Photographer: Jin Lee/Bloomberg

The Holiday Shopping Season Won’t Bear Gifts for Private Equity

  • Little joy for junk-bond-rated merchants facing mounting debt
  • ‘There is no exit. Retailing is fairly gruesome right now’

As Christmas approaches, many private-equity firms that bet on retail in the past decade are ruing the day. Again.

The 2016 holiday shopping season will probably be another disappointment for junk-bond-rated merchants owned by the likes of Bain Capital Private Equity and Apollo Global Management, which by most accounts would dearly like to be rid of them. Chains from Claire’s Stores Inc. to J. Crew Group Inc., swimming against mounting debt and declining foot traffic at malls, won’t get joy out of what’s expected to be a difficult quarter for sales. It will do little to boost the chances they can engineer public offerings or find buyers.

“There is no exit,” said Jan Kniffen, founder of the consulting firm J. Rogers Kniffen Worldwide Enterprises in New York. “Retailing is fairly gruesome right now in terms of getting return on your investment. It doesn’t matter if you’re public or private -- everyone is struggling.”

Back before the recession, when Americans were throwing money into buying houses and furnishing them and acquiring clothes and trinkets along the way, there was a rush to invest in retail properties. More acquisitions came later. Between mid-2003 and the end of 2008, some 482 retail leveraged buyouts were announced, with a combined value of $141 billion, according to an analysis by GLC Advisors & Co. of data compiled by Bloomberg.

Now many owners are stuck.

Bleak Stories

A few are already out of the picture, notably Sports Authority Inc., a $1.4 billion buyout led by Leonard Green & Partners in 2006 whose assets were to sold liquidators in April. Others are eyeing debt walls, including Gymboree Corp., a children’s apparel seller taken private in 2010 by Bain Capital for $1.8 billion. The company’s 9.125 percent notes are trading at about 53 cents on the dollar. Gymboree and Bain didn’t respond to requests for comment.

The stories are bleak for others, such as Neiman Marcus Group, a luxury department-store chain acquired in 2005 by Warburg Pincus LLC and TPG Capital Management in a $5.1 billion leveraged buyout and purchased for $6 billion in 2013 by Ares Management and the Canada Pension Plan Investment Board.

How can Ares and the pension plan make their money back, let alone score a profit? Neiman Marcus reported a net loss of $407 million in its fiscal fourth quarter. U.S. luxury sales declined 3 percent in the past year, according to an October study from Bain & Co. A strong U.S. dollar is depressing foreign-tourist spending, putting a damper on the holiday outlook.

“They’re going to have to hold it until they can fix it,” said Michael Appel, founder of Appel Associates, a consulting firm. “In some cases, they may just say, ‘We’d rather put the money to better use than just having it sit there.”’

Neiman Marcus and it owners didn’t respond to requests for comment.

Retailers need to be nimble to react to changing customer demands and quick to spend to update stores, train and hire employees and improve merchandise. That’s no easy exercise for this cash-strapped group.

Take Claire’s, once a destination for tween girls that has struggled to compete with online jewelry sellers and chains such as Forever 21 Inc. Loaded with $2.53 billion in debt after its 2007 leveraged buyout by Apollo, Claire’s has to figure out how to pay creditors and manage its large fleet of stores. The company didn’t respond to a request for comment and Apollo declined to comment.

FTI Consulting Inc. is advising Claire’s as it aims to hold off default, according to people familiar with the situation. Companies often turn to FTI for help with restructuring; it has worked with several chains, including RadioShack, that filed for bankruptcy in recent years.

Even a surge in sales this quarter may not be enough to keep Claire’s going, or inspire optimism for others.

“Retailing has been a great sector since 1877, when David May opened his first department store,” Kniffen said. “But it’s certainly gone through a lot of creative destruction.”

— With assistance by Beth Jinks

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