🚛Dump Trucks🚛

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Manufacturing, Trucking & the Ports

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We’re old enough to remember a narrative that went something like this:

  • Amazon Inc. ($AMZN) is dominating retail with 2-day (now 1-day) shipping +

  • Traditional brick-and-mortar retailers are converting to e-commerce +

  • Digitally-native-vertical-brands are cutting out brick-and-mortar and going direct-to-consumer =

  • Increased need for logistics and shipping capabilities.

Because of these developments, among others, this country — it was said — was suffering from a trucking shortage relative to the demand and so wages rose rapidly and seemingly every retailer reported that rising shipping expenses were harming the bottom line. Given this, you’d think truckers would be crushing it.

Maybe…not? At least anymore.

In August we noted the following:

ACT research reflects two straight quarters of negative sector growth and DAT reported a 50% decline in spot market loads, with no category immune to the declining trend. Van load-to-truck is down 50%, flatbed load down 74.5% and reefer load down 55.5%. Some fear this may be a leading indicator of recession. Alternatively, it may just be the short-term effects of tariffs and the acceleration of orders into earlier months to avoid them. 

Still, the trucking industry is worried. 

Van spot rates were down 18.5%, flatbed spot rates down 18.4%% and reefer spot rates down 16.8%. The word “bloodbath” is now being bandied about. Per Business Insider:

“There has been a spate of trucking companies declaring bankruptcy this year, too. The largest was New England Motor Freight, which was No. 19 in its trucking segment. Falcon Transport also shut down this year, abruptly laying off some 550 employees in April.

"We have become increasingly convinced that freight is likely to remain weak through 2019 followed by falling truckload and intermodal contract rates in 2020," the UBS analyst Thomas Wadewitz wrote to investors in a June 18 note.

Trucking's biggest companies have been slashing their outlooks. Knight-Swift and Schneider both cut their annual outlooks earlier this year.”

Will this trend continue as manufacturing numbers continue to slip?

That was a good question. And, indeed, manufacturing does continue to slip — at least according to the ISM Manufacturing PMI report:

With the foregoing context, take some more recent news:

1. Hendrickson Truck Lines Co.

The family-owned trucking company recently filed for bankruptcy in the Eastern District of California (a chapter 22, actually). The company is on the smaller side: liabilities between $10-50mm; roughly 90 trucks and 100 drivers; operations in 10 states. Per FreightWaves:

“The company said its financial problems started in January with a sharp decline in overall freight tonnage. This, combined with excess truck capacity, resulted in a 21% rate drop compared with 2018, resulting in a $400,000 per month revenue drop, according to its petition.  

Two of the carrier’s top customers, which accounted for nearly 50% of its business, switched to lower-cost providers, the company said.” (emphasis added)

The company also blamed a poor truck leasing deal for its filing.

2. Truck Orders Are Down

The Wall Street Journal recently reported:

Order books for heavy-duty truck manufacturers are thinning out as a weaker U.S. industrial economy pushes fleet operators to put the brakes on plans to expand freight-carrying capacity.

Trucking companies in November ordered 17,300 Class 8 trucks, the big rigs used in highway transport, according to a preliminary estimate from industry data provider FTR. That was down 39% from November 2018 and a 21% decrease from October, providing a weak start for what is typically the busiest season for new-equipment orders.

The orders last month were the lowest for a November in four years, and analysts said they expect a backlog at factory production lines that has been dwindling this year to pull back even more.

It continued:

Truck-equipment makers have started scaling back production and laying off workers this year as demand for new trucks has weakened.

Daimler Trucks North America LLC said in October it planned to lay off about 900 workers at two North Carolina Freightliner plants as “the market is now clearly returning to normal market levels.”

Engine-maker Cummins Inc. cut its annual revenue forecast in October and the company last month said it plans to lay off about 2,000 workers early next year. â€œDemand has deteriorated even faster than expected, and we need to adjust to reduce costs,” the Columbus, Ind.-based manufacturer said in a statement.

