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

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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💊How's GNC Doing (Long Online Supplements, Short Fitness Stores)?💊

A quick recap of PETITION’s coverage of everyone’s (cough, no one’s) favorite supplements slinger.

In August 2017 in “GNC Holdings Inc. Needs Some Protein Powder,” we wrote:

GNC Holdings Inc. ($GNC) remains in focus as it reported its Q2 numbers this past Thursday. In summary, decreased consolidated revenue, decreased domestic (company-owned and franchised) same-store sales, decreased net income and operating income, decreased manufacturing/wholesale business...basically a hot mess. Limited bright spots included China sales and the new GNC storefront on Amazon. You read that right: the storefront on Amazon. Ugh. The company has $52mm of cash, $163.1mm available under its revolver and a robust $1.5b of long-term debt on its balance sheet. The stock traded down 7% after the announcement (but was up on the week).

In February 2018 in “GNC Makes Moves (Long Brand Equity, Meatheads & Chinese Cash),” we introduced the great strides GNC was undertaking to avoid a bankruptcy filing. These actions included (a) paying down its revolving credit facility, (b) moving towards an amend-and-extend transaction vis-a-vis its term loan, (c) obtaining a $300mm capital infusion by way of issuance of a perpetual preferred security to CITIC Capital, a Chinese investment fund and controlling shareholder of Harbin Pharmaceutical Group, and (d) the formation of a JV in China whereby it would slap its brand on Harbin’s product.

The following month in “GNC Holdings Inc. & the Rise of Supplements,” we highlighted that the amend-and-extend got done. And this:

Concurrently, the company entered into a new $100 million asset-backed loan due August 2022 and engaged in certain other capital structure machinations to obtain $275 million of asset-backed “first in, last out” term loans due December 2022. Textbook. Kicking. The. Can. Which, of course, helped the company avoid Vitamin World’s bankrupt fate.  Goldman Sachs!

We also noted a number of DTC supplements companies that were juiced by financings or acquisitions, citing them as headwinds to GNC and GNC’s nascent DTC business. The stock traded at $3.97/share back then. And we wrote:

Perhaps those restructuring professionals disappointed by Goldman Sachs’ success in securing the refinancing should just put that GNC file in a box labeled “2021.”

We revisited GNC in May 2018 in “GNC Holdings Inc. Isn’t Out of the Woods Yet.” At that time, the stock hovered around $3.53/share and the company reported more bad news including (i) 200 store closures, and (ii) declining revenue, same store sales at domestic franchise locations, and net income. We wrote:

Clearly GNC’s future — now that it has some balance sheet breathing room — will depend on its ability to capture new international markets, e-commerce growth primarily through its private label, innovation around product to combat DTC supplements brands, and continued cost controls. It will also need to execute on its goal of translating e-commerce sales to foot traffic. To accomplish this Herculean task, GNC may just need some supplements.

Last July, we noted that revenue continued its downward trend but earnings generally beat (uber-low) expectations. In August, we highlighted how Goldman Sachs was acting very “Goldman-y,” given that Goldman Sachs Investment Partners was a major investor in DTC vitamins and supplements startup Care/of, which had just raised a $29mm Series B round. We’ve slacked on our coverage since.

So, like, what’s up with GNC now?

It reported earnings back in July and continued to show weakness. Quarterly consolidated revenue and adjusted EBITDA declined meaningfully — the latter down 3% YOY. Same store sales were down 4.6%. E-commerce was down 0.2%. Revenue from franchise locations decreased 1.8%.

The company blamed promotional offers it implemented at the beginning of the quarter for the lousy same-store sales results.

Early in the second quarter, we made some adjustments to some of our promotional offers and our marketing vehicles, and we saw a direct negative impact to the top line. We quickly course corrected and saw sales strengthen throughout the remainder of the quarter.

PETITION Note: somebody must have gotten fired. Hard. Nothing like dropping an idea that is so horrifically bad that it immediately resulted in a “direct negative impact to the top line.” YIKES.

