News broke that Claire’s unsecured creditors were lining up in opposition to the retail chain’s proposed restructuring. As you may well know, the accessories chain filed for Chapter 11 bankruptcy protection a few months back. It was the latest in a series of retail failures due to leveraged buyout (LBO) related debt. The practice, in which buyers fund acquisitions via leveraging (with that debt then placed back on the balance sheets of their acquisition targets), is increasingly commonplace especially among private equity firms, though some major deals have also been driven by real estate investment trusts.
The Claire’s bankruptcy is just the latest in LBO-debt related bankruptcies. The challenge in today’s market is that even just moderate declines in sales may prove fatal to retailers with huge debt loads. With the latest news that Claire’s creditors are likely to reject that chain’s reorganization plans, there is a likelihood that Claire’s may not survive the Chapter 11 process and may find itself in Chapter 7 liquidation.
Claire’s currently operates roughly 1,300 stores of its namesake brand as well as approximately 240 Icing locations. Both concepts typically average about 1,000 square feet in size. They predominately locate in malls, though some are in lifestyle center and urban locations. The chain leases 100% of its portfolio, with average unit sales typically hovering in the $400 to $500 per square foot range.
In all, the chain has been able to exit about 130 leases to date, but a total liquidation would mean well over 1,200 additional storefronts going vacant in the United States; globally the chain operates roughly 3,000 stores.
Unfortunately this is yet another ominous sign of what may befall LBO-debt addled retailers seeking bankruptcy protection. We have already seen a number of high profile retailers fail to re-emerge from bankruptcy in the past year. Some of these concepts have been relevant ones or among the dominant players in their categories. Regardless, whether troubled retailers were relevant or if they were concepts long past their prime, creditors have been increasingly unwilling to throw retailers lifelines. The implications of this for retailers that aren’t necessarily the dominant players in their own categories, or those that may be facing still competitive landscapes against more financially secure rivals, are bleak.
It’s far too soon to say that Claire’s will have to liquidate as some others have who sought bankruptcy protection, but the writing on the wall appears ominous. Perhaps more importantly for retail landlords is the fact that there are a number of major retailers on most analyst bankruptcy watch lists that are all facing the challenge of LBO-related debt.
Guitar Center, Neiman Marcus, J. Crew, GNC, Charlotte Russe, 99 Cents Only, David’s Bridal and Lands’ End are just a few of the concepts that analysts are watching carefully. Meanwhile, a dozen other firms face the looming challenge of LBO-related debt, including Petco, PetSmart, The Fresh Market, Hot Topic, Academy Sports, Talbots, Hudson’s Bay Company, Pep Boys, Chuck E. Cheese, JoAnn Fabrics and BJ’s Wholesale Club.
Heading into this year, we predicted that store closure levels could be as many as 11,000 among major chains, up from the roughly 8,500 major chain closures we recorded last year. As of the end of May, we tracked more than 5,000 already. While we had initially believed that this number would be driven by heightened strategic closures, those have not transpired at the numbers we anticipated as landlords have shown themselves increasingly willing to litigate with retailers looking to get out of leases early. Unfortunately, we are still on pace for our prediction of 11,000 closures — those numbers instead are being driven by LBO related bankruptcies. Let’s hope that Claire’s doesn’t add considerably to those totals—Stay tuned!
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