What’s going on here? Well, yes, manufacturing is down. But “global trade tensions are weighing on transportation demand.” More from the WSJ:

U.S. factory activity contracted in November for the fourth straight month, according to the Institute for Supply Management.

Freight volumes and trucking prices have been on the decline. U.S. domestic freight shipments fell 5.9% in October compared with the same month last year, while truckload linehaul rates were down 2.5% year-over-year, according to Cass Information Systems Inc., which handles freight payments for companies.

🤔

3. Trade, Declining Truck Orders, and Imports (Short the Ports?)

We’re curious: if tariffs and trade wars are trickling down to trucking, what must this mean for ports in this country? Per Transport Topics:

Three West Coast ports saw significant drop-offs in cargo volume last month, the latest indication that the United States’ long-simmering trade dispute with China is impacting operations at the nation’s ports.

The Port of Los Angeles, the nation’s busiest facility, saw a 19.1% decline in 20-foot-equivalent units (TEUs) container volume, moving 770,188 compared with 952,553 in the same period a year ago. Imports and exports were both down 19%. The drop-off also means the Los Angeles port is 90,697 TEUs behind last year’s record pace, having processed 7,861,964 TEUs through the first 10 months, compared with 7,723,159 at this point last year.

Port Executive Director Gene Seroka and other officials were in Washington on Nov. 12, and he is sounding the alarm over the damage being done to the economy because of the ongoing trade battle and the resulting tariffs on hundreds of billions of dollars worth of products.

And this, apparently, isn’t isolated to the West Coast:

Will we start seeing some port distress in the near future? Fewer trucks and fewer trains mean lower revenue. 🤔

4. Celadon Group Files for Bankruptcy

Indianapolis-based Celadon Group Inc. ($CGIPQ) is a truckload freight services provider with a global footprint. Founded in 1985, the company professes to have pioneered the commerce trail between the United States and Mexico. Thereafter, it IPO’d and used the proceeds for growth capital, expanding its freight-forwarding business with the acquisition a UK-based company and another 36 companies thereafter. Not only did these acquisitions expand its geographic footprint, but they also expanded the company’s freight capabilities, opening up revenue possibilities attached to refrigerated and flatbed transportation. In all, today the company operates a fleet of 3300 tractors and 10000 trailers with 3800 employees. Its primary focus continues to be NAFTA countries; its customers include the likes of Lowes Companies Inc. ($LOW), Philip Morris International Inc. ($PM), Walmart Inc. ($WMT), Fiat Chrysler Automobiles NV ($FCAU), Procter & Gamble Inc. (($PG) and Honda Motor Co Ltd. ($HMC).  

All of the above notwithstanding, it is now a chapter 11 debtor. Worse yet, it will, in short order, wind down and no longer be in existence. In an instant, the aforementioned 3800 employees’ livelihoods have been thrown into disarray.

Not that the signals weren’t there. The company has been in trouble for some time now. In addition to macro woes, it has a large number of self-inflicted wounds. 

Back in July, the company teetered on the brink of bankruptcy but it bought itself a short leash. On July 31, 2019, the company refinanced its term loans held by Bank of America NA ($BAC), Wells Fargo Bank NA ($WFC) and Citizens Bank NA ($CFG) with a new facility agented by Blue Torch Finance LLC* that counted Blue Torch and Luminus Partners Master Fund as lenders.** The new lenders provided $27.9mm of new term loans and, in exchange, received $8mm in original issue discount and fees. The banks, it appears, got out just in the knick of time. Indeed, the company and its lenders have been engaged in an endless stream of negotiations, concessions and waivers ever since: the credit docs have been amended ad nauseam ever since the initial transaction because the company was in constant danger of breaching its covenants.

