Mostly Non-Black-Friday Retail Report (Macy's, J.Crew, Signet Jewelers)

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A Week of Nonstop Retail

Don't worry: Macy's ($M) has a plan (must read) and it includes finally trying to address what competitors - not just Amazon ($AMZN) - have been doing for, literally, decades. Of course, maybe, just maybe, the first part of their plan should be to make sure they're able to collect payment from their customers. But, we're not #BlackFriday experts. Anyway, thanks, millennials, you're killing the mall-based low-cost jewelry sellers. This week, Signet Jewelers ($SIG) reported dogsh*t numbers with same-store sales down 5% and downward-adjusted guidance for 2018. J.Crew Group Inc. = 💩💩💩. The company reported revenue down 5%, and aggregate comp sales down 9% (JCrew down 12%, but Madewell up 13%); it reported an all-in $17.6mm net loss (driven, in part, by its restructuring efforts...FEES!). The company also announced plans to close more stores for a total '17 tally of 50 closures. Elsewhere, people are concerned about derivative effects of big box retail: here, what happens to Salvation Army? Finally, happy 10 year anniversary Circuit City.

Unrestricted Subsidiary Shenanigans: iHeartMedia Version

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Last week we wrote about Caesars and the "mess" that ensued after beleaguered creditors went after PE funds for value transfers to unrestricted subsidiaries (a playbook recently deployed in J.Crew, as well). This past week a judge ruled in favor of the company in iHeartMedia Inc., ruling that an equity transfer to an unrestricted sub didn't equate to a default. Elsewhere in iHeartMedia world, lots of negotiations and due diligence (per Reorg Research).
 

No Sympathy for Mickey Drexler & J.Crew

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We clowned on JCrew's Mickey Drexler last week and this week he's unemployed. That's what happens when you fall victim to the innovator's dilemma. J.Crew is another classic example of a post-recession private equity buyout and dividend recap boom that saddled a once-high-flying retailer with a f*ck ton of debt. Now it's in deep distress and there are questions about Drexler's legacy. Seriously? Here's a guy who had previously been fired from another retailer only to be thrown a lifeline; he then made a bold investment in cahoots with some private equity bros, got lucky, and then tried to double down and take another bite at the apple with some more private equity bros (so creative, they are). Only that second bite was rotten and now the guy is unemployed and the company is quickly diving into the sh*tter. But legacy? The dude got a massive payout in the first buyout and so he, least of all, should be the last to really give a crap about legacy. You know what's a great legacy? Tens of millions of dollars, that's what. 

Retail: It's All About Merchandise. Peace Out Mickey Drexler (J. Crew)

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 J. Crew's Mickey Drexler blames merchandising and, in this case, a retail exec may actually be telling the truth. In a wildly inept kind of way (note: this blurb was in our newsletter that came out yesterday, Sunday, June 5. As of a few minutes ago, Drexler has been binned by the company. Later Mickey). Particularly since the New York Times dumped on the company's CURRENT merchandise right before the holiday weekend which, guessing here, probably turned off some potential customers. So, this ain't a legacy issue...clearly. Meanwhile, we're slowly becoming fan boys of Professor Scott Galloway. If you're unfamiliar with him (like we were until recently), we recommend you listen to this interview here (podcast). He's insightful about technology and we particularly like how he sh*ts on WeWork - a company that makes absolutely zero sense to us from a valuation perspective. Anyway, his piece "Shark Repellent -- Fighting Amazon" is one of the more succinct summaries on what it takes to combat the "Amazon Effect." 

