Financial Roundup: J.Crew Restructures Debt Amid Losses, Neimans Shuts Down Takeover Talks, and Sears Canada Teeters

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J.Crew is looking to climb out of debt amid sweeping changes, Neiman Marcus continues to go it alone and Sears Canada is just looking to hold on.

J.Crew

In a Nutshell: The struggling retailer introduced a plan to remake its balance sheet–it’s carrying $1.5 billion in long-term debt–through an exchange offer to bondholders and an update to its term loan intended to end its legal battle with lenders and push its next loan maturity to 2021.

This comes on the heels of longtime chief executive officer Mickey Drexler’s announcement that he is stepping down as CEO, with West Elm president Jim Brett moving in next month.

Earnings: Impairment charges and severance related cutting 250 jobs and closing about 20 stores contributed to a first-quarter loss of $123.3 million, compared with an $8 million deficit a year earlier. Adjusted earnings before interest, taxes, depreciation and amortization fell 41 percent to $26.6 million from $45.4 million, as revenues dropped 6 percent to $532 million.

Sales: Total revenue decreased 6 percent to $532 million. Comparable company sales decreased 9 percent following a decrease of 7 percent in the first quarter last year. J.Crew sales fell 11 percent to $428.5 million, with comparable sales declining 12 percent following a decrease of 8 percent in the first quarter last year. Madewell sales increased 17 percent to $84.7 million, with comparable sales up 10 percent following an increase of 6 percent in the first quarter last year.

The Debt Plan: The private exchange offer calls for affiliates of the company buying all $566.5 million in outstanding payment-in-kind notes for $250 million in new secured notes backed up by a subsidiary holding most of the intellectual property tied to the J. Crew name. It also calls for $190 million in new preferred stock issued by the retailer’s corporate parent and 15 percent of the firm’s common stock.

The plan also calls for holders of the term loan, which is trading at about 70 cents on the dollar, to receive a $150 million payment at par, with some adjustments.

The plan would end the litigation in New York State court that started this year after investors began agitating against the company’s move to place most of its trademark in a separate subsidiary.

The plan would dilute the equity holdings of TPG Capital and Leonard Green & Partners, which took J. Crew private in a $3 billion deal in 2011, but also give the company some much-needed breathing room.

CEO’s Take: Mickey Drexler, who will remain chairman but hand over the CEO title next month, said, “While we are disappointed with our first quarter earnings, we are optimistic regarding the work we have underway to improve our business. We have a clear vision and action plan in place to meet our customers’ needs. I look forward to transitioning my role to chairman and to working with our new CEO, Jim Brett, as he takes the reins in July and continues to position J.Crew for long term success.”

Read more about retailers’ struggle to with liquidity: How a Lack of Liquidity is Tanking Retail—And Who’s to Blame

Neiman Marcus

In a Nutshell: Though there were no additional details given, Neiman Marcus today said it is no longer entertaining discussions about a full or partial sale of the business. The company had put itself on the market in March and had been rumored to be in talks with Hudson’s Bay Company.

“At this time, any conversations regarding any kind of transactions are terminated and not happening,” president and CEO Karen Katz said on the company’s earnings call.

For the third quarter, ended April 29, the company reported margin pressure from the pace of markdowns, which is expected to continue through Q4 and stabilize in FY18 with better inventory control.

Sales: Total revenue for the quarter was $1.11 billion, down 4.9% from the $1.17 billion in the same period of FY16. Comp sales dropped by 4.9%, with traffic, transactions and average tickets down in stores. Single mid-digit declines are expected into Q4. Meanwhile, online sales increased by 2.1%, with improved traffic heading into the fourth quarter.

Year-to-date revenue reached $3.59 billion, a 6.2% decrease from $3.82 billion in the first three quarters of FY16. Comp stores were off 6.6% in the first three quarters of FY17.

Net: Net loss of $24.9 million compared to net earnings of $3.8 million for the same period of 2016. The company reported a net loss for the three quarters of $165.5 million, up from $1.1 million for the same period last year.

Profit: Adjusted EBITDA was $135.9 million compared to $173.2 million for Q3 of 2016. Year-to-date adjusted EBITDA was $385.6 million down from $520.4 million for the same three quarters of the previous year.

CEO’s Take: While Neimans is starting to see some benefits from NMG One, the integrated merchandising solution that has created myriad headaches throughout its early implementation, the big payoffs are still at least a quarter away. Katz said the major challenges associated with the roll out have been resolved so it looks forward to significant advantages emerging in FY18 with regard to inventory accuracy and visibility. Ultimately, the company says NMG One will allow for better buys, pricing and margins, and it will tie online to offline to facilitate product flow through the warehouses as well as services like buy online, pickup in store.

Sears Canada

In a Nutshell: The company continues to face a challenging environment with recurring operating losses and negative cash flows from operating activities in the last five fiscal years. Sears Canada’s ability to continue is an ongoing concern is largely dependent on its ability to obtain additional sources of liquidity in order to implement its business plan. Based on management’s current assessment, cash and forecast cash flows from operations are not expected to be sufficient to meet obligations coming due over the next 12 months.

The Toronto-based retailer has been working on a transformation and brand reinvention and believes it has made substantial progress in regaining confidence from Canadian consumers, as evidenced by its increased same store sales. It also recently commenced a process to address its liquidity situation and to source and structure financial solutions and strategic alternatives to continue to finance its business and preserve and grow its franchise and brand reinvention. Such alternatives may include a financial restructuring or sale of the company. A special committee of the board of directors has been established, comprised of independent directors, to assist with this process, and the company has retained BMO Capital Markets, as a financial advisor, and Osler, Hoskin & Harcourt LLP, as a legal advisor.

In light of these developments, Sears Canada has postponed its 2017 annual meeting of shareholders scheduled for Wednesday, to a date to be determined.

Revenue: Revenue declined 15.2% to $505.5 million in the first quarter, while same store sales increased 2.9%. The company attributed the difference between this decline and the same stores sales increase to a falloff in its direct business coming from fewer planned catalogs, some products not being available on the new website while back-end logistics technology was under development, and a planned decline in the number of merchandise pick-up locations to reduce costs.

Earnings: Adjusted EBITDA was a loss of $133.9 million in the first quarter compared to a loss of $75.4 million for the same quarter last year. Adjusted EBITDA is a non-IFRS measure. The net loss for the first quarter was $144.4 million or $1.42 per share compared to a net loss of $63.6 million or 62 cents per share in the same quarter last year.

With additional reporting by Caletha Crawford


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