Speaking of yikes, mall performance is, like, YIIIIIIIIIIIKES:

In addition, the negative trends in traffic that we've seen in mall stores over the past several years has accelerated during the past few quarters putting additional pressure on comps. As part of our work to optimize our store footprint, we're increasing our focus on mall locations. And as you know, we have a great deal of flexibility to take further action here due to the short lease terms we have across our store portfolio.

It's important to note that our strip center locations are relatively stable from a comparable sales perspective. As a reminder, 61% of our existing store base is located in strip centers while only 28% reside in malls.

As a result of the current mall traffic trends, it's likely that we will end up closer to the top end of our original optimization estimate of 700 to 900 store closures.

Mall landlords everywhere were like:

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Cracks in Malls Grow Deeper (Long Thanos, Short CMBS)

Retail Carnage Continues Unabated (R.I.P. Payless, Gymboree, Charlotte Russe & Shopko)

Talk of retail’s demise is so pervasive that the casual consumer may be immune to it at this point. Yeah, yeah, stores are closing and e-commerce is taking a greater share of the retail pie but what of it?

Well, it just keeps getting worse.

Consider 2019 alone. The Payless ShoeSource, Gymboree, Charlotte Russe, Shopko, and Samuels Jewelers* liquidations constitute thousands of stores evaporated from existence. It’s like Thanos came to Earth and snapped his fingers and — POOF! — a good portion of America’s sh*tty unnecessary retail dissipated into dust. Tack on bankruptcy-related closures for Things Remembered, Beauty Brands and Diesel Brands USA Inc. and you’re up to over 4,300 stores that have peaced out.

That, suffice it to say, would be horrific enough on its own. But “healthy” (read: non-bankrupt) retailers have only added to the #retailapocalypse. Newell Brands Inc. ($NWL)is closing 100 of its Yankee Candle locations to focus on “more profitable” distribution channels. Gap Inc. ($GPS) announced it is closing 230 of its more unprofitable locations and spinning Old Navy out into its own separate company — the good ol’ “good retail, bad retail” spinoff. Chico’s FAS Inc. ($CHS) is closing 250 stores. Stage Stores Inc. ($SSI) — which purchased once-bankruptcy Gordmans — is closing between 40-60 department stores. Kitchen Collection ($HBB) is closing 25-30 stores. E.L.F. Beauty ($ELF) is closing all 22 of its locations. Abercrombie & Fitch Co. ($ANF)? Yup, closing stores. Up to 40 of them. GNC Inc. ($GNC) intends to close hundreds more stores over the next three years. Foot Locker Inc. ($FL)? Despite a strong earnings report, it is closing a net 85 stores. J.C. Penney Inc. ($JCP)…well…it didn’t report strong earnings and, not-so-shockingly, it, too, is closing approximately 27 stores this year. Victoria’s Secret ($LB)? 53 stores. Signet Jewelers Ltd. ($SIG)? Mmmm hmmm…it’s been closing its Zales and Kay Jewelers stores for years and will continue to do so. As we noted on Sunday, The Children’s Place Inc. ($PLCE) also intends to close 40-45 stores this year. Build-A-Bear Workshop Inc. ($BBW) will close 30 stores over the next two years. Ascena Retail Group Inc. ($ASNA) recently reported and disclosed that it had closed 110 stores (2% of its MASSIVE footprint) in the last quarter. Even the creepy-a$$ dolls at American Girl aren’t moving off the shelves fast enough: Mattel Inc. ($MAT) indicated that it needs to rationalize its retail footprint. There’s nothing Wonder Woman — or even a nightmare-inducing American Girl version of Wonder Woman — can do to prevent all of this carnage.

As a cherry on top, EVEN FRIKKEN AMAZON INC. ($AMZN) IS CLOSING ALL 87 OF ITS POP-UP SHOPS! Alas, The Financial Times pinned the total store closure number for 2019 alone at 4,800 stores (and just wait until Pier 1 hits). Attached to that, of course, is job loss at a pretty solid clip:

All of this begs the question: if there are so many store closures, are the landlords feeling it?

