đŸ’„Forever 81. Million.đŸ’„

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Forever 21 Gets a Landlord Bailout

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The bid deadline in the Forever 21 Inc. bankruptcy cases has come and gone and, well, the stalking horse bidders — a consortium between Simon Property Group Inc. ($SPG), Brookfield Property Partners LP and Authentic Brands Group LLC â€” won the day. The debtors filed a “notice of suspended auction” on Sunday that says it all:

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The headline purchase price figure therefore remains $81mm for the distressed retailer (though, counting liabilities like costs to cure defaults, etc., the bankers assert the total deal is worth approximately $290mm). As indicated in the image above, the hearing to approve the sale is set for Tuesday, February 11 at 9am in the Delaware bankruptcy court.

This is not a good result for suppliers who claim they’re owed approximately $347mm, many of whom objected to the bid procedures and proposed sale. While they ultimately wrestled a small concession from the debtors/purchasers on the proposed break-up fee, they were otherwise shut out. Now, even that concession is worthless.

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These vendors need to realize: virtually all of these retailers who file for bankruptcy are administratively insolvent on day 1. Forever 21 was supposed to be different. It wasn’t.

Indeed, in December, Bloomberg reported that the debtors were underperforming heading into the holiday season; that exit financing avenues were foreclosing; and that all hopes of a reorganization via its filed plan were going out the window. Indeed, we later learned that the debtors were in default under their DIP credit facility (heads up, academics). All of this precipitated the pivot to a quick sale.

Take a look at the debtors’ operating performance and it’s easier to understand the lender skittishness and strategic pivot. On October 15, 2019, the debtors filed their 13-week DIP budget wherein they projected $722.3mm in total receipts from the petition date through December 21, 2019. Actual receipts, however, totaled only $705.3mm through January 4, 2020. For the math challenged, that’s a $17mm underperformance against budget — EVEN WITH THE BENEFIT OF AN ADDITIONAL TWO WEEKS THAT SUBSUMED THE CRITICAL HOLIDAY SHOPPING PERIOD. This is yet another case where projections didn’t comport with reality: while the projections showed steadily increasing weekly receipts throughout the holiday period, the reality is that people simply didn’t shop at Forever 21 as much as anticipated. Despite millions upon millions of professional fees, this is still a business very much in need of an actual “turnaround” to survive (PETITION Note: the fees reflected below, for the most part, only cover the cases through the end of October).* The high fees further necessitated a quick sale.

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SPG and ABG clearly think they are best positioned to ride out an option here. The purchase price is cheap, and there are other benefits that only, as landlord, SPG can derive (i.e., continued rent, full boxes, less in-line tenant risk, etc.). We’ve seen this movie before and it was called Aeropostale.

Here’s what SPG CEO David Simon had to say last week about Aeropostale:


our cash investment in Aero OpCo was approximately $25 million. We have already received $13 million of distributions, so I have $12 million of cash invested in Aero OpCo. At the time we bought it, it was producing a negative EBITDA of $100 million and had over 500 stores. Today, today, we expect Aero OpCo to produce EBITDA pre-royalty from 575 stores of approximately $80 million of EBITDA.

We believe Aero is approximately, if you put a market multiple on it $350 million today and our ownership is 50%. 12 to three -- to 50% of $350 million. That's the math.

This was a private equity deal, complete with dividends. Only, unlike private equity firms, SPG has a residual interest in maintaining the AERO enterprise as its success directly contributes to the success of its other tenants. This is PE+.

Of course, SPG also has an investment in ABG. Here’s what Simon said about that:

Now with respect to ABG we invested -- we made a recent investment in it. So we have a total of 600 -- or sorry $67 million in ABG, Authentic Brands Group. At the time of our original investment, which was roughly $33 million, ABG produced EBITDA of approximately $150 million. Today our value is worth $190 million of our $67 million and ABG is expected to produce EBITDA well north of $350 million and the value is growing every day.

This means that, indirectly, SPG also owns Barney’s New York and Nine West, among other brands that have wound their way into bankruptcy courts near you.

With respect to Forever 21, he added:


we have recently participated with Brookfield and Authentic Brands Group on behalf of the NewCo, SPAR Group, F21, LLC in a stocking horse bid for certain assets and liabilities in a going concern transaction under Section 363 of the Bankruptcy Code. Our Group's successful turnaround of Aero after climbing out of bankruptcy in 2016 gives us confidence with our ability to do the same with Forever 21.

Forever 21 is a storied and well -- widely recognized brand with over $2 billion in global sales. We believe F21 similar to Aero presents a very interesting repositioning opportunity. If the transaction is consummated the newco contemplates the continued operations of many of Forever 21 stores and e-commerce business and maintaining many jobs.

Our interest in the new venture will be approximately 50%. The aggregate purchase price -- acquisition price is approximately $81 million, plus the assumption of certain ongoing operating liabilities.

Again, this is a private equity deal. He continued:

We would not have done Aero and we're -- and we would not be attempting to do Forever 21 for the sole purpose of maintaining our rent. And that's the biggest misnomer out there when I read various publications and analyst notes and media notes. We do it -- we make these investments for the sole purpose of we think there's a return on investment.

Now the fact of the matter is we did all this that Aero and the reality is they kept paying us rent. So that's like -- that's obviously beneficial and I don't want to understate that but that's not why we do it. At the same time with F21, we do think there is a business there, but it's got to be turned around. And I'm not going to project today to you what those numbers are, but we've got our work ahead of us.

But if we are successful in turning around, we will make money at F21 and we'll get paid our rent.

It’s interesting. SPG is beta-testing, in real time, becoming a retail-focused venture and private equity firm. If retail continues to get decimated, we’ll see the extent of their ability to scoop up brands/businesses on the cheap. It seems safe to presume that its portfolio will be larger in a few years than it is now.

*Which is not to say that good work hasn’t been done. As we noted on Twitter here, the debtors, with the help of their advisors, closed 102 stores (creating $91mm of rent relief), reduced operational costs of $100mm, and sold two warehouses for $37mm (the proceeds of which were used to pay down a portion of the DIP credit facility).

