Brick-and-Mortar Meltdown in June: Who Got Crushed?


by Wolf Richter, Wolf Street:
The private-equity protocol of asset stripping bears fruit.

Today, premium-denim designer and retailer True Religion Apparel with 1,900 employees filed for Chapter 11 bankruptcy. Its celebrities-endorsed products are sold in its 140 True Religion and Last Stitch retail stores and in struggling brick-and-mortar department stores, including at Bloomingdale, Nordstrom, and Saks Fifth Avenue.

Bankruptcy rumors had been swirling since October when the company hired a law firm specialized in bankruptcy and restructuring – a dead-giveaway that shareholders and creditors are going to feel some pain.

As so many times in retail bankruptcies, there’s a private-equity angle. Private-equity firm TowerBrook Capital Partners had acquired True Religion for about $835 million in 2013. It took just four years of stripping out assets and piling on debt to reach this magic point.

The court document revealed that the company is now saddled with $535 million in debt, against only $243 million in assets. Asset values are estimated; no one knows what they’re really worth during a fire sale. Dogged by declining sales, the company already closed 30 stores and slashed its workforce. In its last fiscal year ended January 28, 2017, revenues had dropped to $370 million, generating a white-hot loss of $78.5 million.

The court document further revealed that this is a prepackaged bankruptcy, where TowerBrooks worked out a deal with lenders – including funds managed by Goldman Sachs, Waddell & Reed, and Farmstead Capital Management – on a debt-for-equity swap that will wipe out $350 million of its debt. In return for their loss, lenders will get 90{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} of the equity in the restructured company. Junior creditors and equity holders will get some crumbs of the new equity – but only if they vote to approve the restructuring plan.

True Religion has secured a debtor-in-possession (DIP) loan from Citizens Bank for up to $60 million to fund operations during the bankruptcy proceedings. The company will also use the bankruptcy to close some stores and renegotiate store leases with landlords.

It blamed its fate on the switch by consumers to online retail and on competition, particularly from casual sports clothing for outside of the gym – the “athleisure” segment. It hopes to exit bankruptcy in four months, though it will continue to face the same online retailers, athleisure, and low-price competitors. Restructuring a retailer is notoriously difficult, as American Apparel and many others found out. Most ended up being liquidated.

This latest addition to the ongoing brick-and-mortar meltdown topped off the events of June.

On June 22, Sears Holdings announced that it’s preparing to close an additional 18 Sears stores and 2 Kmart stores by mid-September. Liquidation sales at those stores began at the end of June, a spokesman said. The Associated Press, which reported the store closings, said that they’re in addition to the closing of 226 stores announced so far this year: 164 Kmart stores and 62 Sears stores. The latest bout will trim the company’s footprint to about 1,180 stores, from 2,073 five years ago.

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