In part, surprisingly, the number appears to be ‘no.’ Per the FT:

“Investors in mall debt have also shown little sign of worry. The so-called CMBX 6 index — which tracks the performance of securitised commercial property loans with a concentration in retail — is up 4.4 per cent for 2019.”

Yet, in pockets, the answer also appears to be increasingly ‘maybe?’

For example, take a look at CBL & Associates Properties Inc. ($CBL) — a REIT that has exposure to a number of the names delineated above.

On its February 8th earnings call, the company stated:

“We are pleased to deliver results in line with expectations set forth at the beginning of the year notwithstanding the challenges that materialized.”

Translation: “we are pleased to merely fall in line with rock bottom expectations given all of the challenges that materialized and could have made sh*t FAR FAR WORSE.”

The company reported a 4.4% net operating income decline for the quarter and a 6% same-center net operating income decline for the year. The company is performing triage and eliminating short-term pressure: it secured a new $1.185b ‘23 secured revolver and term loan with 16 banks as part of the syndicate (nothing like spreading the risk) to refinance out unsecured debt (encumbering the majority of its ‘A Mall’ properties and priming the rest of its capital structure in the process); it completed $100mm of gross dispositions plus another $160mm in “sales” of its Cary Towne Center and Acadiana Mall; it reduced its dividend (which, for investors in REITs, is a huge slap in the face); and it also engaged in “effective management of expenses” which means that they’re taking costs out of the business to make the bottom line look prettier.

Given the current state of affairs, triage should continue to remain a focus:

“Between the bankruptcy filings of Bon-Ton and Sears, we have more than 40 anchor closures.”

“…rent loss from anchor closures as well as rent reductions and store closures related to bankrupt or struggling shop tenants is having a significant near-term impact to our income stream.”

They went on further to say:

“Bankruptcy-related store closures impacted fourth quarter mall occupancy by approximately 70 basis points or 128,000 square feet. Occupancy for the first quarter will be impacted by a few recent bankruptcy filings. Gymboree announced liquidation of their namesake brand and Crazy 8 stores. We have approximately 45 locations with 106,000 square feet closing.”

Wait. It keeps going:

“We also have 13 Charlotte Russe stores that will close as part of their filing earlier this month, representing 82,000 square feet.”

Earlier this week, Things Remembered filed. We anticipate closing most of their 32 locations in our portfolio comprising approximately 39,000 square feet.”

And yet occupancy is rising. The quality of the occupancy, however — on an average rental basis — is on the decline. The company indicated that new and renewal leases averaged a rent decline of 9.1%. With respect to this, the company states:

As we've seen throughout the years, certain retailers with persistent sales declines have pressured renewal spreads. We had 17 Ascena deals and 2 deals with Express this quarter that contributed 550 basis points to the overall decline on renewal leases. We anticipate negative spreads in the near term but are optimistic that the positive sales trends in 2018 will lead to improved lease negotiations with this year.

Ahhhhh…more misplaced optimism in retail (callback to this bit about Leslie Wexner). As a counter-balance, however, there is some level of realism at play here: the company reserved $15mm for losses due to store closures and co-tenancy effects on company NOI. In the meantime, it is filling in empty space with amusement attractions (e.g., Dave & Buster’s Entertainment Inc. ($PLAY), movie theaters, Dick’s Sporting Goods Inc ($DKS) locations, restaurants, office space and hotels. Sh*t…given the amount of specialty movie theaters allegedly going into all of these emptying malls, America is going to need all of those additional gyms to work off that popcorn (and diabetes). Get ready for those future First Day Declarations that delineate that, per capita, America is over-gym’d and over-theatered. It’s coming: it stretches credulity that the solution to every emptying mall is Equinox and AMC Entertainment Holdings Inc. ($AMC). But we digress.