Still — and we write this knowing we harp on professional fees a lot — the DIP budget line-itemed $25.1mm for professional fees in the first 13 weeks of the case. According to the most recent operating report, the debtors are already at $11.97mm and that’s really only accounting for the end of October. Query whether 7+ weeks of work topped the budgeted delta of $13.13mm? đŸ€”

âšĄïžUpdate: Forever21 Inc.âšĄïž

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Forever21 Inc. is forever filing motions to reject sh*t. On Friday, the company followed up its Store Closing Motion (which, itself, had two supplements) with its fourth rejection motion of non-residential real property leases. By our count, somewhere between 100-150 different lease (or sublease, as the case may be
looking at you Belk Inc.) counterparties have been affected now by the bankruptcy. That’s a lot of landlords and lessors looking for tenants and subtenants, respectively.

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Who is bearing the brunt of this? By our count (in approximate numbers):

TO SEE OUR PREMIUM INSIGHTS ON WHICH MALL REITS ARE GETTING SH*T ON BY FOREVER21 & MORE, CLICK HERE TO SUBSCRIBE (ISN’T TIME YOU GOT AHEAD? DISRUPT YOUR COMPETITION WITH PETITION!)

âšĄïžUpdate: CBL & Associates Properties Inc.âšĄïž

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In our recent newsletter, â€œđŸ‡ș🇾Forever 21: Living the (American) DreamđŸ‡ș🇾,” 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 â€œThanos 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.

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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):

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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:

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Here is the company's stock performance:

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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.

đŸ‡ș🇾Forever 21: Living the (American) DreamđŸ‡ș🇾

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Back in June we kicked off coverage of Forever 21 Inc. with â€œđŸ’„Nothing in Retail is "ForeverđŸ’„".

We then issued quick follow-ups in â€œđŸ’„Fast Forward: Forever21 is a Hot MessđŸ’„â€ and â€œđŸ©Forever21 is Forever F*cking Up.đŸ©â€

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Forgive us, then, for feeling like the company’s inevitable bankruptcy filing — which happened earlier this week — was a wee bit anticlimactic. After all, we all knew it was coming. As such, we felt the need to crank up some Kanye West to help get us through this additional coverage


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What you doing in the club on a Thursday?
She say she only here for her girl birthday
They ordered champagne but still look thirsty
Rock Forever 21 but just turned thirty â€” Kanye West in “Bound 2”

Just kidding, y’all. Kanye is garbage. We don’t listen to Kanye.*

Anyway, we’ve talked time and time again about how the papers that accompany a company’s chapter 11 bankruptcy petition are a perfect opportunity for a company to frame the narrative for the judge, parties in interest, the media and more. A company’s First Day Declaration, in particular, is the bankruptcy equivalent of home field advantage. Coupled with the first day hearing — usually held within a day or two of the bankruptcy filing — a debtor can leverage the First Day Declaration and the opportunity to present first to a courtroom to gain some sympathy from the judge for their current predicament and plant the seeds in the judge’s ears as to the direction of the case.

Except, over time, the judges must begin to get bored. After all, repetitive themes begin to emerge when you track bankruptcy cases. Themes like “the retail apocalypse.” Blah blah blah. The “Amazon Effect.” Oh, f*ck off. Disruption overcame the business! Zzzzzzz. Private equity is evil because they dividended themselves all of the company’s value! Yawn. There’s too much debt on the balance sheet! Typical. The lenders won’t play ball! Mmmm hmmm. The prior management was corrupt AF. Yup, it happens. Weather this year was uncharacteristically bad. Riiiight
that’s retail excuse-making 101.

And, so, it was with great excitement that we read that the Forever 21 bankruptcy stemmed from
wait for it
the American Dream. That’s right, the American Dream.

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In other words, this is a story about unbridled ambition and optimism.

*****

Here’s the short version: two immigrants came to this country in the early 80s from South Korea. They had nothing; they worked hard; they sought out opportunity:

During his time as a gas station attendant, Mr. Chang took notice of the customers that drove the most luxurious cars—the customers working in the garment industry. This realization piqued Mr. Chang’s interest. He recognized that together with his wife, they were perfectly suited to enter the fashion industry. This would enable the couple to capitalize on Mr. Chang’s relationship-building prowess and Mrs. Chang’s keen sense of fashion.

Putting aside how shady the notion of your gas station attendant creeping on you is, this is pretty amazing sh*t.

Mrs. Chang, and her nearly-clairvoyant ability to predict trends, were part of the catalyst that boosted Forever 21’s upswing.

Take note, people: this is the kind of pandering you should get when you pay $1,600/hour.

Anyway, over the years, the Changs built a business that employed tens of thousands of people and generated billions in sales. The Changs put their two daughters through ivy league schools and they subsequently joined the family business. This is a beautiful story, folks. Especially so in today’s fraught political environment where immigration remains a hot button issue. Together, as a family, the Changs grew this company to be a behemoth:

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And therein lies the rub. The company went from 7 international stores in 2005 to 251 by 2015.

Unfortunately, this rapid international expansion challenged Forever 21’s single supply chain and the styles failed to resonate over time across other continents despite its initial success.

It appears that the same entrepreneurial spirit that allowed the Changs to conquer the US led them astray internationally. Indeed, those European and Asian adventures — and the Chang daughters’ vanity project, Riley Rose â€” proved to be too costly. As you can see, while the domestic business has been in decline,** it still shows some promise. The international business, on the other hand, has really sucked the air out of the businessâŹ‡ïž.

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Sure, aside from the international issue, some of the usual excuses exist. Mall traffic is down. Not enough attention to e-commerce. Product assortment could have been better. The company had borrowing base issues under its asset-backed loan. Yada yada yada. But this doesn’t appear to be the absolute train wreck that other recent retailers have been. At least not yet.

So what now?

At the first day hearing, company counsel spared us any in-court singing,*** but did rely on some not-particularly-complex imagery. He said the company’s predicament is like a puzzle and that, to paraphrase, you sometimes just need to get all of the pieces to fit.

