Payless, Gymboree and the road to Chapter 22
Both retailers exited bankruptcy successfully once, now they're back in financial trouble two years later. What happened?
The old adage about history repeating itself isn't, ideally, supposed to apply to retailers that file for bankruptcy. Yet Gymboree — which filed for Chapter 11 in June of 2017 and exited in September that same year — is once again in court, this time with a more drastic plan: to sell Janie and Jack and the online IP of Gymboree, and to shutter Crazy 8 and Gymboree stores.
Gymboree isn't the only retailer looking at retreading the same ground. Payless, which filed for Chapter 11 a few months before Gymboree in 2017, is reportedly considering a second bankruptcy or a possible sale of the company. Reports suggest the shoe retailer's filing could come in the next few weeks and could include a plan to close its stores in North America.
Both retailers went into bankruptcy with a plan and exited in a timely fashion with hopes for a turnaround. Now both are back in a bad place financially.
Some of the blame likely goes to large debt piles at both retailers, courtesy of private equity buyouts. But the companies were also victims of a tough retail market that continues to see competitive pressure along with a bankruptcy process that doesn't offer many good options.
The path to Chapter 22
In its first Chapter 11, Gymboree closed and liquidated 300 stores and shed some $900 million in debt. On paper those were good numbers, but the children's apparel retailer was slowly losing market share prior to its filing and continued to do so after.
According to data compiled by Earnest Research and shared with Retail Dive, Gymboree's share of the children's apparel market the month it filed for its first Chapter 11 was 27.4%, compared to 30.4% for The Children's Place and 42.3% for Carter's. While the retailer was able to maintain its position for several months, in February of 2018, Gymboree's share plummeted to 15.8% and remained in the teens for the rest of the year, while its competitors grabbed close to 40% and 50%, respectively.
Competitor The Children's Place, in particular, hasn't been shy about taking advantage of Gymboree's weakness over the past two years. In The Children's Place's most recent earnings call (which took place about a month before Gymboree would file for the second time), CEO Jane Elfers told analysts that her company was still "the best positioned retailer to gain market share from Gymboree," according to a Seeking Alpha transcript.
"We have targeted a $100 million market share opportunity from Gymboree, inclusive of the $30 million opportunity we have detailed from the stores they have already closed," she added, pointing to the restructuring of Sears as another opportunity to gain share.
Elfers also noted that The Children's Place footprint overlaps with over 500 Gymboree locations. Given the news that Crazy 8 and Gymboree will both be shuttering all of their physical stores, The Children's Place is looking at an even bigger opportunity in the space, especially with Gymboree shoppers who aren't interested in shopping only online.
"I think you end up seeing this a lot … it's kind of like when a shark smells blood," Josh Friedman, global head of restructuring data at Debtwire, told Retail Dive in an interview. "If you're in a bankruptcy process, you can't 100% be devoting all of your time just to running your core business. You're also focused on court and other types of negotiations. I think when companies are emerging ... it makes it harder for them to keep doing what they might have otherwise been able to do if not for the fact that stronger competitors, or at least temporarily stronger competitors, sensed weakness."
While Gymboree did face tough competition from its rivals, this isn't exactly the story of the big kid on the playground kicking the little ones while they're down. Gymboree also faced problems of its own making: One in the differentiation between its core brand, Gymboree, and its lower-end sister Crazy 8; and the other with its core customer base, when the company tried to switch up its merchandising and came out flat.
"[T]hey were just never able to separate the Crazy 8 and Gymboree brands."
Managing Director, Senior Equity Research Analyst at B. Riley Financial
"I think the problem is they were just never able to separate the Crazy 8 and Gymboree brands," Susan Anderson, managing director and senior equity research analyst at B. Riley Financial told Retail Dive in an interview. She believes the cheaper brand cannibalized Gymboree and sent both of them "into a tailspin."
Teen retailer Justice had a similar problem in the past, with excess promotions that made it difficult to get shoppers to pay full price, according to Anderson. But that retailer has since turned things around, whereas Gymboree couldn't win back its customers after a history of promotions and a failed merchandising shift. The clothes looked more like Gap than Gymboree, which turned off customers.
"The Gymboree brand really shouldn't be as discounted and they just never could get there, basically," she added. "I think with the new merchandising initiative last summer, that was kind of the intent, but if the consumer's not buying it, what are you going to do, right?"
Off on the wrong foot
Payless, in many ways, had an easier time in bankruptcy, if such a thing is possible. While Gymboree slashed a lot of debt and worked to preserve Janie and Jack, Payless had a "much less aggressive tact" than others in the Chapter 11 process, according to Friedman. While Payless closed 900 stores, they still exited bankruptcy with over 3,000, which is a substantial footprint.