Why so much drama? Per the company:

“The need to file these chapter 11 cases was a result of a confluence of factors including industry-wide headwinds, former management bad acts, an unsustainable degree of balance sheet leverage and an inability to address significant liquidity constraints through asset sales and other restructuring strategies. In mid-2019, the trucking freight market began to soften. The combination of a decline in overall freight tonnage and excessive truck capacity in the market led to a significant decline in freight rates, and customers began to take bids at lower freight rates. Compared to the year immediately prior, 2019 showed a steady decline in freight rates, including spot freight rates and contractual rates. In addition to declining freight rates, volumes of loads in freight have experienced decreasing numbers for a significant portion of 2019.”

Sound familiar? Well, these issues alone should have been enough to present problems but they were accentuated by the fact that the company’s prior senior management allegedly engaged in some shady a$$ sh*t. That shady a$$ sh*t ultimately led to a Deferred Prosecution Agreement and a $42.2mm fine. While only $5mm has been paid to date, that $37mm overhang is substantial.

With all of these issues piling up, the company ultimately defaulted on its revolver. Consequently, MidCap Financial Trust, the company’s revolver lender, froze lending and the company’s already-growing liquidity problem became a wee bit more problematic. With barely enough money to fund payroll and payroll taxes, the company had no choice but to file for chapter 11. To put an exclamation point on this, the company had merely $400k of cash on hand when it pulled the trigger on bankruptcy. 

So what now? The company ceased operations and will commence an orderly wind down of its businesses, preserving only Taylor Express Inc. as a going concern. Taylor Express is a NC-corporation that the company acquired in 2015; it is a dry van and dry bulk for-hire services provider, operating principally for the tire and retail industries and primarily in the South and Southeast regions of the US. To fund the cases, the debtors secured a commitment from Blue Torch for $8.25mm in DIP financing. The DIP mandates that any sale order relating to the liquidating business be entered by January 22. 

As for the employees? Well: 

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Yeah, they’re understandably pissed. For starters, they were laid off en masse with no notice. One employee, on behalf of all employees, filed an Adversary Complaint alleging a violation of the WARN Act, which requires 60 days’ advance written notice of a mass layoff and/or plant closing. In response, the truckers have formed a “Celadon Closure Assistance and Jobs” group on Facebook. It has 1300 members. Per Fast Company, 

“Truckers in [a] Facebook group are posting about having 20 minutes to clear out their trucks and go. CBS also reported that some drivers “were stranded when their company gas cards were canceled.”

YIKES. All told, this is a hot mess. Per SupplyChainDive:

“’This is noteworthy because of the size of the fleet,’ Donald Broughton, the principal and managing partner at Broughton Capital, told Supply Chain Dive in an interview.  â€˜It’s noteworthy because less than 10 years ago Celadon was known as one of the most active, prolific and successful at salvaging small fleets that were struggling and in trouble.’

The failure of Celadon represents the largest trucking failure this year and ‘certainly one of the largest in history,’ Broughton said.”  

“Largest [insert industry here] failure” is not an honor that anyone wants.

*Blue Torch Finance LLC was also active in another DLA Piper LLP bankruptcy, PHI Inc., as DIP lender. 

**Blue Torch hold a priority right of payment on the term loan collateral with Luminus second and revolver lender, MidCap Financial Trust, third. 


💩Retail, the Internet, China & Counterfeiting (Long Unscrupulousness).💩

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This is a story about S’well. It illustrates just how vicious competition is today. And made even more vicious by (i) “signaling” and ease of discovery (lots of likes on Instagram), (ii) shady-AF Chinese manufacturers (producing legit product by day, extra off-the-truck product by night), and (iii) Amazon Inc.’s ($AMZN) failure to police third-party sellers. Choice bit:

Counterfeiting is an old game: In ancient Rome, counterfeiters knocked off authentic Roman coins. In recent decades, counterfeits of luxury products like handbags, watches, and sneakers have become commonplace. Now, though, online marketplaces like Amazon and social-media sites like Facebook and Instagram are enabling a new copycat ecosystem that’s become a hall of mirrors for both brands and shoppers. It’s never been easier for makers of knockoffs to reach consumers, project authenticity, and make money — and it’s never been harder for the real companies to regain control.