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Those pieces are:

The Footprint. Right-sizing the business by shuttering underperforming locations, domestically and internationally. 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. In other words, the company is mostly erasing its overzealous expansion; it will focus on selling cheaply made crap to Americans and our southern friends down in Latin America rather than poisoning the clothes racks in Canada, Europe and Asia. The new footprint will be around 600 stores. Or, at least, that’s the plan for now. Let’s pour one out for the landlords. Here is CNBC mapping out where all of the closures are and which landlords are hit the most. Also per CNBC:

“At one point, two of Forever 21â€Čs largest landlords, Simon Property Group and Brookfield Property Partners, were trying to come up with a restructuring deal where they would take a stake in the company to keep it afloat. It would’ve been similar to when Simon and GGP, which is now owned by Brookfield, bought teen apparel retailer Aeropostale out of bankruptcy back in 2016. But talks between Forever 21 and its landlords fell through, according to a person familiar with the talks. Simon and Brookfield are listed in court papers as two of Forever 21â€Čs biggest unsecured creditors. Simon is owed $8.1 million, while Brookfield is owed $5.3 million, and Macerich $2.7 million.”

Only one of the locations marked for closure, however, belongs to Simon Property Group ($SPG).

The company notes:

To assist with the initial component of the strategy, 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. The parties have exchanged proposals and diligence is ongoing. Forever 21 looks forward to continuing to work with its landlords to reach a mutually agreeable resolution and proceeding through these chapter 11 cases with the landlords’ support.

In tandem with these negotiations, Forever 21 and its advisors met with nearly all of its individual landlords to discuss potential postpetition rent concessions and other relief on a landlord-by-landlord basis. Many of these smaller, individual negotiations proved more fruitful than negotiations with the larger landlords. Although Forever 21 has not finalized the terms of a holistic landlord deal as of the Petition Date, Forever 21 anticipates that good-faith negotiations with its landlord constituency will continue postpetition, and that all parties will work together to reach a consensual, value-maximizing transaction.

Company counsel asserts that, for landlords, Forever 21 is “too big to fail.” This kinda feels like this:

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But don’t worry: the A Malls are totally fine. 

And don’t worry about the loans (CMBX) at all. Noooooo.

Merchandising. Getting “Back-to-Basics” on the merchandising front and focus on the company’s “core customer base.” Here is Bloomberg’s Jordyn Holman casting some shade on this plan. And here is Bloomberg’s Sarah Halzack. While the bankruptcy papers certainly don’t highlight the competition, bankruptcy counsel made a point of highlighting H&M, Zara and Fashion Nova. Retail Dive writes:

‘They did not grow with their target customer and the Millennials have graduated to Zara & H&M,’ Shawn Grain Carter, professor of fashion business management at the Fashion Institute of Technology, told Retail Dive in an email. â€˜Gen. Z is more interested in rental fashion and vintage hand-me-downs because they are more environmentally conscious.’

Interestingly, Stitch Fix Inc. ($SFIX) was up 5% on Monday while the RealReal Inc. ($REAL) was up 15%. (PETITION Note: both got clobbered on Tuesday, but so did everything else).

The Washington Post piles on:

“Slimming down the operation and reducing costs is only one part of the battle,” Neil Saunders, managing director of GlobalData Retail, said in a note to clients. “The long-term survival of Forever 21 relies on the chain creating a sustainable and differentiated brand. This is something that will be very difficult to accomplish in a crowded and competitive sector.

Indeed, we’ve been writing for some time now that fast fashion seems out of sorts. Going “back to basics” may not actually be the right move in the end.

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đŸ€”

Vendor Management. A quick digression: back in May, we wrote about Modell’s Sporting Goods avoidance of bankruptcy. Mr. Modell himself worked the phones and reassured most of his vendors, prompting them to continue doing business with the shrinking sporting goods retailer. This is a feature that you don’t get in PE-backed retail bankruptcies where you have hired guns on management. There, Mr. Modell’s legacy was at stake. He hustled. Likewise, here, the Changs personal business is threatened. Accordingly, the company met with 100 vendors representing 80+% of the vendor base and got them comfortable with continued business; they secured 130 vendor support agreements for equal or better terms. Everyone is invested in making a viable go of the ‘19 holiday season. Sometimes it pays to have someone who is truly invested be all over the supply chain.

Financing. The company’s capital structure is rather simple:

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The ABL is with JPMorgan Chase Bank NA as agent. The term loans were provided by the family. One from Do Won Chang for $10mm and the second from the Linda Inhee Chang 2012 Trust. Because nothing says “American Dream” like raiding your kid’s trust fund.

In conjunction with the bankruptcy, the company proposed a DIP credit facility in the form of (a) a $275 million senior secured super-priority ABL revolving credit facility, which includes a $75 million sub-limit for letters of credit and a “creeping roll up” of the pre-petition ABL Facility, and (b) a $75 million senior secured super-priority term loan credit facility, reflecting $75 million of new money financing. The company sought access to $60mm of the term loan at the hearing, indicating that with $40mm due in rent and $18mm in payroll, it would run out of cash without it. The judge approved this request.

And so here we are. The company intends to march forward with negotiations with its landlords, close tons of locations, sure up the vendor base, locate exit financing, and get this sucker out of bankruptcy in Q1 next year.

Ending up in bankruptcy certainly isn’t part of the American Dream. But living long enough to fight another day might just be.

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*H/t to @JordynJournals, retail reporter for Bloomberg News on this.

**The company notes that domestic sales have increased over the last 4 quarters.

***For those new to PETITION, the same lawyer from Kirkland & Ellis LLP that represents Forever 21 represented Toys R Us. In the now-infamous “first day” hearing in Toys, the attorney sang the Toys R Us jingle — “I don’t want to grow up
” — in the courtroom. Suffice it to say considering the outcome of that case, that tactic didn’t particularly age well. Indeed, this will age better, we reckon (won’t play in email, only in browser):

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📚Resources📚

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. đŸ’„You can find it heređŸ’„. We recently added “Super Pumped: The Battle for Uber” by Mike Isaac, which we blew through rather quickly. Next up on our list: “What it Takes: Lessons in the Pursuit of Excellence” by Stephen A. Schwarzman, “The Ride of a Lifetime: Lessons Learned from 15 Years as CEO of the Walt Disney Company” by Bob Iger, and “That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea,” by Netflix co-founder Marc Randolph.

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âšĄïžFeedback re: Sycamore Partners & MoreâšĄïž

Another quarter is in the books and we here at PETITION continue to be flattered by the reception that you’ve given us. Thank you for your continued readership and support. If you’re not yet a Member, please consider joining our ever-growing community today. If you’re a student, email us for special student rates.