"In that sense, Payless was a more traditional reorganization. You reduce, things are better off, you come in with sponsors, leave with new owners, reduce the balance sheet, reduce the footprint — it has the hallmarks of a restructuring without it having nearly as aggressive a tact as some of the others," Friedman said.
The fact that Payless maintained a large footprint, even after going through Chapter 11, isn't necessarily a bad thing, though. For some retailers, their earnings come from a large spread of stores, while for others trimming to a smaller number makes more sense. Friedman notes that it's hard to say whether Payless should have cut more stores the first time around, whether that was even an option for them financially or if they were just kicking the metaphorical can down the road by leaving more open.
"If you're struggling just running a straight, bread-and-butter business, does making small changes matter that much?"
Global Head of Restructuring Data at Debtwire
Granted, Payless hasn't filed for Chapter 22 — at least not yet. But warning signs came in December that a second bankruptcy could be on the horizon, and were followed in January and February by reports that the retailer was close to filing.
Nevertheless, Payless has trucked along, launching holiday pop-up stores that tested a more modern feel than the rest of the store base. The brand also tried to rack up some social media chatter by opening a fake luxury store, dubbed Palessi, and asking influencers to comment on the designer shoes that were actually Payless products. The latter, while inventive, garnered negative impressions from younger consumers, whose perceptions of Payless fell shortly after the stunt.
Although it may seem out-of-the-box, Friedman notes that it's not necessarily a bad thing for a retailer teetering financially to test out a fresh approach to marketing, especially if it's not a high-risk or high-cost situation.
"If you're struggling just running a straight, bread-and-butter business, does making small changes matter that much?" Friedman asked. "And if there's low downside but a potential reward — then there's not as much of a downside."
It's still unclear whether or not Payless will end up back in bankruptcy court — reports have also said that the retailer might be sold outside of bankruptcy — but it doesn't help that it still carries a large debt load, despite shedding $435 million through bankruptcy in 2017.
"They're too leveraged. So, if they can't pay the interest, plus the intense competition from online retailers, it's just not going to work."
Partner and Chairman of the bankruptcy department at Wilk Auslander
"They still have debt. I mean, they just got rid of some, but they still have tremendous debt," Eric Snyder, partner and chairman of the bankruptcy department at law firm Wilk Auslander, told Retail Dive in an interview. He noted that when the retailer went private in 2017, they were left with a huge amount of debt, which is still impacting them. "It's a function of too much debt and the retail environment is still terrible. A lot of Payless's are at malls, so that's a problem."
At the same time, landlords are more likely to make deals with bankrupt retailers (even twice bankrupt ones) now than in the past, according to Snyder, as it becomes more difficult to find new tenants as major retailers struggle financially. Snyder also sees a pattern between retailers filing Chapter 22's in the past several years and those who did the same during the dot.com boom.
"They're too leveraged," he said. "So, if they can't pay the interest, plus the intense competition from online retailers, it's just not going to work."
Hindsight is 20/20
Regardless of where they started, both Gymboree and Payless are once again on the brink, with one navigating a second bankruptcy and the other facing the specter of the same. It raises more questions than it answers about the efficacy of the Chapter 11 process.
Neither retailer, strictly speaking, did anything wrong while in bankruptcy proceedings. But holding an excessive amount of debt makes bankruptcy, and operating in general, a lot harder. It allows healthier companies to benefit from their missteps and makes recovery even tougher.
After Gymboree's first trip through bankruptcy, some analysts questioned why the retailer didn't shutter its Crazy 8 brand then. But those choices aren't always clear cut while a company's trying to convince interested parties that it can reorganize as a relevant (and profitable) retailer. Anderson speculates Gymboree was trying to keep open as many stores as possible the first time around, but it ended up hurting them in the long run.
"They could have restructured their store base better, closed down stores, maybe closed down Crazy 8 and only focus on the Gymboree brand and then you're not cannibalizing yourself," Anderson said. "And maybe you can bring price points up and just focus on what your product's supposed to mean versus trying to be someone else."
"It's an easier space to not reorganize."
Global Head of Restructuring Data at Debtwire
Payless, likewise, could arguably have closed more stores in 2017, which may have led to a more successful reorganization. But in an industry that's known for being heavy on liquidations, the fact that Payless and Gymboree restructured at all is considered a success, Friedman said.
"It's an easier space to not reorganize," Friedman said, pointing out that the value of inventory is high — and tempting for creditors hoping to get paid. Toys R Us is a good example of a retailer where creditors saw more value in liquidation than in keeping it alive, he added, but retailers often receive criticism no matter which path they choose in bankruptcy.
"Either you're a failed retailer who's going to fire a bunch of employees and close all these stores and you're hurting communities, or, you know, you keep it running and it's: 'Why didn't you close down that brand and close those stores?'" he said.
