Claire's Bankruptcy Would Accompany a Shift Away From Malls

(Bloomberg) -- Claire’s Stores Inc., which is said to be preparing a bankruptcy to ease its crushing debt load, is simultaneously working on a second problem: its deep reliance on malls.

As part of efforts to reposition the accessories chain, Claire’s has been expanding to new arenas. That includes Giant Eagle supermarkets and CVS drugstores, where the company is looking to generate “meaningful” growth.

The changes are significant for a chain that’s closely associated with enclosed suburban malls. Generations of American girls went to Claire’s to have their ears pierced and browse the selection of jewelry, headbands and other accessories. With foot traffic slowing at many U.S. malls, the company now hopes to catch customers at the local drugstore or supermarket.

“You can have the right product, but if no one is coming to see the store, how are you going to sell it?” said Poonam Goyal, a retail analyst at Bloomberg Intelligence. “You want to be where the traffic is, and the mall is less and less where people go.”

For the moment, Claire’s most pressing concern is its $2 billion in debt, which has made the retailer unsustainable. The company is closing in on a bankruptcy deal that would ease that burden, Bloomberg reported Thursday. As part of a Chapter 11 agreement, control of the business would pass from Apollo Global Management LLC to lenders such as Elliott Capital Management and Monarch Alternative Capital.

Interest Payment

The current debt load is more than 10 times a key measure of its annual earnings, the result of its 2007 leveraged buyout by Apollo, the buyout firm run by billionaire Leon Black. More than $1.4 billion of its debt matures next year, and more immediate pressure comes from a $60 million interest payment due March 13.

The company’s 8.875 percent bond due 2019 fell about 5 cents on the dollar to 19 cents at 3:06 p.m. on Friday in New York, according to Trace bond price data.

A Chapter 11 bankruptcy filing, which is typical for retailers, would allow the chain to continue operating and keep creditors at bay until a turnaround plan could be formalized.

Like other chains with a heavy mall presence, Claire’s has had to contend with fewer customer visits and online competition. After inking the deals with CVS and Giant, it’s been seeking to expand such partnerships.

Glory Days

Claire’s was created in the ’60s by the merger of two Chicago accessories merchants. After paying $3.1 billion to acquire the business from the family of founder Rowland Schaefer, the chain expanded rapidly. It added about 350 stores between 2010 and 2013, with more than 2,700 globally by the time it filed plans that year to go public.

The company now operates more than 3,000 stores and says it’s the top ear piercer in the world.

But the retailer struggled to remain profitable after the Apollo buyout, and Claire’s withdrew its initial public offering registration in early 2017.

Claire’s never got out from under the debt Apollo loaded onto it to finance the 2007 takeover. The burden of the LBO debt is now poised to drive it into bankruptcy -- a similar story for retailers over the past decade. Toys “R” Us Inc., which went through its own buyout in 2005, is now preparing to liquidate its U.S. operations, Bloomberg reported this week.

The woes have taken a toll on shopping-mall investors. A Bloomberg index of real estate investment trusts that owns regional malls was down 1.3 percent at 1:30 p.m. in New York, while the broader Bloomberg REIT index was little changed.

But if Claire’s debt concerns are solved -- and management can fine-tune its business model -- the company may be able to return to profitability.

“If you look at many of these retailers that have struggled, it’s not because they’re not operating profitably,” said Greg Portell, lead partner for the retail practice at consulting firm A.T. Kearney. “It’s because they can’t service their debt.”

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