All of these factors — the average rent decline, the empty square footage, etc. — are especially relevant considering the company’s capital structure and could, ultimately, challenge compliance with debt covenants. Net debt-to-EBITDA was 7.3x compared with 6.7x at year-end 2017. Here is the capital structure and the respective market prices (as of March 19):

The new Senior secured term loan due ‘23:

The Senior unsecured notes due ‘23:

The notes due ‘24:

The notes due ‘26:

Additionally, the company is trying to promote how flexible it is with its ability to pay down debt and invest in redevelopment properties. Here is a snippet of the company presentation that displays the debt covenants on its revolver, term loan and other unsecured recourse debt:

What is the real value of the mall assets that are left unencumbered? Recently, the Company has been slowly impairing a number of its assets and many of the Company’s tier 2 and 3 malls have yet to be revalued. If appraisers lower the value of these assets that are really supposed to be supporting the debt, what then?

Life as an unsecured creditor....when a third of your collateral value comes from dying C malls, and you gaze longingly at the A malls inside the term loan lenders' fence. #YouveBeenPrimed $CBL pic.twitter.com/ENgGeTY4zK

— Donut Shorts (@DonutShorts) February 8, 2019

And that doesn’t even take into consideration the co-tenancy clauses. As anchor tenants fall like flies, you’ll potentially see a rush to the exits as retailers with four-wall sales that don’t justify rents (and rising wages) exercise their rights.

So, given all of above, does the market share management’s (misplaced) optimism?

J.P. Morgan’s Michael W. Mueller wrote in a February 7, 2019 equity research report:

"While commentary in the earnings release noted some sequential improvement in 4Q results, we still see it being a grind for the company over the near to intermediate term."

BTIG’s James Sullivan added on February 20, 2019:

"We see no near-term solution for the owners of more marginal “B” assets like CBL & Associates. Sales productivity for such portfolios has shown little growth over the last eight quarters in contrast to the better-positioned “A” portfolios."

"The recent re-financing provides CBL with some near-term liquidity but limits future access to the mortgage market as only a small number of readily “bankable” assets remain unencumbered."

“We expect the challenging conditions in the industry to continue to create pressure on the operating metrics of mall portfolios with average sales productivity of less than $400/foot. More anchor closures are likely and in-line tenants are also likely to manage their brick-and-mortar exposure aggressively and close marginal locations. We reiterate our Sell rating and $2 price target.”

“With overall flat sales productivity in the portfolio, there is limited evidence that a turnaround in performance is likely in the next 24 months. Instead, we expect continued declines in SSNOI with negative leasing spreads and lower operating cost recovery rates.”

“CBL’s new facility which totals $1.185B is secured and replaces a series of unsecured term loans and a line of credit. Collateral includes 20 assets, of which three are Tier 1 Malls, 14 are Tier 2 Malls, and three are Associated Centers. As a result, CBL now has a much smaller number of unencumbered malls.”

“There are no unencumbered Tier 1 Malls (Sales exceeding $375/foot). There are nine unencumbered Tier 2 Malls (sales $300 -$375/foot) and those malls averaged $337/foot in 2017. The 2018 data is not available yet, but sales/foot for Tier 2 assets in 2018 declined by an average $5/foot. So assuming the law of averages applies, the average productivity of the unencumbered Tier 2 assets is $332/foot. Malls with that level of productivity cannot be financed in the CMBS market per CBL management.”

“With limited access to financing using their unencumbered malls, CBL has to look to its available capacity on its new line of credit, $265m, and projected free cash flow after paying its dividends, we estimate, of $155m in 2019 and $135m in 2020. CBL is currently estimating an annual capital requirement of $75m - $125m to redevelop closed anchor boxes. The per box range is $7m - $10m which we believe is low compared to peers whose cost per unit is closer to $17m. So CBL faces dwindling capital sources at the same time that its portfolio is suffering significant quarterly drops in SSNOI.”