One thing we particularly enjoy is feedback from our readers. We endeavor to do our very best to be accurate with our coverage but sometimes we make mistakes. When we do, please don’t hesitate to call us the morons that we can sometimes be. Just email us at petition@petition11.com.

For instance:

  • One Managing Partner at a law firm wrote us that we made a mistake in “Disruption May Be About to Affect Your Wallet (Long Infrastructure Needs)” (paywall). We incorrectly stated that Governor Mike DeWine of Ohio is a Democrat. He is actually a Republican. We have corrected the mistake on the website.

  • Another Partner at a law firm pointed out that we misstated the amount of the committed DIP credit facility in the Hexion Holdings LLC matter. We have corrected the mistake here.

Of course, not all feedback was of the “you guys are morons” ilk. Thankfully. We get some general feedback too:

“When’s the podcast launching? Your following of lazy rascals will be ecstatic with a lazier way to get all the info.” — Restructuring Advisor

PETITION Response: It’s in development but there are some obvious complications. 

“You should know it takes me much longer to read your weekly email newsletter than your estimated published times.” — Liquidator

PETITION Response: Maybe if we use bright yellow, red and black fonts it will speed things up for you.

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And then there is more specific feedback. In response to “Sycamore Partners is a B.E.A.S.T. Part I.,” a number of you wrote in. Some feedback included:

“You are the voice of a generation. This was pure gold!” — Restructuring Advisor

“This article is next level hilarious.” — Student

“As someone who used to summarize lots of cases and hearings when I was more junior, I can say that your Aero summary is the single greatest thing I’ve ever read.

I think you’ve got the difficulties with equitable remedies flipped.  It’s not the prongs on prongs on prongs that are difficult, it’s the evidentiary burden.  You hit it right on the head with 14(!) witnesses (and probably hundreds of trial exhibits). Funds that are experts in these types of transactions won’t get caught dead with the smoking gun needed to prove this stuff at trial - either through careful record building early on and/or discovery practice.

But like a judge once told me, sometimes you need to shoot one of the sheep in front of the flock.  If this were to happen in a big case with lots of publicity, then behaviors might change. Too many road blocks to that like lowball UCC settlements (a la Payless) and judicial temperaments.” — Biglaw Attorney

But this one took the cake (edited to conceal the writer):

Petition, can't tell you how much I loved the Sycamore Partners article! Can't wait for Pt. 2 to drop.

Your mention of Aeropostale triggered some old thoughts... at the time Aero filed its petition, [I dug] around to see what could be learned about Aero's post-petition real estate tactics... since 2016, I can't stop surmising


I marveled at this deal then and now. Once the $SPG/$GGP(nka $BRP)/ABG deal was approved, Buyer got to pick lease rejections and assumptions. Simon/GGP's initial proposal (Sept 12) rejected every store lease that wasn't in a GGP/Simon mall. Savage. In the weeks following, I can only imagine the back alley beatings put on $TCO $MAC Westfield $CBL and others as they begged their collective arch-rivals to keep the stores open--oh the blood(rent)letting! The assumption notices started flowing in
 no way to know what concessions were in those lease amendments! Just to think of $TCO surrendering rental revenue to Aero to keep Aero in place knowing it [sic] inflicting harm to $TCO's metrics (and possibly its valuation) and was flowing back to $SPG and $BRP. Double bitter. Initially, the deal structure was hush-hush, but in the subsequent earnings transcripts over the last 2 years both $SPG and $GGP have stated plainly that they bought Aero for 1xEBITDA, so have made a killing on the investment alone, not to mention the far more juicy bits.

More importantly, $SPG and $BRP control some of their own tenancy now--all the Aero spaces are available to rent to the right new tenants without sacrificing current occupancy rates. Aero stores are inventory on-demand. Is there a dreadful zombie space of 8,000sf at the wrong end of the mall? Just slot in Areo: goose occupancy rates and ease worries of co-tenancy claims! Bring home all that international licensing revenue, and "distribute" it to the owners in the form of rents, as they may be adjusted. Probably as tax-slick as it gets. $SPG and $BRP scratch each other's backs--I can't image what the Aero Real Estate committee looks like in action! [Authentic Brands Group] presenting leases and amendments in $SPG and $BRP malls to representatives of $SPG and $BRP! Oy! The rents in those new stores could really goose their owner REITs’ reported leasing spreads, occupancy rates and NOI metrics. If the stores’ profitability is not the real objective, then the lines get even blurrier.

Since exiting, I wonder what has changed in footprint within the $BRP and $SPG portfolios, since it is a "captive" tenant? The operator is ABG, of course, but I’ll bet lunch that 100% of the growth stores are in either $SPGor $BRP centers. Or, if Aero has opened in a competitor's mall, I would have to believe it would be at nearly breakeven for the outsider-landlord. So, Aero's store would be oh-so-cash-flow-positive to continue to fund the very competitors of that hapless landlord.

That’s quite a “store growth” story. A decidedly different “where are they now” post Ch 11 success story, indeed.

Is the next chapter ABG's acquisition of Nautica, et al. vis a vis $SPG's Premium Outlets division? I don't know what the right metaphor is
 from the perspective of other retailers
 but maybe something like the fox setting up an omelet stand in the hen house! — Real Estate Investor

 Maybe some bank analysts should start asking some detailed questions about Aero on future earnings calls: as far as conspiracy theories go, that one is pretty damn meaty.

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đŸ’„Sycamore Partners is a B.E.A.S.T. Part I.đŸ’„

in , ,

đŸ”„Rinse Wash & Repeat (Long Sycamore Partners)đŸ”„

taken - liam neason.gif

Sycamore Partners is a private equity firm that specializes in retail and consumer investments; it “partner[s] with management teams to improve the operating profitability and strategic value of their businesses.” Back in the summer of 2017, Sycamore Partners acquired Massachusetts-based office retailer Staples Inc. for $6.9b — a premium to the company’s then-trading price but a significant discount from its 2014 high. Your office supplies, powered by private equity! The acquisition occurred shortly after Staples ran afoul of federal regulators who prevented Staples from acquiring Florida-based Office Depot Inc. ($ODP)(which, itself, appears to just trudge along).

Sycamore’s reported thesis revolved around Staples’ delivery unit, a B2B supplier of businesses. Accordingly, per Reuters:

Sycamore will be organizing Staples along three lines: its stronger delivery business, its weaker retail business and its business in Canada, two sources familiar with the deal said. This structure will give Sycamore the option to shed Staples’ retail business in the future, one of the sources said.