This is crazy:

…less than a year into starting the business, Kauss realized she had a big problem. Kauss and her then-boyfriend Jeff Peck (now her husband and the company’s president) were heading to S’well’s factory in China when they stopped for a couple days’ vacation in Hong Kong. Kauss saw there was a trade show and insisted on stopping by. When she arrived, it appeared that S’well had a significant presence at the show, with bottles displayed in a case and a ribbon flaunting an award it had apparently won. “A man came over to me and gave me his business card, very properly, and said he was from S’well,” she says. His card had S’well’s logo on it, with the little TM for ”trademark.”

The problem: Kauss at that point was running S’well from her apartment. It had no presence in Asia. Nor did it have a sales rep there. And it had no employees besides Kauss. She had barely gotten the company off the ground, and her bottles were being knocked off.

What. The. Hell. Read the piece. It’s long. And nuts.

But that’s not all. This is a horribly pervasive problem:

Last year, when the Government Accountability Office bought 47 consumer products like cosmetics and travel mugs online from third-party sellers on sites including Amazon.com and Walmart.com, it determined that 20 of them were fakes.

Here’s the problem from another vantage point (also very much worth reading):

I've been talking to a friend who's a cofounder at a womenswear ecommerce startup about their content strategy. I searched around to see what kind of stuff is out there about them (press mentions, reviews, etc.), and stumbled upon something odd. On a Bustle.com top ten sex toys list, it had listed a product from their brand. They do not sell sex toys. I clicked through, and it led to an Amazon site with their company’s branding. They do not sell on Amazon.

It turned out a China-based seller had “hijacked” their brand. This is apparently a regular thing.

A few days later, when visiting my friend's office, I found out that they had one staff member dedicated to monitoring Amazon for exactly these situations. There was a big spreadsheet where they tracked various culprits. There was a specific contact at Amazon they would call when they found shady stuff like this. They had a lawyer they billed, and a process in place to deal with this. It cost time and money and it was a never-ending game of whack-a-mole. It had become such an increasingly frequent problem over the past few years, yet they seemed fairly blasĂŠ about it. It was just business as usual.

I understand counterfeiting has always been a problem in retail, but this felt different. Amazon was their competitor. It had launched a private label brand that directly competed, undercutting them on price and shipping speed. Yet, Amazon also sold counterfeit items of theirs (well, Amazon “facilitated” it) and the startup bore the cost of cleaning up the trillion dollar company’s platform. I guess this was how ecommerce worked in 2019.

The article goes on to explain that this is the natural side effect of Amazon’s concerted efforts to court Chinese sellers to its platform. It explains the lack of quality control and…..

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🥈Second Order Effects Are Real (Long #retailapocalypse Victims)🥈

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We’ve spent a considerable amount of time discussing the possible and/or actual second order effects of disruption. For instance, waaaaaaay back in December 2016, we queried to what degree the scanless technology that Amazon Inc. ($AMZN) had then launched in its AmazonGo concept might affect grocers and quick service restaurants. We noted the following possibilities:

[Our] list of losers: manufacturers of conventional scanners...plastic separator bricks...cash registers...conveyer belts; landlords (maybe? - less square footage required without the cashier and self-checkout stations); print media/candy manufacturers/gift cards - all things that benefit from lines and impulse buys at checkout; human capital; people on the wrong end of income inequality.

Three years later, you don’t hear much about AmazonGo. Sure, it’s grown: there are now reportedly 20 locations with more on the way, but it hasn’t exactly taken the world by storm and caused mass disruption to either grocers or QSRs. It’s still worth watching though: the possible second order effects are countless.

An example of actual second order effects is Cenveo Inc., which filed for bankruptcy in February 2018. At the time we wrote:

…it's textbook disruption. Per the company, 

"In addition to Cenveo’s leverage issues, macroeconomic factors, including the introduction of new e-commerce, digital substitution for products, and other technologies, are transforming the industry. Consumers increasingly use the internet and other electronic media to purchase goods and services, pay bills, and obtain electronic versions of printed materials. Moreover, advertisers increasingly use the internet and other electronic media for targeted campaigns directed at specific consumer segments rather than mail campaigns." 

