Pacific Sunwear Bankruptcy
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1 Abraxas Group www.abraxasgp.com PACIFIC SUNWEAR BANKRUPTCY Apparel Retailers Struggle to Adapt to Shifting Market Dynamics Date: April 10, 2016 David Johnson Interim Executive Restructuring and Turnaround Advisor
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Transcript of Pacific Sunwear Bankruptcy
1Abraxas Group
www.abraxasgp.com
PACIFIC SUNWEAR BANKRUPTCY
Apparel Retailers Struggle to Adapt to Shifting Market
Dynamics
Date: April 10, 2016
David JohnsonInterim ExecutiveRestructuring and Turnaround Advisor
“This cold night will turn us all to fools and madmen”
‒ William Shakespeare, King Lear
Abraxas Group
www.abraxasgp.com2
Overview
• On April 7th, 2016, Pacific Sunwear (“PacSun”) announced that it had entered into a restructuring support agreement (“RSA”) with lender Golden Gate Capital, and would be filing for chapter 11 bankruptcy in order to facilitate a comprehensive reorganization of the company.
• The company further announced that it will convert 65% of its term loan with Golden Gate into equity in the reorganized company, and that it had secured Debtor-in-Possession (“DIP”) financing of $100MM from Wells Fargo.
• The bankruptcy of PacSun is illustrative of the overall challenges facing apparel retailers.
Abraxas Group
www.abraxasgp.com4
Weak Operating Performance
Abraxas Group
www.abraxasgp.com5
Fiscal Year Ending 2014 2013 2012 2011 2010
Net Sales 827$ 798$ 785$ 759$ 756$
Gross Profit 223 199 196 167 171
Gross Margin 27.0% 24.9% 25.0% 22.0% 22.6%
Operating loss from continuing operations (15) (21) (38) (71) (76)
Long Term Debt 94 86 80 74 29
Consolidated Operations
• Margin improvement insufficient to stem losses
• Aggregate $221MM loss from continuing operations
• Long term debt up by $65MM
Cash Flow
Fiscal Year Ending Jan-15 Feb-14 Feb-13
Cash Flows from Operating Activities 10.7 (7.7) 6.4
Cash Flows from Investing Activities (15.6) (12.3) (6.1)
Cash Available for Debt Service (4.9) (20.1) 0.3
• Weak operating cash flow, insufficient to cover investment in business
• Negative Cash Available for Debt Service in two of last three years
Source: Pacific Sunwear 2014 Annual Report
$ millions
• A considerable driver of distress for retailers has been the challenge of operating lease obligations
• PacSun faced more than $350MM in operating lease obligations as of January 31, 2015
High Cost of Retail Footprint
Abraxas Group
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Fiscal Year Ending Amount
January 30, 2016 77.8
January 28, 2017 66.1
February 3, 2018 58.9
February 2, 2019 47.6
February 1, 2020 34.4
Thereafter 65.5
Total future operating leases 350.3
Source: Pacific Sunwear 2014 Annual Report
$ millions
• Fast Fashion is driving consumer expectations for “faster, cheaper” clothes
• Declining in mall traffic is forcing many retailers to rationalize their store footprint
• The growing importance of ecommerce is challenging apparel retailers to execute omni-channel strategies
Apparel Retail Headwinds
Abraxas Group
www.abraxasgp.com8
Source: U.S. Census Bureau
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Ecommerce as % of Retail Sales
Recent Apparel Retailer Bankruptcies
Name Year Approx. # of Stores
Loehmann's 2013 40
Deb Stores 2014 300
Dots 2014 400
Ashley Stewart 2014 170
Wet Seal 2015 500
Coldwater Creek 2015 400
Quiksilver 2015 120
American Apparel 2015 230
Pacific Sunwear 2016 600
Retail Bankruptcy Outcomes, by Filing Year
Abraxas Group
www.abraxasgp.com9
• A recent report by AlixPartners highlighted the considerable challenges retail companies have had in successfully restructuring since the 2005 amendment to the U.S. bankruptcy code
• The report found that limitations on the timeframe to accept or reject leases and the granting of administrative priority for what had previously been unsecured claims have made liquidation a more likely outcome for troubled retailers.
Retail Bankruptcy Trends
Abraxas Group
www.abraxasgp.com10
Source: Pacific Sunwear 2014 Annual Report
Key Takeaways
1) The challenges facing retailers, especially in the apparel sector, are severe.
2) Shifting competitive dynamics have challenged the business models of many apparel retailers.
3) An unintended consequence of the 2005 change to the U.S. bankruptcy code has been a higher bar for success for retailers, with the result that many retailers that file for bankruptcy fail to reorganize, and are instead liquidated.
Abraxas Group
www.abraxasgp.com12
• David Johnson is a career change agent who has served as interim manager or financial advisor on over $5 Billion of distressed middle market transactions.
• In his nearly 20 years as a change agent, David has served as an advisor, board member, interim manager, investor and operator at organizations ranging in size from pre-revenue startups to Fortune 500 organizations.
David Johnson
Email: [email protected]
Ph: 312-505-7238
Twitter: @TurnaroundDavid
Abraxas Group
www.abraxasgp.com13
