💥Stage Stores Inc: Bankruptcy Soon? (Short Department Stores)💥

In August 2019’s “💥Tariffs Tear into Tech+💥,” we wrote:

We’ve previous noted the gradual unwind of Stage Stores Inc. ($SSI) in November 2018’s “💰Will Crypto Mine Some Bankruptcy Work?💰” “…noting that (a) its off-price business experienced a 9.9% comparable sales increase, alleviating negative 5.5% department store comps somewhat, equating to 2.8% total comp sales declines …,” in January 2019’s “💥A Retail Bloodbath💥,” (“…closing more stores and pivoting more into the discount space, replacing shuttered Goody’s stores with Gordmans locations.”), and in March 2019’s “Thanos Snaps, Retail Disappears👿” (“…closing between 40-60 department stores.”). On March 20, the stock was just barely hovering above penny-status, trading at $1.04/share. After the Trump-tweet/tariff-induced bloodbath on Friday, the stock now sits at $0.78/share.

Thursday was a big day for the company. One one hand, some big mouths leaked to The Wall Street Journal that the company retained Berkeley Research Group to advise on department store operations. That’s certainly not a great sign though it may be a positive that the company is seeking assistance sooner rather than later. On the other hand, the company reported Q2 ‘19 results that were, to some degree, somewhat surprising to the upside. Net sales declined merely $1mm YOY and comp sales were 1.8%, a rare increase that stems the barrage of consecutive quarters of negative turns. Off-price conversions powered 1.5% of the increase. The company reported positive trends in comps, transaction count, average transaction value, private label credit card growth, and SG&A. On the flip side, COGs increased meaningfully, adjusted EBITDA declined $2.1mm YOY and interest expense is on the rise. The company has $324mm of debt. Cash stands at $25mm with $66mm in ABL availability. The company’s net loss was $24mm compared to $17mm last year.

Some of the reported loss is attributable to offensive moves. The company’s inventory increased 5% as the company seeks to avoid peak shipping expense and get out ahead of tariff risk (PETITION Note: see a theme emerging here, folks?). There are also costs associated with location closures: the company will shed 46 more stores.

What’s next? Well, the company raised EBITDA guidance for fiscal ‘19: management is clearly confident that the off-price conversion will continue to drive improvements. No analysts were on the earnings call to challenge the company. Restructuring advisors will surely want to pay attention to see whether management’s optimism is well-placed.

Subsequently, the company issued a January 13 press release that spooked the markets. Interestingly, it reported positive comp sales (+1.4%) for the nine-week period ended 1/4/20. In retail-land these days, a positive comp sales figure is the equivalent of killing it. More compelling, for the 48-week year to date period, comp sales were up 4.2%. The problem? These figures didn’t live up to expectations.

The guidance didn’t help matters either. The company announced:

“In response to the holiday sales performance, we implemented incremental promotional efforts in the fourth quarter to ensure appropriate inventory levels as we enter fiscal 2020. As a result, we now expect full year 2019 earnings to be approximately $25 million to $30 million below the low end of the previously announced guidance range.”

Indeed, it appeared that management’s optimism was, in fact, misplaced.

Which gets us to yesterday’s The Wall Street Journal’s piece, entitled, “Discount Retailer Stage Stores Preps for Possible Bankruptcy.”

The Journal reported:

Stage Stores Inc. is preparing for a financial restructuring that could include a bankruptcy filing as the discount retailer contends with persistent losses at its department store outlets, according to people familiar with the matter.

The publicly listed, Houston-based company has recently been late in paying its vendors amid a liquidity squeeze, the people said.

The company is likely to file for chapter 11, although the situation remains fluid and Stage Stores could complete an out-of-court debt restructuring process, according to the people. (emphasis added)

The highlighted part above is the key, we think. It’s not that the company is stretching vendors per se … that much is fairly typical for companies with liquidity constraints. The question is why? Or more appropriately, who has risk?

Wells Fargo Bank NA ($WFC) is the company’s administrative agent and primary lender under the company’s asset-based credit facility. Prior to Destination Maternity’s ($DEST) chapter 11 filing, Wells Fargo tightened the screws, instituting reserves against credit availability to de-risk its position. It stands to reason that it is doing the same thing here given the company’s sub-optimal performance and failure to meet projections. Said another way, WFC has had it with retail. Unlike oil and gas lending, there are no pressures here to play ball in the name of “relationship banking” when, at the end of the day, so many of these “relationships” are getting wiped from the earth.

⚡️Update: Destination Maternity Inc. ($DEST)⚡️

Speaking of ugly…

In the aforementioned October CBL update, we wrote:

The last thing CBL needed — on the heals of the downgrade — was near-instantaneous bad news. It got it this week.

Yesterday, the bankruptcy court granted interim approval authorizing Destination Maternity Corporation ($DEST) to assume a consulting agreement with Gordon Brothers Retail Partners LLC. Gordon Brothers will be tasked with multiple phases of store closures. Among those implicated? CBL, of course:

CBL is landlord to DEST on 16 properties that are slated for rejection. Considering that DEST cops to being party to above-market leases, this ought to result in a real economic hit to CBL as (a) it will lose a high-paying tenant, (b) it will take time to replace those boxes, and (c) it is highly unlikely to obtain tenants at as favorable rents.

Let’s pour one out for CBL, folks. The hits just keep on coming.

On Friday, Destination Maternity filed a motion seeking approval of a stalking horse bidder for its assets. In September’s “🤔Is it a "Destination" if Nobody Goes?🤔,” we concluded:

And so we’ll have to wait and see whether Greenhill can pull a rabbit out of their hats. Unfortunately, this is looking like another dour retail story. This looks like a liquidating ABL if we’ve ever seen one.

According to the motion, Greenhill dug deep. They reached out to over 180 potential buyers, executed 50 CAs, and granted due diligence access to nearly two dozen parties.* They also conducted 8 management presentations with potential bidders. If you’ve ever wondered why investment bankers make what they make, this ought to illustrate why: it can be a lot of work trying to garner interest and herd cats. Then again, they did accept a mandate where there was a questionable likelihood that the asset value would clear the debt. 🤔

Unfortunately, the result is not — as predicted — particularly stellar. To be clear, this isn’t a reflection upon Greenhill. This was a difficult assignment in a challenging retail environment: it’s a reflection of that.

And so Marquee Brands LLC** and a contractual joint venture between Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC (together, the “Agent”) entered into an asset purchase agreement (APA) with the debtors pursuant to which they will purchase “the Debtors’ e-commerce business, intellectual property, store-in-store operations, and the right to designate the sale of certain inventory and related assets” for an estimated $50mm (subject to adjustments). Repeat: an estimated $50mm. The Agent will liquidate the company’s inventory, fixtures and equipment and conduct store closing sales at the 235 stores where closing sales are not already in process. Said another way: the company’s retail footprint is going the way of the dodo. Clearly this isn’t credit positive for CBL and other landlords.

To refresh everyone’s recollection, here is what the company’s capital structure looked like at the time of its bankruptcy filing:

We previously noted when highlighting the aggressive milestones baked into Wells Fargo Bank’s consent to use its cash collateral:

Wells clearly wants this sucker off its books in 2019.

Rightfully so. The $50mm purchase price is subject to a $4mm holdback. In other words, the actual value transfer may be approximately $46mm. That puts the purchase price at riiiiiiiiiiiiight around Wells Fargo’s exposure. Its aggressive handling of the case appears to be warranted: this thing looks a hair away from administrative insolvency.

Apropos, the official committee for unsecured creditors — in a grasp for some sort of relevance here — filed a limited objection to the motion. The committee argued that the break-up fee (3.5%) and expense reimbursement (up to $750k) were unwarranted given the size of the bid and the lack of a going concern offer.

They were shot down. They did, however, wrestle some concessions. They apparently got the purchase price increased by $225k (in exchange for avoidance actions) and an additional $225k to be paid to 503(b)(9) admin claimants prior to Wells getting its money. A small victory but something for some creditors here.

And that ladies and gentlemen is what bankruptcy boils down to. Is there value? And if so, who gets it? Here, it’s hard to see any real winners. Not the company. Not Wells. Not CBL and the company’s other landlords. Not vendors. Or suppliers. Or employees. Or, really, even the professionals (for once). Time will tell whether Marquee can do something with this brand that makes it one of the rare winners. It’s not clear from the papers how much of the $50mm is attributable to them and, therefore, how much they’re putting at risk. Clearly nobody else was comfortable with the risk here. However you quantify it.

*At the time of filing, the numbers were 170 parties contacted and 34 executed CAs. So, there wasn’t much additional interest in the assets post-filing.

**Marquee Brands also owns BCBG which, itself, traversed the bankruptcy process not long ago.

💥Good Retail Numbers. Bad Malls.💥

⚡️Update: CBL & Associates Properties ($CBL)⚡️

We did a deep dive into Tennessee-based CBL & Associates Properties ($CBL) back in March’s “Thanos Snaps, Retail Disappears👿” and, in the context of Destination Maternity’s bankruptcy filing, followed-up in an October update. To refresh your recollection, CBL is a real estate investment trust (REIT) that invests primarily in malls based in the southeastern and midwestern US. At the time of the aforementioned “Thanos” piece, the REIT’s stock was trading at $1.90/share; its ‘23 unsecured notes were priced around $80 and its ‘24 unsecured notes around $76. In case you haven’t noticed — all Black Friday ($7.4b in online sales, $2.9b via mobile ordering) and Cyber Monday (a record $9.2b) talk about gangbusters retail sales notwithstanding — the malls haven’t particularly fared much better since Q1. To put an exclamation point on this, early reports are that brick-and-mortar stores saw an overall 6% decline in sales over Black Friday.

When it reported Q3 earnings at the end of October, CBL’s numbers weren’t pretty. Revenue fell approximately $20mm YOY, net operating income declined 5.9% YOY, and same-center mall occupancy, while up on a quarter-by-quarter basis, was down 200 basis points YOY.

On Monday, the company announced that “it is suspending all future dividends on its common stock, 7.375% Series D Cumulative Redeemable Preferred Stock and 6.625% Series E Cumulative Redeemable Preferred Stock.” The company’s CEO, Stephen Lebovitz said:

“We anticipate a decline in net operating income in 2020 as a result of heightened retailer bankruptcies, restructurings and store closings in 2019. Offsetting these declines by retaining available cash is necessary to maintain the market dominant position of our properties and to reduce debt. CBL has also made significant efforts over the past 18 months to reduce operating costs, including executive compensation and overall corporate G&A expense, as well as execution of a strategy to utilize joint venture and other structures to reduce capital expenditures. Ultimately, we believe these actions will allow the Company to return greater value to its shareholders.”

Given the above, it’s worth revisiting the alleged benefit of REITs to investors. Among them are that:

• post 1960, REITs provided small investors with an opportunity to benefit from commercial property rental streams; and

• they are, typically, high dividend payers — considering that by law, they must distribute at least 90% of their taxable income to shareholders as dividends.

WOMP. WOMP. Not so much these days, it seems. But, we bet you’re asking: how can it terminate its dividend while maintaining its REIT status? From the company:

“The Company made this determination following a review of current taxable income projections for 2019 and 2020. The Company will review taxable income on a regular basis and take measures, if necessary, to ensure that it meets the minimum distribution requirements to maintain its status as a Real Estate Investment Trust (REIT).”

Umm, that doesn’t portend well. The answer is: it may not have “taxable income.” B.R.U.T.A.L.

How did the market react?

The stock market puked on the news. The stock was down 6% with a general market drawdown, but after-hours, upon the announcement, the stock gave up an additional ~30% on Monday and closed at $1.02/share on Tuesday:

Meanwhile, the preferred stock also obviously traded down (lots of Moms and Pops chasing yield, baby yield, getting burned here), and the ‘23 unsecured notes and the ‘24 unsecured notes, at the time of this writing, last sold at $72.75 and $64.1, respectively.

The GIF above says it all about this story. And, worse yet: it may get uglier.

⚡️Update: CBL & Associates Properties Inc.⚡️

In our recent newsletter, “🇺🇸Forever 21: Living the (American) Dream🇺🇸,” we highlighted the exposure that landlords have to Forever21:

The company currently spends $450mm in annual rent, spread across 12.2mm total square feet. The company will close 178 stores in the US and 350 in total.

We highlighted how the company noted the impact this plan will have on large mall landlords, the company said:

Forever 21’s management team and its advisors worked with its largest landlords to right size its geographic footprint. Four landlords hold almost 50 percent of its lease portfolio. To date, Forever 21 and its landlords have engaged in productive negotiations but have not yet reached a resolution.

Two of those landlords were the largest unsecured creditors, Simon Property Group ($SPG) and Brookfield Property Partners ($BPY). But another, CBL & Associates Properties Inc. ($CBL), also has exposure. In “Thanos Snaps, Retail Disappears,” we discussed CBL’s issues: bankruptcy-related store closures are something that CBL is very familiar with. Management said last February that things were going to turn around but, instead, things just keep getting worse as more and more retailers go out of business.

Forever 21 is one of CBL’s top tenants, occupying 19 stores (plus 1 store in “redevelopment phase”). Per CBL’s FY 2018 10-K, Forever 21 accounts for roughly 1.2% of CBL’s revenue or $10 million.

Of those 20 stores, 7 are subsumed by a motion by Forever 21 to enter into a consulting agreement to close stores (see bankruptcy docket (#81 Exhibit A):

On October 14, 2019, partly due Forever 21’s bankruptcy, Moody’s downgraded CBL’s corporate family rating to B2 from Baa3 and revised its outlook to negative. Moody’s explained:

CBL's cushion on its bond covenant compliance is modest, particularly the debt service test, which requires consolidated income to debt service to annual debt service charge to be greater than 1.50x. The ratio has declined from 2.46x at year-end 2018 to 2.27x at Q1 2019, and 2.25x at Q2 2019 due principally to declining operating income during these periods. CBL's same-center NOI growth was -5.3% for Q2 2019 YTD and CBL projected same-center NOI growth to be between -7.75% and -6.25% for 2019, which means that the debt service test will likely weaken further.

The chart below reflects the company’s capital structure and debt prices. It is not doing well. In fact, the term loan and the unsecured notes have priced down considerably since March:

Here is the company's stock performance:

The last thing CBL needed — on the heals of the downgrade — was near-instantaneous bad news. It got it this week.

Yesterday, the bankruptcy court granted interim approval authorizing Destination Maternity Corporation ($DEST) to assume a consulting agreement with Gordon Brothers Retail Partners LLC. Gordon Brothers will be tasked with multiple phases of store closures. Among those implicated? CBL, of course:

CBL is landlord to DEST on 16 properties that are slated for rejection. Considering that DEST cops to being party to above-market leases, this ought to result in a real economic hit to CBL as (a) it will lose a high-paying tenant, (b) it will take time to replace those boxes, and (c) it is highly unlikely to obtain tenants at as favorable rents.

Let’s pour one out for CBL, folks. The hits just keep on coming.

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

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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