Bloomberg reported that Claire’s Stores Inc. was preparing to file for bankruptcy to reduce its massive debt load. The company is also struggling with another equally serious problem – its reliance on malls.
To deal with the second problem, the accessories chain has been repositioning itself by moving into new areas, including Giant Eagle supermarkets as well as CVS drugstores.
Generations of young American girls have been going to the mall to visits Claire’s and get their ears pierced and buy their accessories. However, with changing consumer tastes, footfalls in malls has dropped so much that many retailers have shut down and others like Claire’s are struggling to survive.
With its main source of customers drying up, Claire’s is hoping to create a new customer base in drug stores and supermarkets.
Bloomberg Intelligence retail analyst, Poonam Goyal stated that having the right product was no enough. If no one was visiting the store, how were you going to sell that product? She said these products needed to be where the traffic was, and malls were no longer that place.
Besides just empty malls, online competition from giants like Amazon.com and more agile competitors have had a massive impact on the retailer.
While Claire’s tries to tackle its reliance on malls, the more pressing issue is its massive $2 billion debt. The company has almost closed on a Chapter 11 bankruptcy deal that would manage its debt. As a part of the agreement, management of the company would be transferred from Apollo Global Management LLC to lending companies Elliot Capital Management as well as Monarch Alternative Capital.
The current debt burden that is crushing the company is a direct result of the leveraged buyout by Apollo Global Management LLC in 2007, the buyout company run by billionaire Leon Black. The $1.4 billion debt matures next year, but immediate pressure on the company is to pay off the $60 million interest that is due on March 13.
A Chapter 11 bankruptcy filing will give the company a chance to restructure itself and keep operating. It will also give Claire’s a chance to formulate a turnaround plan while keeping the company’s debtors at bay.
Claire’s was once one of the most successful companies in the US. Created in the 1960s through a merger between two accessories merchants from Chicago, the chain expanded rapidly. The company added 350 stores between 2010 and 2013 in the US and also had more than 2,700 stores across the globe. Today, Claire’s claims to be the world’s number one ear piercer and has more than 3,000 stores worldwide.
The company had planned to go public, however, since its buyout by Apollo, Claire’s has struggled to remain profitable and so finally shelved all plans to raise an IPO in 2017.
The company was never able to get out of the debt that Apollo loaded onto Claire’s, which is what has driven this iconic brand to bankruptcy.
However, there is a ray of hope. If the Chapter 11 filing works and Claire’s is able to work out its debts – and the new management can clean up the company’s business model – then the company may be able to return to profitability and save itself.
According to the lead partner of consulting firm AT Kearney, Greg Portell, many of the retailers that have struggled have been profitable. The challenge that they have faced is not being able to service their debt. Debt has been the killer of companies rather than a lack of profitability.
Representatives from both Claire’s as well as Apollo were unavailable for comment.