Claire’s New CEO Gets Thumbs-Up From Lenders: Corporate Finance

Claire’s New CEO Gets Thumbs-Up From Lenders
Claire’s, acquired by Apollo in a $3.1 billion leveraged buyout in May 2007, has total debt of 8.8 times earnings before interest, taxes, depreciation and amortization in the 12 months to April 28, Bloomberg data shows. Photographer: Daniel Acker/Bloomberg

Lenders are signaling approval of Claire’s Stores Inc.’s new chief executive officer, whose marketing experience at Walt Disney Co. is fueling optimism that the Apollo Global Management LLC-owned specialty retailer’s results will improve even as its European division struggles.

Claire’s $1.45 billion term loan was quoted June 22 at 95.1 cents on the dollar to yield 5.9 percent, according to data compiled by Bloomberg, rising 2.6 cents since June 5, the day before the company announced James Fielding’s appointment. Its bonds returned 3.4 percent, compared with 1.9 percent all junk-rated retailers, Bank of America Merrill Lynch index data show.

Fielding was previously president of Disney Stores Worldwide Sales, where he helped increase profitability by focusing on children aged two to 12, similar to part of Claire’s target demographic. His hiring ended the Hoffman Estates, Illinois-based retailer’s search for a CEO after Gene Kahn, who was installed by Apollo after the takeover and oversaw expansion in Europe during the economic crisis, resigned from the role in January.

The new CEO has a “pulse on the younger market, Claire’s target customer,” Tom Ferguson, an analyst with Montpelier, Vermont-based KDP Investment Advisors Inc., said in a telephone interview. “It’s definitely a positive that they’ve filled that position,” he said.

Claire’s $260 million of 10.5 percent bonds due in June 2017 last traded at 85 cents on the dollar to yield 14.89 percent, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, counting trades of any size. The bonds had fallen as low as 71.5 cents on the dollar in January, after investors failed to embrace the European expansion plans.

Leverage Declines

Fielding and J. Per Brodin, the company’s chief financial officer, did not return a telephone call seeking comment. Claire’s declined to comment through Kathleen Blomquist, an outside spokeswoman who works for Rubenstein Associates Inc. Apollo declined to comment through Charles Zehren, also of Rubenstein.

Claire’s, acquired by Apollo in a $3.1 billion leveraged buyout in May 2007, has total debt of 8.8 times earnings before interest, taxes, depreciation and amortization in the 12 months to April 28, Bloomberg data shows. That’s down from leverage of 16 times on Jan. 31, 2009, as earnings recovered from the worst recession since the 1930s, the data show.

The retailer, which has a junk category credit rating of Caa2 from Moody’s Investors Service and B- by Standard & Poor’s, had $2.4 billion of long-term debt as of April 28, according to a May 25 regulatory filing. High-yield, high-risk, or junk, bonds are rated below Baa3 at Moody’s and BBB- by S&P.

Europe Division

The company’s next maturities are an undrawn $200 million revolving loan in May 2013 and $665 million outstanding under a $1.45 billion term loan expiring in May 2014, Bloomberg data shows.

The net loss at Claire’s widened to $19.9 million in the three months ending April 28 from $19.6 million a year earlier as its Europe division had the fourth straight quarterly decline in same-store sales, company earnings statements show.

James Conroy resigned this month from his positions as chief operating officer and interim co-chief executive officer, and his responsibilities are being taken over by Fielding, who started June 18, according to company statements. Fielding, worked at Disney Stores Worldwide since May 2008, responsible for global operations of 360 locations in 12 countries and in five, according to a June 12 regulatory filing.

Product Focus

Revenue at Disney’s retail business rose 6 percent in the quarter that ended March 31 to $243 million, from $229 million during the similar period a year earlier because of increased sales in North America driven by promotional events and an ongoing shift in store presentation, a May 8 regulatory filing shows.