The retailer had 1255 US and 304 Canadian stores at the time of the deal. The business reportedly had 48% of the office supply market, generating $889mm of adjusted free cash flow in 2016.

*****

Fast forward 18 months and, Sycamore is already looking to take equity out of the company. According to Bloomberg, the plan is for Staples to issue $5.2b of new debt ($3.2b in term loans and $2b of other secured and unsecured debt), which will be used to take out an existing $3.25b ‘24 term loan and $1b of 8.5% ‘25 unsecured notes (which Sycamore reportedly owns roughly $71mm or 7% of).* This is textbook Sycamore, so much so that it’s actually cliche AF — or as Dan Primack said, “
this sort of myopic greed gives ammunition to private equity’s critics.” Like this guy:

And this gal:

Talk about reputations preceding


Anyway, here’s what the deal would look like once consummated:

LBO Hoe.png

That $1b difference is the equity that Sycamore is taking out of the company. What does the company get in return? F*ck all, that’s what. Zip. Zero. Dan Primack also wrote:

Dividend recaps are a mechanism whereby private equity-owned companies issue new debt, and then hand proceeds over to the private equity firm (as opposed to using it to grow the business). Sometimes they don't matter too much. Sometimes they form leveraged anchors around a company's neck. (emphasis added)

Yup. That about sums it up. Here is Sycamore placing a leveraged anchor on
uh
improving “the strategic value” of Staples:

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This is the market reacting to Sycamore’s strategy for Staples:

Moodys CDS Spread Snapshot.JPG

If the above GIF looks familiar, that’s because this is like the Taken series: Sycamore has a very particular set of skills. Skills it has acquired over a very long run. Skills that make them a nightmare for retailers like Staples. They look poised to deploy those particular skills over the course of a repetitive trilogy: the first chapter centered around Aeropostale. And here’s how that ended:

MOOO.gif

The sequel was Nine West and this is how that ended:

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And, well, you get the point. Staples looks like it may be next to experience those very particular skills.

———

Okay, so the above was a bit unfair. In Aeropostale, the company went after Sycamore Partners hard, seeking to ding Sycamore, among others, for equitable subordination and recharacterization of their (secured) claims. Why? Well, Sycamore was not only the company’s term lender (to the tune of $150mm), but it was also a major equity holder with 2 board seats and the majority-owner of Aeropostale’s largest (if not, second largest) merchandise sourcer and supplier, MGF Sourcing Holdings Ltd.

NERD ALERT: for the uninitiated, equitable subordination is an equitable remedy that a bankruptcy court may apply to render justice or right some unfairness alleged by a debtor (or some other party in the shoes of the debtor, if applicable). It is generally VERY DIFFICULT TO WIN on this argument because the burden of proof is on the movant and there are multiple factors and subfactors that the accuser needs to satisfy — because, like, this is the law and so everything has a test, a sub-test, and a sub-sub-test and maybe even a sub-sub-sub-test. Judges love tests, sub-tests, and multi-pronged sub-tests. Three-prongs. Four-prongs. Everywhere a prong prong. Just take our word for it. It’s true.

Recharacterization is another equitable remedy that, if satisfied and granted by the court, would have resulted in Sycamore’s $150mm secured term loan position being reclassified as equity. This is a big deal. This would be like Mike Trout being on the verge of winning the MVP and the World Series AND securing a $350mm 10-year contract only to, on the eve of all of that, get (a) caught partying with R. Kelly til six in the morning with enough PED needles lodged in his butt to kill a team of horses, (b) suspended from baseball, (c) exiled into an early retirement a la Alex Rodriguez or Barry Bonds, and (d) forced into personal bankruptcy like Latrell Sprewell or Antoine Walker. Or, more technically stated, since secured debt is way higher in “absolute priority” than equity, this would instantaneously render Sycamore’s position worthless and juice the potential recovery of unsecured creditors. Then there is the practical side: for this remedy to apply, the bankruptcy court would have to make a “finding” that prong after prong has been satisfied and issue an order saying you’re the shadiest m*therf*cker on the planet because you’re actually dumb and careless enough to have met all of the prongs. So, as you might imagine, this is pretty much the worst case scenario for any secured party in bankruptcy and a career ender for the poor schmo who orchestrated the whole thing.

In Aeropostale, the Debtors argued that Sycamore and its proxy MGF engaged in inequitable conduct prior to Aeropostale’s filing, including (a) breach of contract, (b) “a secret and improper plan to buy Aeropostale at a discount” and (c) improper stock trading while in possession of material non-public information. This one had the added drama of arch enemies Kirkland & Ellis LLP (Sycamore) and Weil Gotshal & Manges LLP (Aeropostale) duking it out to the ego-extreme. Just kidding: this was all about justice! 😜

Anyway, there was a trial with fourteen testifying witnesses over eight presumably PAINFUL days that, in a nutshell, went like this:

WEIL GOTSHAL: “Sycamore are a bunch of conspiratorial PE scumbags who ran this company into the ground, your Honor!”

JUDGE LANE: “Not credible. Good day, sir. I said GOOD DAY!”

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KIRKLAND & ELLIS/SYCAMORE:

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In the end, Sycamore fared pretty well. They got nearly a full recovery** and releases under the plan of reorganization. Relatively speaking, the company also fared well. It didn’t liquidate.*** Instead, two members of the official committee of unsecured creditors — GGP and Simon Property Group ($SPG)— formed a joint venture with Authentic Brands Group and some liquidators and roughly 5/8 of the stores survived — albeit as a shell of its former self and with heaps of job loss (improved strategic value!!). Sure, millions of dollars were spent pursuing losing claims but that’s exactly the point: when Sycamore is involved, they win**** and others lose.***** The extent of the loss is just a matter of degree.

———

Speaking of degrees, all the while Nine West was lurking in the shadows all like:

joker.gif

WHOA. BOY. THIS ONE WAS A COMPLETE. AND UTTER. NEXT LEVEL. SH*TSHOW.

We’ve discussed Nine West at length in the past. In fact, it won our 2018 Deal of the Year! We suggest you refresh your recollection why (including the links within): it’s worth it. But what was the end result? We’ll discuss that and the (impressively) savage tactics deployed by Sycamore Partners therein in Part II, coming soon to an email inbox near you.