Ouch. To put it simply, every single time you opt-in for an electronic bank statement or purchase a comic book on your Kindle rather than from the local bookstore (if you even have a local bookstore), you're effing Cenveo.

To close the trifecta, we’ll again highlight the recent pain in the SMA space. Catalina Marketing and Acosta Inc. both became chapter 11 filers while Crossmark Holdings Inc. narrowly avoided it. Why? Because CPG companies are taking it on the chin from new and exciting direct-to-consumer e-commerce brands, among other things, and have therefore shifted marketing strategies.

So, on the topic of second order effects, imagine being in the C-suite of a company that, among other things:

  • Prints signage, displays, shelf marketing and other promotional-print-material for brick-and-mortar retailers including the likes of, among others, struggling GNC Inc. ($GNC), Gap Inc. ($GPS), and GameStop Inc. (GME), all of which are shrinking their brick-and-mortar footprint;

  • Creates menu boards, register toppers, ceiling danglers and more for QSRs and fast casual restaurants who are competing with food delivery services more and more every day; and

  • Services consumer packaged goods companies by creating end cap promotions, shelf marketing, floor graphics and more.

Uh….YEAAAAAAAAAH. Some high risk exposure areas right there, folks.😬 And, so you’ve got to imagine that revenues of this “hypothetical” C-suiter’s company are declining, right? Particularly given that print is a highly competitive price-compressed industry?

Luckily, you don’t have to stretch the imagination too far.

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👟The Latest in Fitness Trends (Long Innovation)👟

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There are a lot of venture investors operating under the hypothesis that audio is the next frontier in wearables and that the Apple AirPods were just the opening salvo. Amazon Inc. ($AMZN) is apparently working on pods that double-up as fitness trackers. This is a space worth watching.

Elsewhere in fitness, we’re writing this particular section midweek and yet we literally just walked by someone rocking his NYC Marathon medal. Seems a bit aggressive to still be wearing that thing 72 hours post-race but, whatevs. To each his own. 

Here’s a piece from Reess Kennedy about fitness and marketing, discussing the rise of the Nike Vaporfly 4%, a running shoe that Nike Inc. ($NKE) alleges will enhance performance by…wait for it…4%. Regarding the NYC marathon, he writes, “I’d safely wager that 70% of the men and women running under 3:10 were wearing it.” He adds:

“…Sunday all I was thinking was, “Why and how did Nike win so hard here?! They’ve gobbled up significant market share and achieved one of the most successful product adoption feats in the history of footwear—possibly in the history of product adoption!—and, at $250, they’ve also set a new off-the-chart, ‘luxury’ price point for racing shoes in the process!’”

He concludes that much of the adoption is attributable to FOMO: if your competitors are juicing with the Vaporfly, you should be juicing too.  He writes:

“I think the far more powerful demand ignitor was actually the brazen insertion of a precise performance gain right into the name of the actual product: The Vaporfly 4%.”

“For the first time in history, a shoe company is making a clear ROI claim to buyers. This is the real reason they’ve sold so many.”

“Many runners really struggle over many marathon attempts to break three hours—often, tragically, missing it by only a few minutes on each attempt. A 4% improvement for these folks hovering around three hours would mean about a seven-minute gain! If you’re on the edge of a lifetime goal is it worth it to pay $250 to achieve it? Yeah, probably. â€œ

This begs the obvious question: how long until the release of the “Brooks Boss 6%,” the “Adidas A$$-kicker 7%” or the “Saucony Supersonic 9%”? Will we start seeing distressed players engage in marketing schemes like this to drive traffic? Should we?*

Why aren’t restructuring firms using this tactic? 