Interesting Restructuring News

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  • Grocery. Cerberus Capital Management-owned Albertsons is reportedly in talks regarding a possible take-private buyout of publicly-traded grocer Sprouts Farmers Market ($SFM). Given the tough grocery environment, this is an interesting development. And it may get EVEN MORE interesting given this.
  • Oil&Gas. Crude stockpiles hit a modern record this week as American producers basically flick off Saudi Arabia/OPEC and produce, baby, produce. Crude priced down to ~$48/barrel. This - and the embattled state of Seadrill Ltd. - isn't stopping John Fredriksen from looking at picking off offshore assets. Speaking of offshore assets, the oil players are going face-to-face with power suppliers - for wind. Meanwhile, a dissenting view relating to the effect of the rise of electric cars on oil demand (paywall). Elsewhere, in Canada...
  • Retail. Bebe Stores Inc. ($BEBE) is plans to shut down its brick-and-mortar locations and become an exclusively e-comm brand - a plan that depends on the sudden charity of landlords who have shown ZERO propensity for flexibility with retail tenants. Seriously, like, ZERO. See, e.g., THE TRAIL OF RETAIL CORPSES LINING THE 2017 BANKRUPTCY ROLLS. Meanwhile, Land's End ($LE) continued to suffer from its association with Sears while reporting a perfect storm of, wait for it...decreased net revenue, decreased catalogue and e-commerce revenue, decreased same-store sales, and worsening gross margin. J.Crew  reported sliding sales, revenue and same-store comps but nevertheless reported a (very) small profit - largely on the back of Madewell. And then there is Nike ($NKE) which, in its quarterly report, noted increased profit but modest sales growth in the face of online shipping headwinds.
  • Retail II. Uh oh. It appears that Walmart may be getting it's (e-commerce) sh*t together which doesn't bode well for brick-and-mortar already suffering from the Amazon onslaught. Speaking of which, peace out Payless Inc. Wethinks we'll soon be saying "peace out" to a bunch of Chinese shoe manufacturers on top of the thousands of American jobs that will be wiped out. But dividends for Golden Gate Capital and Blum Capital Partners!
  • Rewind I: We have taken a little bit of heat for two mentions of 3D-printing in this newsletter; we have been accused of over-hyping the technology and its near-term ramifications. Well, noting the Adidas announcement this week, have we?? 
  • Chart of the Week: 

What the Pros Say (3/19/17)

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  • Professional Compensation. Whereas we would typically demerit a firm for reviewing a "recent" case from 4 months ago, we'll pass here for two reasons: 1) this DLP Piper LLP summary by Richard Chesley, Rachel Albanese and Adam Lanza is solid; and 2) there's no ridiculous attempt here to shield the bankers from a decision that ultimately came down in their favor. Sidebar: speaking of fees, SunEdison was in the spotlight this week and these fees are in bleacher seat territory.
  • Unrestricted Subsidiaries. Anyone interested in understanding the shenanigans taking place in iHeartMedia or J.Crew ought to read this strong coverage of the use of covenants to restructure their capital structure by Chapman & Cutler LLP's Michael Friedman, Simone Tatsch, and Nicholas Whitney.

News for the Week of 3/12/17

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  • Commercial Real Estate Backed Loans. Looks like J.C. Penney store closures could impair $30b of loans.
  • European Elections & CDS. Investors perceive greater redenomination risk in France and Germany.
  • European Retail. It seems the bloody retail phenomenon isn't exclusive to US retailers. Jack Wolfskin, a German producer of outdoor wear and equipment, is in the midst of a restructuring of its $365mm of debt. The Blackstone Group is the company's sponsor and PJT Partners is shopping the company. Meanwhile, Jaeger, a UK-based clothier is also on the block, with an administration within the bounds of possibility. AlixPartners is advising the company.
  • High Yield. Valeant Pharmaceuticals, Foresight Energy and Community Health Systems all issued new high yield debt this past week and what screams of a massive yield grab. No, we're not joking: this actually happened. And demand was so strong that upsizing took place. We repeat: "demand was so strong that upsizing took place."
  • Oil & Gas Fallout. Like we said last week, we're crushing Ramen so it's hard to feel sorry for a man pulling in $2mm and a $50k/month consulting fee, but its interesting to see some of the effects of the energy downturn - here, relating to Energy XXI's former CEO. 
  • Power. The Westinghouse saga got juicier with Weil and the Japanese Prime Minister basically saying put up or shut up. Meanwhile, FirstEnergy is involved in shenanigans and Exelon is now getting active. 
  • Private Equity History Lesson. A review of J.Crew's take-private transaction and private equity's affinity for dividends, long-term viability be-damned. 
  • Puerto Rico. Sh*t is getting real and people are starting to clamor for bankruptcy.
  • Television. Netflix is going after unscripted reality TV. Choice quote: "The competition should be scared out of their minds. These guys are monsters — they're coming in to play and play hard."
  • Uber. Expansion in India seems to be predicated upon a mountain of driver debt.
  • Rewind I: Five weeks ago we reported the following: "The Finish Line Inc. announced its sale of Jack Rabbit Sports this week (66 locations) for undisclosed terms. "Undisclosed terms" = GU gels and a jock-strap." Apparently, we were too generous with our characterization of the financial consideration. Something tells us this won't stop Peter J. Soloman from dutifully and opportunistically noting the tombstone on its pitch materials for the next big retail mandate.  See, also, this.
  • Rewind II: Looks like Avaya Inc. has a potential buyer in publicly-traded Extreme Networks Inc. for its networking business (for $100mm).
  • Rewind III: Store closures. Add Staples to the list (70 locations) and Signet Jewelers (165 stores). And here is one report on the failure of BCBG.
  • Chart of the Week: 
  • Chart of the Week II: 