*At the time of this writing, the unsecured bonds last traded at $108.01 according to TRACE. This potentially gives Sycamore the added benefit of booking significant gains on the $71mm of unsecured notes in its portfolio.

**It’s unclear whether Sycamore recovered 100% but given that they got $130mm under the cash collateral order out of an approximately $160mm claim, it’s likely to have been close. Now, they did lose $53mm on AERO stock.

***A f*cking low bar, sure, but still. Have you seen what’s happening in these other retail cases?

****Putting aside nation-wide destruction, hard to blame LPs for investing in the fund. They get returns. Plain and simple. This ain’t ESG investing, people.

*****Sure, Weil “lost” its attempt to nail Kirkland
uh Sycamore
here but they got paid $15.3mm post-petition and $4.4mm pre-petition so that’s probably the best damn consolation prize we’ve ever heard of in the history of mankind. Weil has, to date, also avoided having a chapter 22 and liquidation in its stable of quals so there’s that too. In retail, you have to take the victories where you can get them.

GAIN THAT EXTRA EDGE WITH PETITION, SUBSCRIBE TO OUR KICKA$$ PREMIUM NEWSLETTER HERE.

Nine West Finally Bites It

in , , ,

Another Shoe Retailer Strolls into Bankruptcy Court

A few weeks back, we wrote this in “👞UGGs & E-Comm Trample Birkenstock👞,”

“Mere days away from a Nine West bankruptcy filing, we can’t help but to think about how quickly the retail landscape is changing and the impact of brands. Why? Presumably, Nine West will file, close the majority of - if not all of - its brick-and-mortar stores and transfer its brand IP to its creditors (or a new buyer). For whatever its brand is worth. We suppose the company’s lenders - likely to receive the company’s IP in a debt-for-equity swap, will soon find out. We suspect ‘not a hell of a whole lot’.”

Now we know: $123 million. (Frankly more than we expected.)

Consistent with the micro-brands discussion above, we also wrote,

“Saving the most relevant to Nine West for last,

Sales at U.S. shoe stores in February 2017 fell 5.2%, the biggest year-over-year tumble since 2009. Online-only players like Allbirds, Jack Erwin, and M.Gemi have gained nearly 15 percentage points of share over five years.

Yes, the very same Allbirds that is so popular that it is apparently creating wool shortages. Query whether this factor will be featured in Nine West’s First Day Declaration with such specificity. Likely not.”

Now we know this too: definitely not.

But Nine West Holdings Inc., the well-known footwear retailer, has, indeed, finally filed for bankruptcy. The company will sell the intellectual property and working capital behind its Nine West and Bandolino brands to Authentic Brands Group for approximately $200 million (inclusive of the above-stated $123 million allocation to IP, subject to adjustment) and reorganize around its One Jeanswear Group, The Jewelry Group, the Kasper Group, and Anne Klein business segments. The company has a restructuring support agreement (“RSA”) in hand with 78% of its secured term lenders and 89% of its unsecured term loan lenders to support this dual-process. The upshot of the RSA is that the holders of the $300 million unsecured term loan facility will own the equity in the reorganized entity focused on the above-stated four brands. The case will be funded by a $247.5 DIP ABL which will take out the prepetition facility and a $50mm new money dual-draw term loan funded by the commitment parties under the RSA (which helps justify the equity they’ll get).

Regarding the cause for filing, the company notes the following:

“The unprecedented systemic economic headwinds affecting many brick-and-mortar retailers (including certain of the Debtors’ largest customers) have significantly and adversely impacted the operating performance of the Debtors’ footwear and handbag businesses over the past four years. The Nine West Group (and, prior to its sale, Easy Spirit¼), the more global business, faced strong headwinds as the macro retail environment in Asia, the Middle East, and South America became challenged. This was compounded by a difficult department store environment in the United States and the Debtors’ operation of their own unprofitable retail network. The Debtors also faced the specific challenge of addressing issues within their footwear and handbag business, including product quality problems, lack of fashion-forward products, and design missteps. Although the Debtors implemented changes to address these issues, and have shown significant progress over the past several years, the lengthy development cycle and the nature of the business did not allow the time for their operating performance within footwear and handbags to improve.”

Regarding the afore-mentioned “macro trends,” the company further highlights,

“
a general shift away from brick-and-mortar shopping, a shift in consumer demographics away from branded apparel, and changing fashion and style trends. Because a substantial portion of the Debtors’ profits derive from wholesale distribution, the Debtors have been hurt by the decline of many large retailers, such as Sears, Bon-Ton, and Macy’s, which have closed stores across the country and purchased less product for their stores due to decreased consumer traffic. In 2015 and 2016, the Debtors experienced a steep and unanticipated cut back on orders from two of the Debtors’ most significant footwear customers, which led to year over year decreases in revenue of $16 million and $46 million in 2015 and 2016, respectively. These troubles have been somewhat offset by e-commerce platforms such as Amazon and Zappos, but such platforms have not made up for the sales volume lost as a result of brick-and-mortar retail declines.”

No Allbirds mention. Oh well.

But wait! Is that a POSITIVE mention of Amazon ($AMZN) in a chapter 11 filing? We’re perplexed. Seriously, though, that paragraph demonstrates the ripple effect that is cascading throughout the retail industrial complex as we speak. And it’s frightening, actually.

On a positive note, The One Jeanswear Group, The Jewelry Group, the Kasper Group, and Anne Klein business segments, however, have been able to “combat the macro retail challenges” — just not enough to offset the negative operating performance of the other two segments. Hence the bifurcated course here: one part sale, one part reorganization.

But this is the other (cough: real) reason for bankruptcy:

Source: First Day Declaration

Source: First Day Declaration

Soooooo, yes, don’t tell the gentlemen mentioned in the Law360 story but this is VERY MUCH another trite private equity story. đŸ’€đŸ’€ With $1.6 billion of debt saddled on the company after Sycamore Partners Management LP took it private in 2014, the company simply couldn’t make due with its $1.6 billion in net revenue in 2017. Annual interest expense is $113.9 million compared to $88.1 million of adjusted EBITDA in fiscal year 2017. Riiiiight.