Apropos, the shorts are getting aggressive on the name:

Short Interest in CBL & Associates Properties, Inc. $CBL Increases By 6.8% https://t.co/SBsgSN7VU9

— Zolmax News (@ZolmaxNews) March 5, 2019

The historical stock chart is ugly AF:

Which brings us to commercial mortgage-backed securities (CMBS) — derivative instruments comprised of loans on commercial properties. Canyon Partners’ Co-Chairman and co-CEO Joshua Friedman is shorting the sh*t out of mall-focused CMBS (containing among many other things, CBL properties) via a well known CDS index: the Markit CMBX.BBB- (and lower Indices) — to the tune of approximately $1b (out of $25b AUM). This is the mall-equivalent of the big short, except for commercial real estate. 🤔🤔

Here is a CMBX primer for anyone who wants to nerd out to the extreme. Choice bit:

CMBX allows investors to short CMBS credit risk across a wide array of vintages and credit ratings. Shorting individual cash bonds is difficult and rarely done, with the exception of a few very liquid names. The market for cusip level CMBS CDS used to exist, but the liquidity proved very poor and it was quickly replaced by trading of the synthetic indices.

And here is some color on what Mr. Friedman said regarding his trade:

Wowzers. Just imagine what happens to retail — including the malls — when the noise gets even louder.

*Samuels Jewelers filed chapter 11 last year but announced liquidation this year after failing to secure a buyer for its assets.

💰Goldman Sachs Has its Cake and Eats it Too💰

Short GNC Holdings Inc. Long Care/of. 

We’ve written extensively here, here, here and here about GNC Holdings Inc. ($GNC) and the challenges that the company faces. We won’t revisit all of that here other than to note that GNC was, upon information and belief, preparing for a bankruptcy filing prior to it amending and extending its term loan, entering into a new ABL, and obtaining $275mm of asset-backed FILO term loans. We quipped that this was the quintessential “kick-the-can-down-the-road” transaction. Goldman Sachs ($GS) advised the company on the entire capital structure fix. Suffice it to say, then, that Goldman Sachs is intimately familiar with the GNC business.

Which, naturally, makes the fact that Goldman Sachs Investment Partners (a division of Goldman Sachs Asset Management) served as the lead investor in vitamin startup Care/of’s Series B financing all the more interesting.

Now, of course, we know Goldman is a big shop. They’re probably talking to WeWorkabout how to design their spaces to balance the sheer volume of “Chinese walls” with the need for an aesthetic that appeals to the millennial mindset. And, surely, Goldman Sachs’ capital advisory arm is entirely different and separate from Goldman’s asset management and venture arm.

But still.

Earlier this week Care/of, a direct-to-consumer wellness brand that specializes in monthly subscriptions of personalized vitamins and supplements, announced the new round of $29mm. In addition to Goldman, investors included Goodwater Capital, Juxtapose, RRE Ventures and Tusk Ventures. Former President of GNC, Beth Kaplan, also invested and will be joining the Board. 🤔

Bloomberg notes:

Care/of, a startup selling vitamins and herbal supplements online, raised funds from investors including Goldman Sachs Group Inc.’s venture arm that value the company at $156 million, within striking distance of publicly traded retail chains that are among the industry’s leaders.

The startup’s $156 million valuation isn’t far from Vitamin Shoppe Inc., with 3,860 employees and a market capitalization of about $203.5 million, or GNC Holdings Inc., which has a market value of $254.2 million with 6,400 employees. Care/of has about 100 workers, Chief Executive Officer Craig Elbert said.

“Consumers are increasingly shifting spend online and so I think large retail footprints have the potential to be a liability,” Elbert said in an interview. “There’s a lot of growth ahead of us and lot of reasons why this should be an e-commerce business.”