The employee impacts of bankruptcy were brought into sharp relief for Gymboree last month, when a former worker filed a lawsuit suing the children's apparel retailer for not giving any WARN notice to employees before laying off an estimated 400 employees after its second Chapter 11 filing, per a Reuters report.
In essence, there are a lot of factors that impact a retailer's choices in bankruptcy, including paying back creditors, keeping jobs, and whether or not a company is saddled with debt. Going through multiple bankruptcies might be the better of two evils if the alternative is to liquidate the stores the first time around.
"[I]t's a way to get rid of the store debt, and a way to get rid of some of the other debt, and then you live for another day. I mean, there's no alternative, right?"
Partner and Chairman of the bankruptcy department at Wilk Auslander
By the second trip, though, the chances of liquidation are much higher, according to Snyder. Involved parties are no longer interested in funding another bankruptcy, which leads to more liquidations rather than restructurings. The problem grows worse with private equity ownership, as many of the firms aren't invested in the ultimate fate of the company, Snyder said.
"These are just faceless hedge funds. They don't care," Snyder said. "They buy the company, some money down. They try to make it work, it doesn't work. There's a bankruptcy. They take over the company. They try to make it work again, that doesn't work. They close it. That's Payless and Gymboree. Same deal. It's hedge fund money, it's too much debt and it's the retail environment."
Gymboree's plan to sell off Janie and Jack, paired with its liquidation of the Crazy 8 brand and all of Gymboree's physical stores, matches that pattern, but Snyder noted that unrealistic sales projections are another problem — and one that's not easily solved.
"If you don't get a plan approved, then you don't come out," Snyder said. "So I think there's a bit of aggressive assumptions for financial projections that I think a lot of people on the inside realize just aren't going to happen. But it's a way to get rid of the store debt, and a way to get rid of some of the other debt, and then you live for another day. I mean, there's no alternative, right?"
Just another name?
The fate of Gymboree, while not entirely decided, seems likely to follow lines similar to these: an online-only Gymboree and a stronger competitor for whoever lands the high-end portion of the market through Janie and Jack. There could also be wholesale opportunities for Gymboree thanks to the value of the brand, Anderson said, but she doesn't expect to see a future buyer open Gymboree stores any time soon.
With a primarily online presence in its future, Gymboree will be leaving the children's apparel market open for its competitors — and many of them will likely benefit from the retailer's second filing.
"Children's Place definitely has some of the best opportunity, given their core customer is really paying the same rate and they have some nice overlap," Anderson said. "They're definitely going to be a big beneficiary. But then I think it's kind of just spread everywhere — Gap, Abercrombie Kids, Target, Walmart, Old Navy, private labels at the department store. I think there's opportunity for kind of a lot of people to pick up share."
Gymboree has a few things going for it as a smaller retailer in its possible next life, mainly that it has a relatively strong brand name, but the path to being successful out of a bankruptcy auction isn't always straightforward, according to Friedman.
"There are brands that get sold and you'll never meaningfully hear from them again," he said. "And there are others that you see around and you might not even notice a difference because you've never been in one of their stores."
On one hand, e-commerce is more widely accepted now than ever, but there's a reason that many digitally native brands are opening physical stores — a single-channel approach isn't seen as widely successful. Customers want to be able to track down a store as well, even if it's just showrooming.
As a result, some of the most successful brands selling online-only post-bankruptcy have had strong mailing lists to rely on, according to Snyder, who cited both Sharper Image and J. Peterman as brands that have managed to stay above water by relying on online sales and a strong catalog game.
For Payless, though, the future is much more uncertain. While reports suggest either a sale or a second bankruptcy, the latter becomes much more likely once rumors surface that a filing could be on the horizon, Snyder said.
"Normally you'd try to do a sale with an investment bank outside of bankruptcy because you maintain whatever goodwill you have. Once it goes into bankruptcy, or everybody thinks a bankruptcy is inevitable, what they do is people sit back because they can pick it up cheaper at an auction," he said, noting the importance of getting support from creditors. "But with Payless, everyone knows the writing's on the wall, so no one is going to give any good bids until the bankruptcy," he added. "At that point, the creditors are looking at either a liquidation by liquidators, because there's plenty of stores and plenty of inventory, or somebody buys it for a discount amount with the goal to get as much as possible of the inventory."
Maybe Payless and Gymboree could have done more to stave off their current financial troubles. Maybe Payless could have cut more stores. Maybe Gymboree could have shuttered Crazy 8 the first time around. But there's no guarantee that more action in Chapter 11 would have saved two specialty retailers with large debt loads and strong competitors. The repeat filings could say more about the nature of the bankruptcy process than about the tough retail environment.
"Everybody nods and winks at each other and they give it a try, but it's no surprise the numbers aren't real and that it's going to go back in again," Snyder said regarding Chapter 11. "Everybody sees these companies coming out, but the people that know the numbers know that within a year or two's time, they're going to go back in again and just liquidate."
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