Are private equity firms the true retail chain killers?
It’s common to hear Amazon.com mentioned as a culprit when discussing why a given retail chain has filed for bankruptcy. Less commonly heard of late, but also meriting investigation, is the role that burdensome debt built up under the ownership of private equity firms has played in many of these failures.
While chains such as Gymboree, Payless ShoeSource, rue21 and True Religion have been characterized as businesses too slow to react to changes in consumer shopping behavior, that is only part of the explanation, according to a recent Wall Street Journal article. The other part is that these companies were owned by private equity firms that financed their acquisitions with debt and then borrowed more to pay dividends to themselves rather than investing in the businesses.
In the case of Payless, the Journal reports, Golden Gate Capital and Blum Capital acquired the business in a leveraged buyout in 2012 and then added to the company’s debt, which had grown to $700 million, by financing $350 million in dividends that went to the two firms. By last year, Payless’s debt load had ballooned to $840 million. In April, Payless filed for protection under Chapter 11.
Private equity firms, according to the Journal, have found that low interest rates and the availability of capital have been too good to pass up in recent years and acquired many retailers struggling under debt in the past decade. Going further back, chains including Linens ‘n Things, Mervyn’s and Sports Authority were forced to liquidate after being acquired in leveraged buyouts.
Too be sure, it’s not just privately-owned retailers that have had to play the debt juggling act. J.C. Penney has retired more than $1.4 billion in debt since 2014 and has reworked terms of its revolving credit facility, for example, to give the company more flexibility while it continues its turnaround efforts under CEO Marvin Ellison. In January, Penney announced it had sold its headquarters office building and 45 acres of surrounding land for $353 million.
- Private Equity Takes Fire as Some Retailers Struggle – The Wall Street Journal
- Information About Payless’ Reorganization – Payless ShoeSource
- JCPenney’s CFO Edward Record will leave the struggling department store – CNBC
- JCPenney Announces Successful Closing of $2.35 Billion Credit Facility Refinance – J.C. Penney Company, Inc.
- J.C. Penney Announces Sale of Home Office Campus for $353M – J.C. Penney Company, Inc.
- Would Nordstrom be better off private? – RetailWire
- What should Staples do differently now that it is going private? – RetailWire
DISCUSSION QUESTIONS: Is the debt carried by retailers today more burdensome than levels carried in the past? Has private equity firm ownership of retail chains been a positive or negative for the industry on balance?