A few other observations:

  1. Leases. The company is rejecting 75 leases, 72 of which were brick-and-mortar locations that have already been abandoned and turned over to landlords. Notably, Simon Property Group ($SPG) is the landlord for approximately 35 of those locations. But don’t sweat it: they’re doing just fine.

  2. Liberal Definitions. As Interim CEO, the Alvarez & Marsal LLC Managing Director tasked with this assignment has given whole new meaning to the word “interim.” Per Dictionary.com, the word means “for, during, belonging to, or connected with an intervening period of time; temporary; provisional.” Well, he’s been on this assignment for three years — nearly two as the “interim” CEO. Not particularly “temporary” from our vantage point. P.S. What a hot mess.

  3. Chinese Manufacturing. Putting aside China tariffs for a brief moment, if you're an aspiring shoe brand in search of manufacturing in China and don't know where to start you might want to take a look at the Chapter 11 petitions for both Payless Shoesource and Nine West. A total cheat sheet.

  4. Chinese Manufacturing Part II. If President Trump really wants to flick off China, perhaps he should reconsider his (de minimus) carried interest restrictions and let US private equity firms continue to run rampant all over the shoe industry. If the recent track record is any indication, that will lead to significantly over-levered balance sheets borne out of leveraged buyouts, inevitable bankruptcy, and a top 50 creditor list chock full of Chinese manufacturing firms. Behind $1.6 billion of debt and with a mere $200 million of sale proceeds, there’s no shot in hell they’d see much recovery on their receivables and BOOM! Trade deficit minimized!!

  5. Yield Baby Yield! (Credit Market Commentary). Sycamore’s $120 million equity infusion was $280 million less than the original binding equity commitment Sycamore made in late 2013. Why the reduction? Apparently investors were clamoring so hard for yield, that the company issued more debt to satisfy investor appetite rather than take a larger equity check. Something tells us this is a theme you’ll be reading a lot about in the next three years.

  6. Athleisure & Casual Shoes. The fleeting athleisure trend took quite a bite out of Nine West’s revenue from 2014 to 2016 — $36 million, to be exact. Jeans, however, are apparently making a comeback. Meanwhile, the trend towards casual shoes and away from pumps and other Nine West specialties, also took a big bite out of revenue. Enter casual shoe brand, GREATS, which, like Allbirds, is now opening a store in New York City too. Out with the old, in with the new.

  7. Sycamore Partners & Transparency in Bankruptcy. Callback to this effusive Wall Street Journal piece about the private equity firm: it was published just a few weeks ago. Reconcile it with this statement from the company, “After several years of declines in the Nine West Group business, part of the investment hypothesis behind the 2014 Transaction was that the Nine West¼ brand could be grown and strong earnings would result.” But “Nine West Group net sales have declined 36.9 percent since fiscal year 2015—from approximately $647.1 million to approximately $408 million in the most recent fiscal year.” This is where bankruptcy can be truly frustrating. In Payless Shoesource, there was considerable drama relating to dividend recapitalizations that the private equity sponsors — Golden Gate Capital Inc. and Blum Capital Advisors — benefited from prior to the company’s bankruptcy. The lawsuit and accompanying expert report against those shops, however, were filed under seal, keeping the public blind as to the tomfoolery that private equity shops undertake in pursuit of an “investment hypothesis.” Here, it appears that Sycamore gave up after two years of declining performance. In the company’s words, “Thus, by late 2016 the Debtors were at a crossroads: they could either make a substantial investment in the Nine West Group business in an effort to turn around declining sales or they could divest from the footwear and handbag business and focus on their historically strong, stable, and profitable business lines.” But don’t worry: of course Sycamore is covered by a proposed release of liability. Classic.

  8. Authentic Brands Group. Authentic Brands Group, the prospective buyer of Nine West's IP in bankruptcy, is familiar with distressed brands; it is the proud owner of the Aeropostale and Fredericks of Hollywood brands, two prior bankrupt retailers. Authentic Brands Group is led by a the former CEO of Hilco Consumer Capital Corp and is owned by Leonard Green & Partners. The proposed transaction means that Nine West's brand would be transferred from one private equity firm to another. Kirkland & Ellis LLP represented and defended Sycamore Partners in the Aeropostale case as Weil Gotshal & Manges LLP & the company tried to go after the private equity firm for equitable subordination, among other causes of action. Kirkland prevailed. Leonard Green & Partners portfolio includes David's Bridal, J.Crew, Tourneau and Signet Jewelers (which has an absolutely brutal 1-year chart). On the flip side, it also owns (or owned) a piece of Shake Shack, Soulcycle, and BJ's. The point being that the influence of the private equity firm is pervasive. Not a bad thing. Just saying. Today, more than ever, it seems people should know whose pockets their money is going in to.

  9. Official Committee of Unsecured Creditors. It’ll be busy going after Sycamore for the 2014 spin-off of Stuart WeitzmanÂź, Kurt GeigerÂź, and the Jones Apparel Group (which included both the Jones New YorkÂź and KasperÂź brands) to an affiliated entity for $600 million in cash. Query whether, aside from this transaction, Sycamore also took out management fees and/or dividends more than the initial $120 million equity contribution it made at the time of the transaction. Query, also, whether Weil Gotshal & Manges LLP will be pitching the committee to try and take a second bite at the apple. See #8 above. đŸ€”đŸ€”

  10. Timing. The company is proposing to have this case out of bankruptcy in five months.

This will be a fun five months.

Feature of the Week: More Earnings (Simon Property Group & Starbucks)

This past week was an earnings-fest with Amazon and Google pumping out redonkulous numbers, Vince Holding Corp. missing estimates by 10 cents, declining 26% and continuing its slide towards bankruptcy, and FTI Consulting missing estimates BADLY, declining 3% and charting -23% year-to-date (we wonder how Berkeley Research Group is doing?). While all of these reports were intriguing, we took particular interest in reports from Simon Property Group and Starbucks...

Simon Property Group

Upshot: increased net operating income, increased retail sales per square foot, and increased average base rent. The company reported a flat occupancy rate of 95.6% at Q1 end and affirmed it's previous '17 guidance (typically, the company raises guidance). Snoozefest, we know, but keep reading...

