Another company on the infamous Fitch "retail death list" has taken its first step toward bankruptcy.
On Thursday, distressed children's clothing retailer Gymboree elected not to make the interest payment due June 1 on its outstanding 9.125% notes due in 2018, Debtwire reported, with Moody's downgrading the company to D from CC on Friday, as it does not expect Gymboree to make the interest payment, "or any other payments on its debt obligations, and sees a general default given ongoing lender negotiations."
While not exactly news - the WSJ previewed the inevitable Chapter 11 at the beginning of May - a Gymboree bankruptcy filing is now assured over the next month, and certainly by July 1 when the grace period expires. In March, the company posted a $324.9 million loss for its fiscal second quarter; same-store sales fell 5% in the period while EBITDA crashed.
In early May, the WSJ reported that Gymboree was looking to close 350 of its 1,200 stores as part of a broader restructuring under Chapter 11 protection. Buckling under its debt, the company has been in talks with its lenders who may or may not agree on a prepackaged bankruptcy. According to the WSJ, the company has contacted firms known for liquidating inventories and other assets during store closures.
Gymboree was taken private in a $1.8 LBO buyout by Bain Capital in 2010, at which point the PE firm stripped out the assets, and loaded the company up with debt, $1.06 billion as of June 28, an amount company founder Joan Barnes described to Bloomberg as “horrendous." Meanwhile, LTM EBITDA was cut by more than half from the mid-$60 million to negative most recently, explaining the upcoming filing. Walmart, Children’s Palace, and online retailers have put the squeeze on sales and margins. In recent years, Gymboree scrambled to raise cash by mortgaging its distribution center in 2015. In 2016, it sold Gymboree Play and Music to Zeavion Holding, a Bain investor. But in its fourth quarter, the company lost $325 million, and the CEO was sacked.
In an attempt to control the post-petition equity, Bloomberg reported that Bain Capital has been buying up Gymboree’s crashing bonds to have more leverage during the upcoming bankruptcy process and participate in what Bain hopes will be Gymboree’s revival. After plunging to 4 cents on the dollar in April, prices on Gymboree's fulcrum 9.125s of 2018 have rebounded to roughly 8 cents.
Some still see value here: “It was one of the first aspirational brands to cater to the preschool market,” said founder Joan Barnes who is now an adviser to Gymboree Play and Music.
“There is no reason it can’t be again" Barnes added, although Jeff Bezos surely disagrees.
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