News for the Week of 2/26/17

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  • Busted Startups. Here, Beepi. Despite $150mm of VC and a last raise at a $564 valuation, the used-car marketplace is selling for parts, with Sherwood Partners acting as assignee. With auto-lending for new cars at subprime levels, this capitulation isn't all-too surprising.
  • Busted Startups II. Some argue that part of the failing brick-and-mortar narrative relates to delivery services like Birchbox. Maybe not. Trunk Club sold to Nordstrom and has languished and now JackThreads looks like it's worth JackSh*t. 
  • Clean Energy. Challenges. But progress with storage.
  • Disruption. The fall of Blackberry.
  • Distressed Investing. In malls. These guys have cajones.
  • Greece. Remember the bailout controversies that sent the markets into a tizzy a few years back? Yeah, they're back. Europe looks staged for a lot of volatility in coming months with elections looming in France and Germany. This could create some real interesting investment opportunities. Of course, that's what people said of Brexit, too.
  • Power. Maybe. Maybe not. This week the denials poured down from Toshiba re: Westinghouse. Meanwhile, FirstEnergy drops some bombs in its investor presentation.
  • Restaurants. Five chains that look like dogsh*t in 2017.
  • Retail. Apparently President Trump's promises to make America great again did not take into account all of the vitriol that would be unleashed towards his brands and resulting domino effect: case and point, Perfumania, which was teetering BEFORE folks wanted to wash themselves of the Trump stank. Speaking of mall-based stench, L Brands' Victoria's Secret ain't looking so hot these days as forward guidance looked bleak. And Amazon announced the release of its discount bras. Cue Jaws theme song.
  • Retail II. People have been talking about Toys R' Us for years and in '16 they took steps to deal with the over-levered balance sheet. The company continues to cut costs on the ops side too. Meanwhile, other companies like J.Crew are engaging in Intellectual Property machinations to stave off the inevitable and raise financing - the legality of which remains an open question.
  • Retail III - Department Stores. AlixPartners makes a cameo appearance in this interesting summary of the state of department stores. Choice stat: "As recently as 1999, department stores had total sales of $230 billion. Last year they came in at $155.5 billion, according to Census data." Accordingly, JC Penney is closing 140 stores (and probably still has 300 too many) and Sears is continuing to cut costs with 130 HQ firings. On point, Macy's reported numbers this past week. And so did Walmart - and the market initially responded in a way that is a smack to Warren Buffett (see last week's newsletter). Meanwhile TJX Cos. (TJ Maxx, Home Goods, Marshalls) showed that brick-and-mortar still has some legs (as did Nordstrom).
  • Fast Forward: Ocean Rig acknowledged that it's effed and the stock took a dive: a possible bankruptcy is on the horizon. And Cumulus Media had a setback in its efforts to restructure.
  • Rewind I: Sporting goods - analysts are starting to notice the massive bloodbath and, accordingly, downgraded Dick's Sporting Goods.
  • Rewind II: Let's hope that Sycamore Partners' purchase of The Limited fares better than Versa Capital Management's investment in Eastern Outfitters. $26.8mm price tag. Meanwhile, Wet Seal is available.
  • Chart of the Week: 
  • Tweet of the Week: