Levi Goes ‘Soft And Stretchy’ In A Rigid Retail Market

It’s rough out there on the retailer high seas. “Challenging” is the word used by Sears CEO Edward Lampert and Levi Strauss to describe the industry, and many retailers are struggling to keep up with the growth in eCommerce, the costly process of digital transformation and changing consumer tastes. Customers now expect a seamless online, physical and mobile shopping experience.

Retailers that are unable to call on substantial financial reserves are struggling in the current environment. Consumers want everything these days, from online shopping with one-click ordering and fast delivery to an exciting and high-tech shopping experience at physical stores. Mobile shopping is growing and a key focus of retailers going into the holiday season. It is no wonder that many retailers are unable to flexibly adapt and change. Here’s an update on some of the recent casualties.

Rue21 Inc., the teen fashion retailer, appointed a new chief executive in the midst of efforts to tackle a heavy debt load and stiff competition, according to The Wall Street Journal. Ex-chief financial officer, Keith McDonough, assumed the role after Bob Fisch left the position earlier in October.

The company also announced Nina Barjesteh as the new marketing chief and the creation of a new position of chief customer officer. Data from Factset showed a dip in the bond price from $0.35 to less than $0.29. Rue21 issued $250 million in bonds that mature in 2021, but according to a recent Fitch Ratings report, it is considered at risk of default in the next year.

The debt load for rue21 includes a $538.5 million secured term loan, which comes due in 2020. Along with Claire’s Stores Inc., Sears Holdings Corp. and Nine West Holdings Inc., Fitch names rue21 as a retailer at a “high risk of default” because of its bond debt, declining foot traffic, competition from eCommerce and other retailers and “a lack of a compelling product line.”

The teen retail industry is a particularly distressed one, and Aeropostale Inc. and Pacific Sunwear of California Inc. both sought bankruptcy protection earlier in 2016. While both found buyers, the companies will be much smaller coming out of Chapter 11. The heavy debt carried by rue21 is especially burdensome, according to Mathew Christy, an S&P Global Ratings analyst.

Rue21’s new strategy includes opening 40 new stores, giving 100 current stores a facelift and focusing on branding. According to McDonough: “It is important to note that, as rue21 implements these new, customer-focused initiatives, the company has no term loan debt maturities until Oct. 2020 and maintains significant liquidity under its $150 million revolving credit facility.” The company’s liquidity is “comfortable,” according to WSJ.

According to Christy of S&P, retailers typically open new stores to offset bleaker same-store sales. “The issue going forward is whether that trend is still sustainable. We think the retail industry itself is definitely overstored.”

Rue21 was acquired by Apax Partners in a $1.1 billion leveraged buyout in 2013.


Levi Battles The Soft And Stretchy

Levi Strauss & Company found itself in a much more comfortable outfit, and financial position, when it announced on Oct. 11 that profits were up by 69 percent in the latest quarter. The firm cut booked charges from a year ago, including expenses linked to a cost-cutting program. Chief Executive Chip Bergh said: “We are pleased with the third-quarter results with broad-based revenue growth across all three regions, despite the continued challenging environment, particularly in the U.S. Our direct-to-consumer business continues to drive our results with both brick-and-mortar and eCommerce growing double digits.”

The company reported growth of 14 percent compared to a year ago in direct-to-consumer sales due in large part to expansion of its retail network and increasing online sales. For the quarter ended Aug. 28, profits were up from a year earlier by $58 million, and revenue was up 3.8 percent to $1.19 billion.

Sales from Levi’s Americas division, which generates most of the sales, increased by 2 percent to $724 million, while sales in Europe jumped 9 percent to $283 million. In Asia, sales rose by 5 percent to $179 million. Bergh told WSJ that “the U.S. remains challenging with department stores, a significant part of Levi’s wholesale channel, struggling.”

Revenue for the Americas division climbed in Mexico but dropped a little in the U.S., where wholesale declines offset direct-to-consumer growth. Of note, however, is that Levi responded to the market and has seen growth in women’s wear, which has been dominated by athletic and yoga clothing.