This is so Goldman-y. Collect an advisory fee to extend the life of the dominant brick-and-mortar retailer with one hand while investing in a nimble direct-to-consumer upstart that will chip away on that very same retailer on the other hand. Even before the former requires capital markets advice from a Goldman-type in a few years — which, it undoubtedly will — it may be on the lookout for an M&A banker. Perhaps to sell itself. Perhaps to buy a start-up and build a moat against Amazon. How convenient that Goldman will have familiarity with both businesses. We’d say that maybe there’d be a conflict somewhere in there but, well…do those really even exist anymore??

GNC Holdings Inc. Isn’t Out of the Woods Yet

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GNC Holdings Inc. Kicks the Can

The Rise of DTC Supplements Constitutes a Threat to GNC

via GIPHY

Speaking of a concessions business, GNC Holdings Inc. ($GNC) is a big proponent (have you been to Rite-Aid lately?) and look how well…oh, wait…nevermind.

When we last wrote about GNC back in February, the company had reported surprising earnings, margins and free cash flow; it also paid down its revolving credit facility and seemed on the verge of amending and extending its term loan. It had also just received a cash infusion commitment from a Chinese investment fund in exchange for 40% of the company. Subsequently, the company was able to amend and extend the term loan to 2021. Concurrently, the company entered into a new $100 million asset-backed loan due August 2022 and engaged in certain other capital structure machinations to obtain $275 million of asset-backed “first in, last out” term loans due December 2022. Textbook. Kicking. The. Can. Which, of course, helped the company avoid Vitamin World’s bankrupt fate. 👊 Goldman Sachs!

Meanwhile, this is what the stock looks like:

Pretty ugly. And it may get worse when you factor in what’s going on in the world of supplements, generally. What’s going on, you ask? A sh*t ton of venture capital investment, corporate cash infusion and growth.

Earlier in March, a company called Ancient Nutrition, producer of bone broth protein and collagen supplement, raised $103 million of funding from VMG Partners, Hillhouse Capital and ICONIQ Capital. Notably, the product is available throughout Chicago — just not at GNC. Rather, it is available at Whole Foods, Fresh Thyme Farmers Market and Heinan’s. Similarly, in New York City, it is predominantly found at Whole Foods, Fairway and Natural Green Market, among other places.

Supplements are going gangbusters elsewhere too. Earlier this month, Hims, an erectile dysfunction and hair loss company aimed at millennials and dubbed “Viagra, but for hipsters” (yup, you read that right), raised $40 million of funding at a $200 million valuation (kudos to GQ for creative photography). It’s distribution channel? Direct-to-consumer. Sorry GNC. Same goes for Roman and Keeps, two Hims-like competitors.

Meanwhile, The Clorox Company got into the game last week with an $700 million acquisition (3.5x sales) of Nutranext, a Florida-based wellness company that makes supplements and has a strong direct-to-consumer business. You know where you can’t get Nutranext…?

That’s right: GNC.

Perhaps those restructuring professionals disappointed by Goldman Sachs’ success in securing the refinancing should just put that GNC file in a box labeled “2021.”

GNC Makes Moves (Long Brand Equity, Meatheads & Chinese Cash)

GNC Buys Itself Some Time

GNC Holdings Inc. ($GNC) reported earnings recently and, to the chagrin of distressed folks who probably hoped it would be a bigger, messier bankruptcy filing than Vitamin World, the company doesn't look slated for bankruptcy court after all. At least not in the short term. The company reported EPS up $0.18 YOY on a $12.2mm drop in consolidated revenue (weighed down primarily by wholesale). Margins increased by nearly 2% - mostly on account of cost cutting initiatives (which include the closure of 90 locations in 2017). The company reported $196.7mm of free cash flow. That's more than Netflix!

The company is using its cash to pay down its revolver and, as of 12/31/17, had no borrowings outstanding. The company also looks close to an amend and extend of its term loan for two years to 2021 - as of Valentine's Day, the company had garnered the support of nearly 50% of its term lenders. Net debt to EBITDA is 4.6x. The company expects to see a short-term hit on account of the tax reform (limitations on net interest and expensing of capital investments) but a long term benefit.