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📦Nerds Lament: Subscription Box Company Goes BK📦

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We’re old enough to remember when subscription boxes were all the rage. The e-commerce trend became so explosive that the Washington Post estimated in 2014 that there were anywhere between 400 and 600 different subscription box services out there. We reckon that — given the the arguably-successful-because-it-got-to-an-IPO-but-then-atrocious-public-foray by Blue Apron Inc. ($APRN) â€” the number today is on the lower end of the range (if not even lower) as many businesses failed to prove out the business model and manage shipping expense.

And so it was only a matter of time before one of them declared bankruptcy.

Earlier this morning, Loot Crate Inc., a Los Angeles-based subscription service which provides monthly boxes of geek- and gaming-related merchandise (“Comic-con in a box,” including toys, clothing, books and comics tied to big pop culture and geek franchises) filed for bankruptcy in the District of Delaware.* According to a press release, the company intends to use the chapter 11 process to effectuate a 363 sale of substantially all of its assets to a newly-formed buyer, Loot Crate Acquisition LLC. The company secured a $10mm DIP credit facility to fund the cases from Money Chest LLC, an investor in the business. The company started in 2012.

Speaking of investors in the business, this one got a $18.5mm round of venture financingfrom the likes of Upfront Ventures, Sterling.VC (the venture arm of Sterling Equities, the owner of the New York Mets), and Downey Ventures, the venture arm of none other than Iron Man himself, Robert Downey Jr. At one point, this investment appeared to be a smashing success: the company reportedly had over 600k subscribers and more than $100mm in annualized revenue. It delivered to 35 countries. Inc Magazine ranked it #1 on its “Fastest Growing Private Companies” list. Deloitte had it listed first in its 2016 Technology Fast 500 Winners list. Loot Crate must have had one kicka$$ PR person!

But life comes at you fast.

By 2018, the wheels were already coming off. Mark Suster, a well-known and prolific VC from Upfront Ventures, stepped off the board along with two other directors. The company hired Dendera Advisory LLC, a boutique merchant bank, for a capital raise.** As we pointed out in early ‘18, apparently nobody was willing to put a new equity check into this thing, despite all of the accolades. Of course, allegations of sexual harassment don’t exactly help. Ultimately, the company had no choice but to go the debt route: in August 2018, it secured $23mm in new financing from Atalaya Capital Management LP. Per the company announcement:

This financing, led by Atalaya Capital Management LP ("Atalaya") and supported by several new investors (including longstanding commercial partners, NECA and Bioworld Merchandising), will enable Loot Crate to bolster its existing subscription lines and improve the overall customer experience, while also enabling new product launches, growth in new product lines and the establishment of new distribution channels.

Shortly thereafter, it began selling its boxes on Amazon Inc. ($AMZN). When a DTC e-commerce business suddenly starts relying on Amazon for distribution and relinquishes control of the customer relationship, one has to start to wonder. 🤔

And, so, now it is basically being sold for parts. Per the company announcement:

"During the sale process we will have the financial resources to purchase the goods and services necessary to fulfill our Looters' needs and continue the high-quality service and support they have come to expect from the Loot Crate team," Mr. Davis said.

That’s a pretty curious statement considering the Better Business Bureau opened an investigation into the company back in late 2018. Per the BBB website:

According to BBB files, consumers allege not receiving the purchases they paid for. Furthermore consumers allege not being able to get a response with the details of their orders or refunds. On September 4, 2018 the BBB contacted the company in regards to our concerns about the amount and pattern of complaints we have received. On October 30, 2018 the company responded stating "Loot Crate implemented a Shipping Status page to resolve any issues with delays here: http://loot.cr/shippingstatus[.]

In fact, go on Twitter and you’ll see a lot of recent complaints:

High quality service, huh? Riiiiiiight. These angry customers are likely to learn the definition of “unsecured creditor.”

Good luck getting those refunds, folks. The purchase price obviously won’t clear the $23mm in debt which means that general unsecured creditors (i.e., customers, among other groups) and equity investors will be wiped out.***

Sadly, this is another tale about a once-high-flying startup that apparently got too close to the sun. And, unfortunately, a number of people will lose their jobs as a result.

