parts rather than as an operating retailer, and ultimately prevailed.
With Toys R Us, the financiers of the toy retailer's bankruptcy loan lost faith in the company after an abysmal holiday season and pulled the plug, opting to liquidate rather than pump in more money until Toys R Us could sell itself or reorganize.
At Claire's, Oaktree has opposed the reorganization plan, negotiated ahead of the Chapter 11 filing, since the beginning. Attorneys for the investment fund have said it was based on "an artificially low valuation that was not and has not been market tested," in part because it did not include the thousands of new CVS concession stands. Oaktree also argued that the exit financing plan "delivers substantially all of [Claire's] enterprise value to the RSA [restructuring support agreement] parties," which does not include Oaktree.
Oaktree also blasted Apollo Global Management, the private equity firm that took Claire's private in a 2007 leveraged buyout, in court papers earlier this year, saying there were "serious questions regarding the independence of [Claire's] and their decision making from their controlling equity sponsor." In Oaktree's view, Apollo has, for more than a decade "exercised unfettered control over the debtors."
Bankruptcy Judge Mary Walrath echoed those concerns in court this week, saying that she saw problems with Claire's and its finance committee "being too close to Apollo." Apollo, as the judge noted, would get under the plan a small stake of the exit financing for Claire's, which will likely determine the makeup of its owners.
Unsurprisingly, Claire's opposed the notion that it has not sought the highest value on the market or through its reorganization agreement, as well as opposed the legal basis for Oaktree's arguments. Ray Schrock, an attorney for Claire's, pointed out in a hearing that Oaktree has said Claire's is worth $2 billion but has not produced a bid worth that amount. He also raised the specter of Toys R Us, where an effort by the retailer to reorganize itself in bankruptcy — an effort, notably, that lacked a plan similar to Claire's — fell apart and led to the company winding down.
"We need to get through this process," Schrock said. "For the rest of the creditors, for the 10,000 employees that work at Claire's, for all the vendors that depend on this, it's not just a one-way option. It's something that matters. We can't put the company in jeopardy through the back-to-school and the holiday seasons and have everyone look at ourselves and say we thought it was going to make it, and it didn't."
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