This is What Happens after PE Firms Get Through with a Retailer

Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter

At least, they didn’t blame China.

Thursday afterhours, the Container Store, former LBO queen and IPO hero with 77 stores around the country, reported third quarter “earnings” – in quotes because those “earnings” were a loss.

Consolidated net sales for the quarter ending November 30 rose 3.3% to $197.2 million. But cost of sales rose 5.3%. CEO Kip Tindell blamed their new “$75 free-shipping service.” It’s “driving sales” and is “absolutely a good thing, but of course it’s a headwind to gross margin,” he said. That’s how Amazon leaves its mark.

Selling, general, and administrative expenses jumped 8.6%. “Disappointing,” Tindell called it. CFO Jodi Taylor blamed the “complexity of our transformational TCS Closets initiative,” plus higher payroll, healthcare, and storage expenses. Stuff happens in real life.
Stock-based compensation, pre-opening costs, and depreciation and amortization also rose. So income from operations plunged 87% to $1.8 million. And after $4.2 million in interest expense and a tax benefit of $694,000, there was a net loss of $1.7 million. It brought the net loss for the nine months to $4.3 million.
The company had lost money in fiscal 2013 and 2014 and had made a little in fiscal 2015. All hopes are resting on fiscal 2016 as the big profit year. But the company had some more news:
It cut its sales projections for fiscal 2016 at the midpoint by about 2% to $785-$795 million. It slashed its earnings projections from 30-38 cents a share to 10-13 cents. It projected that sales at established stores – stores open at least 16 months, plus online sales – would fall 1% to 1.6% for the year, and 3% to 5% for the fourth quarter.
All heck broke loose. Before the announcement, shares had closed at a new low of $7.06. In afterhours trading, they got pummeled. And on today, shares crashed 41% to close at $4.21.
As so many debacles, this one too has a private equity angle.
The Container Store, founded in 1978, was acquired by PE firm Leonard Green in July 2007, at the peak of the LBO frenzy. In November 2013, the “IPO window” – that brief period when anything can be sold at ludicrous prices and then get pumped up even higher as exuberance and hype rule – was wide open. And it was time to unload. The IPO price was set at $18 per share. Overnight, Wall Street machinations doubled the price behind closed doors. The first trade took place at $36 per share. The company became the hero of Wall Street.
So forget the losses it had been cranking out.
The stock then soared to $47.07 in two months. But early 2014, the hot air began hissing out. Today it’s down 88% from when it first started trading and down 91% from its peak two months after its IPO. This is how IPOs function as wealth-transfer machines.
Tindell tried to do the best he could. During the earnings call (via Seeking Alpha), he talked about “a choppy retail environment and softer than planned November,” his euphemism for the Thanksgiving shopping debacle.
And the rest of the shopping season? “The start to the fourth quarter has also been more challenging, which we have reflected in our revised outlook,” he said – his euphemism for the Christmas shopping debacle.
After going through how they’ve been spending more than planned, and how “disappointing” those expenses were, Tindell then pointed to the future, not the immediate quarter whose projections he’d slashed, but the more distant future, when the “greatest impact” of their efforts would be felt,  namely “in 2016 and beyond.” In brick-and-mortar retail these days, the good times are always in the distant future.
The Container Store isn’t the only one. Other brick-and-mortar retailers are struggling, particularly those that have been bought out by PE firms that piled debt on these companies and paid themselves fat fees and special dividends. Now these retailers have trouble borrowing more money at reasonable costs. They’re junk-rated, and at the lower end of the spectrum, credit is drying up. Risks that everyone refused to see are suddenly getting priced in. They’re suffocating on interest costs. Some already ran out of liquidity last year and defaulted, and more will in 2016.
They’re facing a very tough retail environment. American consumers are strung-out. But for brick-and-mortar retailers, the problems are worse: sales have been shifting to the internet. And then there are the Millennials, the Holy Grail for retailers.
Millennials make up the largest age demographic, and their earnings power is increasing. But they’re smart and have ideas of their own and refuse to be roped in massively with the usual tricks and devices. Instead they’re inexplicably frugal when it comes to things like clothes. But they love to blow their money on experiences, such as restaurants and going places, and on their electronic lives, their smartphones, gadgets, broadband bills, and Netflix accounts. And they do much of their shopping online.
More and more brick-and-mortar retailers are now admitting that they haven’t figured out how to get the attention of these folks.
That’s the reality brick-and-mortar retailers face. PE firm Leonard Green was able to exit from the Container Store in time – a disaster for those who wittingly or unwittingly (in their retirement nest eggs) ended up with these misbegotten shares.
But many of the retailers are still owned by PE firms, such as Neiman Marcus, Albertsons, J. Crew Group, 99 Cents Only Stores, Bon-Ton Stores, Claire Stores, and a slew of others. Exits were planned and IPOs were lined up, but the stock market got the jitters, and the IPO window closed on them. For these over-indebted, junk-rated brick-and-mortar retailers, it’s going to get much tougher. Read…  Defaults and Restructuring Next for Retailers