The Brick & Mortar Retail Meltdown, February Update

by Wolf Richter, Wolf Street:

And private equity is all over it.

The brick-and-mortar retail meltdown – despite protestations to the contrary – continues with a mechanistic air of inevitability. This started in 2015, took off in 2016, and picked up pace and magnitude in 2017, a progression I documented along the way. Now in 2018, there has been a brutal January and here’s the even more brutal February.

Bon-Ton Stores filed for Chapter 11 bankruptcy on February 4. The filing by the regional department store chain based in Pennsylvania was the largest bankruptcy filing by a retailer in 2018. It had been discussing with its creditors a restructuring of its debts, but that had turned out to be fruitless.

This was a surprise to no one. In September, the company hired bankruptcy advisers to deal with nearly $1 billion in debt. In December, it defaulted on an interest payment. In January, after the 30-day grace period, it announced it had entered into forbearance agreements with some of its lenders. Over the make-or-break holiday selling period, sales fell 4.2%. On February 1, it announced more details on a new wave of store closings, involving 42 of its 260 stores. Liquidation sales in those stores began on February 1. Its shares are in the process of becoming worthless.

Bi-Lo is preparing to file for bankruptcy as soon as March and shutter nearly 200 stores, Bloomberg reported on February 16. The company, which owns the Winn Dixie, Harveys, Fresco y Mas, and Bi-Low supermarkets, is buckling under $1 billion of debt. About 50,000 jobs could be affected.

The low-margin supermarket business has entered a period of major upheaval – not from online competition which hasn’t taken off yet in the US, but from competitors with deep pockets that are barreling into the stagnating market, including the expansion plans of German deep-discounter Aldi, and the moves by the likes of Walmart and Target. Last year, Amazon vowed to churn the butter, so to speak, by acquiring Whole Foods. Even the private-equity owned combo of Albertsons, Safeway, and other chains is struggling mightily to stem declining same store sales.

For Bi-Lo it would be the second bankruptcy filing in nine years, having previously filed in 2009.

As so many times in these retailer bankruptcies, there’s a private equity angle. PE firm Lone Star had acquired Bi-Lo in a leveraged buyout, announced in late 2004, that loaded the company up with debt. As part of the agreement to get Bi-Lo to emerge from the 2009 bankruptcy, Lone Star contributed $150 million in capital; and in 2012, Lone Star provided $275 million to help fund the leverage buyout of Winn-Dixie. But since 2012, Lone Star as extracted at least $800 million from Bi-Lo via special dividends. Lone Star also extracted management fees from Bi-Lo. Bi-Lo had to borrow this money. Now it’s cratering under that debt.

Tops Markets filed for Chapter 11 bankruptcy on February 21, buckling under $715 million in debt. The company with 170 supermarkets in New York, Pennsylvania, and Vermont, employing over 14,000 people, blamed “previous private equity ownership” that had “saddled the Company with an unsustainable amount of debt on its balance sheet.”

Morgan Stanley Private Equity had acquired Tops Markets during the LBO boom in 2007 and did “saddle” it with debt. So it’s easy for the executives at Tops Markets blame them. But it’s also self-serving and hilarious: In 2013, these executives at Top Markets — the ultimate insiders — acquired the company from Morgan Stanley and have been running the show for four years, doing their own saddling with debt.

The company has arranged $265 million in debtor-in-possession (DIP) loans to keep the doors open during the bankruptcy proceedings.

Toys R Us is stumbling closer to liquidation in the US. This too is a private equity story – the biggest one to fail so far in retail land. On February 21, CNBC reported that the company, which had filed for Chapter 11 bankruptcy protection last September and then got hammered by a terrible holiday selling season, is at risk of breaching a covenant on a $3.1-billion DIP loan that a group of lenders led by J.P. Morgan Chase had extended to fund its operations during the bankruptcy proceedings.

The covenant requires that the company keep a certain amount of cash on hand, but after bleeding through the holiday period, these cash levels are now at risk. The company hasn’t breached any covenants yet, it said, but if it is found to be in breach, the lenders could force it to pay back the entire loan immediately, which could force Toys R Us into liquidation.

But how much will there be left to liquidate? After obtaining court approval earlier in February to close 182 stores in the US and shed 4,500 workers along with them, Toys R Us is now planning to close another 200 stores in the US and lay off more people, the Wall Street Journal reported on February 21, citing its sources. This will slash the retailer’s footprint in the US by about half since the bankruptcy filing.

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