The Phaserl


The Bloodletting Among Retailers Simply Doesn’t Let Up

by Wolf Richter, Wolf Street:

A very busy day in Brick-and-Mortar Fiasco Land.

Neiman Marcus, the Texas-based luxury retailer with 42 stores around the country and two Bergdorf Goodman stores in Manhattan, is in no immediate risk of bankruptcy, the sources told Reuters on Friday, though it has hired investment bank Lazard Ltd to help restructuring its nearly $5 billion in debt.

When this news emerged, Neiman Marcus unsecured bonds due in 2021 plunged 7% to 54 cents on the dollar, according to Thomson Reuters, and its $3 billion term loan fell 5% to 77 cents on the dollar.

Earlier this year, Neiman Marcus scrapped its IPO entirely, after having delayed it in 2015 when its difficulties could no longer be swept under the rug. In December that year, it reported its first quarterly sales decline since 2009, with same-store sales dropping 5.6%. There was plenty of red ink. And layoffs commenced.

At the time, CEO Karen Katz blamed the oil and gas bust in which wealthy shoppers in Texas were tangled up. She also blamed the “strong dollar” that prevented foreign tourists from splurging at its stores in the gateway cities Honolulu, San Francisco, Las Vegas, New York, Washington, and Miami.

As so many times in the brick-and-mortar retail fiasco, there’s a private-equity firm behind it: In 2005, Neiman Marcus was subject of a leveraged buyout. It’s now owned by Ares Capital and the Canadian Pension Plan Investment Board. Their hopes of an elegant exit via an IPO have been scrapped.

But the Neiman Marcus restructuring news wasn’t enough for just a regular brick-and-mortar Friday.

“People with knowledge of the matter” told Bloomberg on Friday that appliances and electronics retailer HHGregg – which had announced on Thursday that it would close 88 of its 220 stores, shutter three distribution centers, and shed 1,500 jobs – is preparing to file for Chapter 11 bankruptcy.

It too needs to restructure its debt. Inventory will be sold off over the next few weeks, and the stores will be shuttered by mid-April.

In January, HHGregg had hired two restructuring advisory firms, Stifel, Nicolaus and Miller Buckfire. Hiring restructuring advisors is a sign that bankruptcy is one of the options being contemplated – regardless of how energetically Neiman Marcus might be denying it

In theory, this would be enough for a productive week in the collapse of brick-and-mortar retail, but no.

BCBG, the California-based fashion retailer that had acquired fashion design firm Herve Leger in 1998, and that once had more than 570 boutiques globally, including 175 in the US, and whose cocktail dresses and handbags were shown off by celebrities, filed for bankruptcy on Wednesday.

It is buckling under $459 million of debt. It has 4,800 employees. Layoffs have already started. More layoffs and other cost cuts are planned, according to court documents, cited by Bloomberg. It started closing 120 of its stores in January. It wants to sell itself at a court-supervised auction. If that fails, it wants to negotiate a debt-for-equity swap with junior lenders owed $289 million.

This is the company’s third effort at restructuring. Guggenheim Partners arranged a $200 million loan for BCBG in 2006. In 2015, Guggenheim affiliates took equity in exchange for reducing debt. In August 2016, founder Max Azria surrendered his majority equity stake as part of a second debt restructuring and departed, according to the court papers.

And this is how bad it is: On Friday still, Reuters, citing “people familiar with the matter,” reported that the acquisition of Macy’s by Canadian department-store chain, Hudson’s Bay Co, which owns the Lord & Taylor and Saks Fifth Avenue chains, is going nowhere because financing cannot be lined up to back a credible offer.

Hudson’s Bay, burdened with about $4.5 billion in debt, has a market value of C$2.2 billion (US$1.6 billion). It wants to swallow Macy’s, which has a market capitalization of $10 billion. Both of them have been suffering from disappointing sales. Reuters:

Macy’s is skeptical that Hudson’s Bay can raise the necessary financing for its bid, and it is not currently engaged in any negotiations about a possible deal, the sources said this week.

Hudson’s Bay’s existing equity partners, including mall operator Simon Property Group Inc., have been reluctant to back Hudson’s Bay’s bid for Macy’s, which would require them to invest more money in mall real estate, even as consumers continue to abandon them in favor of internet shopping, the sources added.

However, the setback with Macy’s illustrates the limits of financial engineering. Retailers with a reliance on malls across the United States, including Macy’s, Sears Holdings Corp and J.C. Penney Co Inc., have suffered as shopper traffic in several malls has declined.

As a result, the underlying real estate of these mall-based department stores is less financially attractive to the investors that Hudson’s Bay has traditionally relied on to help extract cash from its properties or raise financing for acquisitions.

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