As president of Disney Stores, Fielding repositioned shops to focus on kids instead of fans of all ages and stocked merchandise based only on the most important Disney franchises such as Winnie the Pooh and “Brave,” the new Pixar Animation Studios film that came out on this month. Products are now grouped on stores shelves according to those characters, as opposed to categories such as costumes and stuffed animals.

The company said at an investor meeting in February 2011 that traffic at remodeled stores was 20 percent higher than existing locations and the revamped sites were 25 percent more productive on sales and margin basis.

Salary, Bonus

Fielding will receive an annual base salary of $900,000 at Claire’s and a yearly “target bonus” of 100 percent of that amount, Claire’s said in the June 12 filing with regulators. The bonus will be paid in full for his first year of employment and then will be based on annual performance goals.

He will also receive a $500,000 signing bonus that would be fully returned if his employment is terminated for “cause” or if he quits “without good reason” before June 18, 2013. Half the bonus would be repaid by Fielding if he leaves before June 18, 2014.

Claire’s hired him “after conducting an extensive search and considering many capable candidates,” Peter Copses, chairman of Claire’s and a senior partner at Apollo, said in a June 6 statement. “At Disney Stores, Jim successfully managed a specialty retailer with significant international operations and a well-developed e-commerce business,” he said.

‘Tough Time’

Claire’s is the company’s primary brand in North America and exclusively in Europe, focusing on customers from three to 18 years old. Its Icing brand targets a 23-year-old college-graduate woman just entering the working force, while aiming to attract a broader group of customers from 19 to 27 years of age, according to the May 25 filing.

“In fiscal 2012, we plan to open approximately 125 company-owned stores with the majority of those being opened in Europe,” Brodin, Claire’s CFO, said on a May 24 conference call to discuss first-quarter results with analysts and investors.

Claire’s operated 3,074 stores on April 28, with 1,944 in North America and 1,130 in Europe, including sites in the U.K., France, Switzerland, Spain, Ireland, Austria, Germany, Netherlands, Portugal, Belgium, Poland, Czech Republic and Hungary, according to the May 25 filing.

“They’re looking for incremental growth in Europe,” said Ferguson. “It’s a tough time to be focused on that market.”

Claire’s same-store sales fell 3 percent in the first quarter, with a 5.5 percent drop in Europe, according to a company statement on May 23.

Jewelry Revenue

The company had sales of $340.6 million during the first quarter, down 1.7 percent from the similar period a year earlier. Adjusted Ebitda fell to $50.5 million from $52 million, the retailer said in the statement.

“The overall strategy that they’re pursuing to improve same-store sales growth is not overly clear,” said Ferguson. “I think they’re making a fairly big push in jewelry.”

Jewelry accounted for 49.8 percent of global net sales in the first quarter, up from 47.6 percent in the period last year, the May 25 filing shows. Sales of accessories were 50.2 percent of the total, compared with 52.4 percent in the first quarter last year.

Claire’s is a “fairly low-priced retailer,” said Ferguson. “That gives it some degree of economic resilience.”

The company has been “chipping away” at its refinancing obligations and has a “highly manageable” maturity schedule over the near-term, KDP said in a June 13 report.

It had about $170 million of cash as of April 28, Bloomberg data show. During the first quarter, it paid down about $490 million of its term loan maturing in 2014 with proceeds from senior secured first-lien notes, according to the May 23 statement.

Strategic Plan

“They’ve done a pretty good job at managing their liquidity,” said Ferguson.

Management has some “runway” to implement its strategic plan, which includes improving merchandise assortments and its customers’ “in-store” experience, according to the KDP report.

“Jim is one of the best merchants in the retail business. He has a great instinct for trends and how they translate to products on the shelf,” said Gary Foster, a former spokesman for Disney Consumer Products, who worked with Fielding for more than seven years. Foster left his position at Disney to become spokesman at Clean Energy Fuels Corp. this month.

“I have witnessed few executives who have the ability to create a positive internal culture with his employees the way Jim can,” he said.

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