Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

How's this for irony? It's been nine months since discount retailer 99 Cents Only's bonds have come close to trading at 99 cents.

The company's $1.6 billion leveraged buyout in 2011 by Ares Capital and the Canadian Pension Plan Investment Board looked like a victory at the outset. The duo topped a bid from Leonard Green & Partners to bag 99 Cents Only, which at the time had the second-highest profit margin and the most sales per square foot among its rivals. 

Today, its roughly $300 in sales per square foot remains higher than Dollar General and Dollar Tree, which take in $221 and $143 in sales per square foot, respectively. But 99 Cents Only's profits have vanished.

Change for a Dollar
The discount retailer's debt has plummeted, underscoring its broader struggles.
Source: Bloomberg via TRACE

While 99 Cents Only brought in nearly $2 billion in revenue last year, it's now generating operating losses amid inventory struggles and higher promotion costs. Sales at established stores continue to fall. And in January, Moody's downgraded the company's debt further into junk territory, citing a deterioration in the company's business.

Common Cents
Sales at 99-cent stores have lagged competitors
Source: Bloomberg, company filings

Back when the buyout was forged, the deal looked foolproof: Discount stores performed well even when the economy didn't. Dollar stores were crushing big-box retailers like Walmart and Target. And the dollar store sector had already been tried and tested by other financial buyers.

KKR and the private equity arm of Goldman Sachs had made a stellar return from their 2007 buyout of Dollar General and its subsequent IPO in 2009.  The 99 Cents Only play looked like a similar bet-- the family that launched the stores back in 1982 would run the company and the private equity buyers would bring faster growth. 

But the fact that it's so debt-laden (roughly 10 times Ebitda according to Moody's) means 99 Cents Only hasn't been able to invest in growth. It's only built about 100 stores since it was acquired, compared to the thousands built by its competitors  during that time. Its stressed balance sheet meant it would never have been able to compete with other bidders for the 330 Family Dollar stores that were divested as part of the chain's takeover by Dollar Tree. Further eating into its growth is an aggressive expansion by Dollar General and Dollar Tree into the California market, where 99 Cents Only has over 70 percent of its store base. 

Small Change
The 99 Cents Only Store chain is much smaller than its competitors
Source: Bloomberg

Meanwhile, the Gold family, which founded the chain in 1982, is no longer part of the company's management team. Three different CEOs and three CFOs in the past year alone has meant that there hasn't been anyone truly steering the ship, leading to problems with the company's inventory systems and empty shelves.

But unlike failed or failing chains such as RadioShack or Aeropostale, which became the weakest players in worsening sectors, dollar stores are resonating with shoppers. And 99 Cents Only's recently appointed CEO, Geoffrey Covert, seems to have the leadership chops needed to turn the chain around. He spent 20 years running operating divisions and new market expansion at Kroger, perhaps one of the only shining stars in retail today.

Covert has the best chance yet at getting the company back on track, or at least looking good enough to sell it to one of its growing dollar-store competitors at a price its private equity owners can stomach.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. After selling the last of its shares in 2013, KKR's final return was said to be roughly five times its initial investment. 

To contact the authors of this story:
Gillian Tan in New York at
Shelly Banjo in New York at

To contact the editor responsible for this story:
Beth Williams at