First Toys "R" Us getting ready to liquidate, and now that other famous pre-crisis retail LBO, Claire’s Stores, the tween fashion accessories mecca where "legions of preteens got their ears pierced", is preparing to file for Chapter 11 in the coming weeks, Bloomberg reported.
The company, which was LBOed by Apollo in 2007, is set to hand over equity control from Apollo to key creditors including Elliott Capital and Monarch, with Bloomberg noting that Venor and Diameter Capital Partners are also involved. The move should help ease the $2 billion debt load at Claire’s, although just like with Toys, it may merely be delaying the inevitable liquidation (it took Toys less than 6 months to go from Chapter 11 to 7).
That said, Claire's bankruptcy is hardly a surprise: the mall anchor retailer was prominently featured in our November piece, "A Look At America's Retail Apocalypse In Charts" in which we highlighted the firm for its massive debt load and upcoming debt maturities. Sure enough, Bloomberg does the same:
The current debt load is more than 10 times a key measure of its annual earnings, the result of its 2007 leveraged buyout by Apollo. More than $1.4 billion of its debt matures next year, and more immediate pressure comes from a $60 million interest payment that’s due March 13.
And since the company no longer hopes to continue as a going concern, it is guaranteed that it will filed Chapter 11 within the 30 day grace period following the March 13 coupon payment which will not be made.
Meanwhile, score another slam dunk victory for Apollo, a firm that leads the league tables in the number of "LBO-to-Default" transformations. When Apollo paid $3.1 billion to acquire Claire’s from the family of founder Rowland Schaefer in 2007, it then began expanding rapidly, adding on even more debt. It added about 350 stores between 2010 and 2013, with more than 2,700 globally by the time it filed plans that year to go public, according to a company document.
But, as Bloomberg notes, the chain struggled to remain profitable after the Apollo buyout, and Claire’s withdrew its initial public offering registration in early 2017. And, about a year later, appropriately enough it is filing for bankruptcy.
Finally, while the company's bankruptcy was a long foregone conclusion, a key outstanding question is what will happen to the cash flow of all those malls where Claire's is an anchor client. According to Claire's 10K, its stores in North America are located primarily in shopping malls and average approximately 1,000 square feet of selling space. It has 1,600 stores in North America, which means 1,600 malls are about to see their cash flow drop that much more, which begs the question: is the "go long the malls" trade, which briefly became cool among the counter-contrarian crowd, already over, and is time to resume shorting the CMBX BBB-.
Meanwhile, back in Seattle, Bezos takes another victory lap on his road to intergalactic domination.