Charming Charlie Holdings Inc.

• 12/11/17 Recap: A mere two weeks before Christmas, another retailer falls into bankruptcy, capping a 2017 retail bloodbath. Here, the Houston-based specialty retailer focused on colorful fashion jewelry, handbags, apparel, gifts, and beauty products follows a long line of retailers into bankruptcy court. In doing so, it demonstrates that the "treasure hunt" experienced often touted as a plus for discount retailers like T.J. Maxx ($TJX), doesn't always hold; it also shows that the difficulties apparent in women's specialty retail are demography-agnostic (here, the core audience is women ages 35-55 - in contrast to, say, rue21). The company blames (i) "adverse macro-trends" and (ii) operational shortfalls, e.g., merchandising miscalculations, lack of inventory, an overly broad vendor base), for its underperformance and reduced sales. EBITDA declined 75% "in the last several fiscal years." 75-effing-percent! With a limited amount of money available under its revolving credit facility and even less cash on hand, "Charming Charlie is out of cash to responsibly operate its business." Ouch. Rough timing. Only subject to a restructuring would lenders support the company; accordingly, the company has entered into a restructuring support agreement with 80% of the term lenders which includes a $20mm new-money cash infusion via a DIP credit facility (the facility includes, in total, a $35mm ABL and a $60mm TL...so yes, a proposed roll-up of $75mm of prepetition debt into a DIP). The company has also commenced the closure of 100 of its 370 stores, a meaningful reduction in its brick-and-mortar footprint (PETITION NOTE: the usual array of landlords, i.e., General Growth Properties ($GGP), have made a notice of appearance). Note the carefully crafted language the company deploys in its initial filing, "The Debtors anticipate 276 go-forward locations following the first round of store closures." Key words, "FIRST ROUND." In other words, the ~100 stores the company notes that it is closing (and that it seeks to retain Hilco for) may just be the beginning. While the company leaves the door open for a sale, the current agreement contemplates the equitization of the term loan (with added equity weight to those providing DIP financing) and a post-emergence debt load of $85mm. 
• Some other takeaways:
  • (1) the fashion industry has suffered a 15% downturn in fashion jewelry sales (and the company experienced a disproportionate 22% decline itself),
  • (2) vendors and factorers continue to be aggressive with constrictive trade terms and protect their turf (similar here to Toys R Us),
  • (3) Kirkland & Ellis LLP appears to effectively deploy its network to populate Boards of Directors (here, one of the independents appointed to the Board in July 2017 has ties to Gymboree and Toys R Us, two Kirkland clients),
  • (4) Guggenheim's efforts to sell this hot mess were unsuccessful pre-petition (query whether they'll have better luck post-petition...we doubt it),
  • (5) recall the words "first round" when you consider that even landlords for locations that remain open will be squeezed as the company seeks "to amend lease terms to reduce occupancy costs and obtain rent abatements for the first quarter of 2018," 
  • (6) this restructuring will lead to some supply chain pain as the company streamlines the vendor base down to 80 from 175, and
  • (7) its hard out there for a pimp (in this case: Charlie Chanaratsopon "vacated" his role as CEO and an interim CEO has taken the helm). 
• Jurisdiction: D. of Delaware (Judge Sontchi)
• Capital Structure: $22mm '20 ABL (Bank of America NA), $132mm '19 TL (Wilmington Savings Trust)  
• Company Professionals:
  • Legal: Kirkland & Ellis LLP (James Sprayragen, Joshua Sussberg, Christopher Greco, Aparna Yemamandra, Rebecca Blake Chaikin, Michael Esser, Anna Rotman) & (local) Klehr Harrison Harvey Branzburg LLP (Dominic Pacitti, Michael Yurkewicz, Morton Branzburg)
  • Financial Advisor: AlixPartners LLC
  • Investment Banker: Guggenheim Securities LLC (Stuart Erickson)
  • Liquidation Agent: HIlco Merchant Resources LLC (Ian Fredericks)
  • Real Estate Advisor: A&G Realty Partners LLC
  • Claims Agent: Rust Consulting/Omni Bankruptcy (*click on company name above for free docket access)
• Other Parties in Interest:
  • DIP ABL Agent/Prepetition ABL Agent: Bank of America NA
    • Legal: Morgan Lewis & Bockius LLP (Robert Barry, Julia Frost-Davies, Amelia Joiner) & (local) Richards Layton & Finger PC (Mark Collins, David Queroli)
  • Ad Hoc Group of Term Loan Lenders
    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Jeffrey Saferstein, Adam Denhoff, Sharad Thaper) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, M. Blake Cleary, Shane Reil)

12/13/17