According to Bergh: “You are seeing a lot of soft, stretchy materials. We are now delivering that same kind of comfort in our jeans.”


Golfsmith Unloads

And the belt is loosening also for Golfsmith International Holdings Inc., which won court approval to go ahead and sell its U.S. stores. The U.S. Bankruptcy Court has signed off on the bid rules, and offers must be submitted by Oct. 17. If required, there will be an auction in the New York office on Oct. 19. The Austin, Texas-based retailer is hoping to sell 109 Golfsmith stores in the U.S. to a buyer through the auction. According to WSJ, Golfsmith stores have suffered from retail locations that are either too big or are in saturated markets.

The company obtained court approval in mid-September to close 20 of its worst-performing stores. The company’s Canadian business managed to find a buyer for more than 50 Golf Town stores before filing for Chapter 11 protection in September — a group under Toronto fund manager CI Financial Corp. and Fairfax Financial Holdings Ltd.

According to WSJ, the golf retailer’s troubles began when Golfsmith and Golf Town merged in 2012. The firm had expanded in the U.S. while Tiger Woods was at the top of his game, and in 2007, the Canadian pension fund Omers acquired Golf Town.

Golfsmith advisers hired to sell the business were unsuccessful, but the company is optimistic that interested bidders will attend the auction. A restructuring pact has been established with lenders. That pact will cut junior debt by 72 percent after emerging from bankruptcy. Forty percent of the company’s junior bondholders gave support before filing for bankruptcy.

The company must swap C$125 million ($94.2 million) in junior debt for $35 million in new junior bonds, according to the deal with lenders. This restructuring results in a 12 percent interest rate that would mature in three years. Golfsmith must receive court confirmation for its restructuring plan on or before Dec. 23.

Golfsmith first began providing custom-made golf clubs in 1967 for which it also provided repair services. In 2006, the company went public. Golf Town, its Canadian arm, launched in Toronto in 1999 before expanding rapidly to 55 stores.


Close Kmart? Never! Well, Just A Few Perhaps

In a show of faith and appealing to consumers, Edward Lampert, chief executive of Sears Holdings, said that he never planned to close the Kmart brand. However, Lampert did say that weaker stores may be closed in order to keep the Kmart chain up and running, according to WSJ.

Lampert is acting aggressively to stop the bleeding for Kmart and end the last few years of losses by investing in profitable stores and closing unprofitable locations. This will reduce the overall footprint but should improve the quality of existing Kmarts. Of the 700 chain locations, Sears plans to close 130. The company will also sell some of its real estate to fund the investments and to explore its other brands, including Kenmore, Craftsman and DieHard.

Earlier, Bloomberg News reported that Stanley Black & Decker Inc. and Techtronic Industries Co. had shown interest in the Craftsman business. Sears declined to comment.

Lampert wants to expand distribution and develop partnerships for the Sears brands. The company has a strong asset base that Lampert said “gives us the wherewithal to fund our business, but we don’t intend to use our asset value to support losses.”

Sears Holdings has closed over 400 Kmart discount stores and supercenters over the last five years, around one-third of the company’s locations, and in one surprise move, the retailer recently spent money remodeling in a Chicago suburb.

Sears Holdings showed a net loss of $866 million on sales of $11.06 billion in the six months ended July 30. At the end of the period, the company had $276 million in cash and long-term debt of $3.4 billion. Lampert plans to inject $300 million in additional debt financing from his hedge fund.

In September, Moody’s downgraded its rating on Sears’ speculative grade liquidity rating, noting that the company would continue to rely on external financing and selling assets to fund its operating losses. Estimated operating cash flow will be negative $1.5 billion for 2016.

According to Lampert: “The retail environment generally has been challenging … We won’t be able to restore profit immediately.”

So, what seems to be the consensus on the retail industry? How about … “it’s challenging.”


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