CEO David Simon had a number of choice things to say about the current state of affairs (PETITION commentary follows in italics):

  • Retailers need to improve the in-store experience via technology, look and feel, and merchandising. He straight-up called his tenants to task alleging that they are overspending on the internet vs. the store fleet. He says this is reversing back and notes that pure e-commerce will need brick-and-mortar. Ironically, most recent bankrupt retailers claim that they filed for bankruptcy because they hadn't focused on their e-commerce fast enough! We can't recall one bankrupt retailer who cited too much expense associated with e-commerce as a cause for filing. He also makes no mention whatsoever of Amazon and Walmart's increased market share in clothing, the rise of mobile e-commerce, the rise of platforms, and millennials' lack of interest in shopping (and penchant for vintage clothing). 
  • A lot of the current bad performance is driven by private equity leverage rather than the common theme, the internet. He expressly calls out dividend recaps. No quarrel here whatsoever and more victims of this are in the bankruptcy pipeline. 
  • SPG has lowered apparel in its retail mix by 5-6%. Whether that was elective was not clear.
  • Expect more discounters like TJ Maxx and HomeGoods and grocers like 365, Wegmans and Fresh Market in high end malls. Other specific new tenants include restaurants (Fig & Olive, Nobu) and several movie theater brands with the occasional Dave & Buster's thrown in for good measure. This all seems consistent with the narrative that more experiential-oriented tenants will fill these spaces. Query how long until and to what degree the pain in the grocer segment will come to roost, if at all.
  • Because these long-term anchors aren't driving foot traffic and revenue to the malls, there is a lot of upside in reclaiming and redeveloping department stores for mixed use, lifetime or community-oriented activity. They are actively taking back space from unproductive retailers and they are "not putting good money in the rabbit hole," suggesting, at least, in part, that future Aeropostale-like deals are unlikely. Note, also, Aeropostale's performance shaved several basis points off performance and is likely to continue doing so through Q4. This sure sounds like a solid counter-narrative but won't this eventually boil down to a case of volume assuming the vacancy rate next quarter is lower than this quarter?
  • Store closures in a market also kill internet sales for that business in-market too. Really interesting and speaks to the thesis promoted by the likes of Warby Parker that some retail presence helps scale.
  • Expect improvements in technology in the mall environment. If people had an issue with Unroll.me selling their data, wait until the beacons scale! 
  • The mall "traffic is there" and the retail apocalypse "narrative is way ahead of itself." Yet, he wouldn't provide traffic data noting that there aren't traffic counters in their malls. The parking trackers at their outlets, however, are up 2%. See also Starbucks below.
  • The strong US dollar has had a significant impact on spending by international tourists. So has our President but we won't go there. Oh, wait, we just did. Not a political commentary: just a plain fact.
  • He would not opine as to how much per capital retail needs to come out of the system. It was abstract but, as we noted last week, Vornado Trust's CEO noted somewhere between 10-30% in the next five years.

Macro narrative aside, Mr. Simon remained upbeat about SPG's quarter and guidance. But speaking of REITS, we'd be remiss if we didn't point out this doozy of a red flag piece by the WSJ, highlighting 10 retailers that S&P Global Market Intelligence has noted as at high risk of default: Sears Holding Corp. (for obvious reasons), DGSE Companies Inc. (millennials don't buy precious metals, apparently), Appliance Recycling Center of America Inc. (millennials haven't been buying homes, apparently, so no need for recycled appliances...?), The Bon-Ton Stores Inc. (specialty retailer massacre), Bebe Stores Inc. (what? nobody wants glittery hats and shirts shouting BEBE anymore?), Destination XL Group Inc. ("our financial condition is extremely healthy" says the CEO whose company has a projected net loss on $470mm of revenue), Perfumania Holdings Inc. (mall-based perfume including the foul-stench of the Trump family...also fact, just saying), Fenix Parts Inc. (doesn't Amazon have an auto parts reselling business? why, yes, as a matter of fact it does), Tailored Brands Inc. (tons of quality tuxedo options online these days), Sears Hometown and Outlet Stores Inc. (obvious).

Of SPG's top 10 anchors, Sears is #2 with 69 locations and 11.3mm square footage of space and The Bon-Ton Stores Inc. is #10 with 8 stores and 1.1mm square footage of space. Macy's is #1 with 121 stores and 23.1mm square footage. Top in-line stores? L Brands, Signet Jewelers and Ascena Retail Group - all of which are reporting rough numbers of late. Which may explain why, in the end, SPG's stock was down this week, is down for '17, and is close to its 52-week low. 

Starbucks

Starbucks is just fine from the restructuring community's perspective. With one exception: Teavana. The company indicated that it is "evaluating strategic options." Why? Good question and, quite frankly, the answer is very much at odds with what Mr. Simon says. See, Teavana is a mall-based retailer; it has 350 locations. And they're not faring well predominantly because, per Starbucks' CFO, there is dramatically reduced mall traffic. Accordingly, Teavana has been suffering from negative same store comps and operating losses "for some time" with the rate of decline over the last 6 months far worse than forecast. Now even further declines are expected. And so we did a quick check: there are 78 Teavana locations in Simon Properties which would be 22% of all Teavana locations. Is it possible that those locations are the outliers and are performing extremely well on account of steady foot traffic? Starbucks doesn't break out numbers of a per location basis. But we highly doubt it. 

The Retail Bubble

After reporting disappointing numbers this week, Urban Outfitters’ shares fell nearly 8% and its CEO, Richard Hayne noted that “[t]he U.S. market is oversaturated with retail space and far too much of that space is occupied by stores selling apparel. Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn’t count digital commerce. This created a bubble, and like housing, that bubble has now burst. We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.” Which is precisely why short sellers have their sights set on mall REITs - and not just the REITs with more class B and C malls, as we’ve long predicted. As the WSJ reported, short interest on Simon Property Group and GGP Inc. has jumped to near a record high. Apropos, we took a look at the rejection motions filed in Radio Shack 22.0 and noted that 6.4% of the locations slated for rejection are from the two aforementioned behemoths. Note, also, that both have been appointed to the official committee of unsecured creditors in BCBG. Allegedly, all of this destruction has landlords looking for alternative clientele for anchor slots including, it seems, grocers like Wegman’s and Aldi. Note: the previously-linked Fox Business/WSJ piece states as fact that “[g]rocers present an advantage for landlords because they are more resistant than traditional retailers to internet competition.” Really? We’ll ponder that as we munch on our fourth delicious Hello Fresh meal of the week.