Market froth has helped a number of these companies survive. When things do eventually turn, we will, unfortunately, see a lot more companies that once featured prominently in rankings and magazine covers fall by the wayside.

*We previously wrote about Loot Crate here, back in February 2018.

**Dendera, while not a well-known firm in restructuring circles, has been making its presence known in recent chapter 11 filings; it apparently had a role in Eastern Mountain Sports and Energy XXI.

***The full details of the bankruptcy filing aren’t out yet but this seems like a pretty obvious result.

😬Decreased Birth Rates, Diminished Sales & Distressed Signs: Destination Maternity Deteriorates (Short Turnaround BoD Types)😬

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Per NPR:

The U.S. birthrate fell again in 2018, to 3,788,235 births — representing a 2% drop from 2017. It's the lowest number of births in 32 years, according to a new federal report. The numbers also sank the U.S. fertility rate to a record low.

Not since 1986 has the U.S. seen so few babies born. And it's an ongoing slump: 2018 was the fourth consecutive year of birth declines, according to the provisional birthrate report from the Centers for Disease Control and Prevention.

Birthrates fell for nearly all racial and age groups, with only slight gains for women in their late 30s and early 40s, the CDC says.

These statistics must really suck for any business that generates revenue off of the maternity cohort.

Enter Destination Maternity Corporation ($DEST), a retailer of maternity apparel with a nationwide chain of specialty stores. As of May 4, 2019, the Moorestown New Jersey company had 998 retail locations, including 452 stores in the US, Canada and Puerto Rico, and an additional 546 leased departments located within department stores (eg., Macy’s, Boscov’s) throughout the US and Canada. It has also been kicking around on distressed retail lists for quite some time now. Unfortunately, the business keeps deteriorating: last week the company joined a recent retail wave and reported some truly dogsh*t numbers.

The company reported Q1 ‘19 results that included (i) $94.2mm in sales, a $9mm YOY decrease (-8.7%), (ii) a 5.2% comp store sales decline, (iii) an 12.5% e-commerce sales decline, (iv) increased inventory (+$5.7mm), and (v) increased debt levels and interest expense (up ~$300K). Sales declines permeated throughout the enterprise, including leased department store sales. The only uptick in sales was in wholesale, which is primarily done through Amazon Inc. ($AMZN). On the plus side, the company enjoyed increased gross margin and meaningfully decreased SG&A (down 6.5%). Gross margin increased due to a pullback in promotional activity; nevertheless, gross profit declined by 6.9% due to the overall decrease in sales. As for SG&A, the reduction is attributable to employees getting the shaft and the company shedding leases like its 2019. Indeed, the company cut 32 stores and 88 leased department locations in the twelve month period. While the company wouldn’t articulate its portfolio strategy going forward, the company did expressly state that it expects additional store closures through the end of 2019.

So, what’s the debt look like? Well, for starters, this is a public company and so we don’t have a private equity sponsor strangling the company with too much debt, dividend recapitalizations, management fees and any of that other fun stuff. So, here, the company doesn’t have a patsy to blame for its woeful performance. Only itself and its revolving door of management teams.

The company’s capital structure looks like this:

  • $50mm ‘23 Revolving Credit Facility (of which $26.2mm is funded and $6.297mm is outstanding as letters of credit)(Agent: Wells Fargo Bank NA). The company has $10.1mm of availability pursuant to its borrowing base limitation. In other words, the company’s lenders are increasingly minimizing their exposure by limiting the company’s ability to borrow the full extent of the committed facility. Indeed, the facility was, in connection with a 2018 amend and extend exercise, ratcheted down from $70mm. The lenders aren’t fooling around here. The weighted interest rate is 4.53%.

  • $25mm ‘23 Term Loan Facility (Agent: Pathlight Capital LLC). The interest rate is LIBOR plus 9%.

  • The company has a couple of other financing agreements totaling approximately $4mm.

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