Interestingly, GNC's brand demonstrated that it still retains some value - even if that value isn't what it once was. CITIC Capital, a Chinese investment fund and controlling shareholder of Harbin Pharmaceutical Group, will inject a $300mm cash infusion in the form of a convertible perpetual preferred security with a 6.5% coupon (cash or PIK) at a $5.35 conversion price. As-converted, this represents roughly 40% of GNC’s outstanding equity. It will also take 5 board seats. The deal is contingent upon the amend-and-extend and a refi of the current revolver. 

But wait. There's more. GNC will also form a JV in China whereby it will drop its current China business into the JV for a 35% interest and $22mm cash payment; it will recognize wholesale sales and receive annual royalty fees, including a $10mm advance on annual royalties. Clearly GNC needed some liquidity now. And clearly this is a branding deal: GNC's brand will be slapped onto Harbin Pharmaceutical Group's product.

We suppose its a good idea to generate value out of your IP BEFORE filing for bankruptcy rather than after. S&P Credit Ratings seemed to think so: it issued an upgrade. While this likely means GNC will stay out of bankruptcy (for now), these transactions, in total, do reflect stress in the franchise. We'll have to keep a close eye on it to see where it goes from here. 

Professional-Services.ai

Short junior attorneys...the machines are coming for them. And, frankly, why shouldn't they come for attorneys at ALL levels? After all, are there situations where there is "overzealous advocacy and hyperactive legal efforts"? When there are "so many attorneys and their respective billings"? "When the hourly rates and amount of time billed are simply unreasonable"? "Staggering," in fact?  Suffice it to say, you won't see Weil filing any cases in Southern District of Iowa anytime soon (see below). Frankly, "overzealous advocacy and hyperactive legal efforts" seems like it could have just as easily applied to the pissing contest that was the equitable subordination claim in Aeropostale but who are we to judge a grudge match between Weil and Kirkland & Ellis (which the the latter convincingly won)? We were too busy popping popcorn and putting our feet up. Switching gears and looking elsewhere in changing labor markets, here's to wondering: is the "gig economy" working? And what becomes of those 89,000 lost retail jobs?

Speaking of retail jobs, it looks like the bankers have all of them. Now there's M&A noise around Neiman Marcus, which is heating up with Hudson's Bay sniffing around hard but trying to avoid assumption of Neiman's substantial debt-load. Meanwhile Nine West Holdings has hired Lazard to figure out its capital structure. Elsewhere in retail, Macy's ($M), Kohl's ($KSS), Nordstrom ($JWN) and J.C. Penney ($JCP) all reported earnings that looked like a dumpster fire and the stocks promptly got decimated. We're sure the bankers are salivating. And speaking of retailers with jacked-up debt (and bankers), GNC Holdings Inc. and its agent bankers JPMorgan reportedly attempted but ultimately failed to extend GNC's $1.13b loan by three years. Now GNC says it will use its "strong" free cash flow to fund ops and deal with its '18 maturity. This is an interesting story on many levels. First, there have been a TON of share buybacks in recent years (the public equivalent of a dividend recap - our favorite) and so it was only a matter of time before one of them bit an uncreative and misled -- uh, we mean, generous shareholder-minded - management team in the bum. Second, the "Amazon-effect" apparently applies to meatheads too with vitamin sales allegedly shifting online. Who knew Biff could function in an m-commerce world? Go Biff. Third, despite a variety of downward trending financials, GNC's loan is still trading at a tick below par and so the proposed transaction might have affected the lenders' yield metrics (hence the rejection). Which gets us to #4: with crappy loans like GNC's ticking up so far upward, most distressed players can't stop complaining about a dearth of opportunities to target: everything is priced to perfection. Sadly, everyone needs the yield wherever they can get it hoping (praying?) that when the going gets rough, they'll be the first to hit eject. No, no (rate-fueled) bubble to see here.