covid-19 - credit today

MARCH 23, 2020

COVID-19:R E T A I L E R S M O S T A T R I S K

SPECIAL ANALYSIS COVID-19: RETAILERS MOST AT RISKAs a follow-up to our Retail Store Closings (related to COVID-19 “CV”) Analysis, which has been updated throughout the week, this report dives a bit deeper in examining specific retailers and segments impacted by the Coronavirus outbreak, detailing the direct, indirect, short-term and long-term issues resulting from the pandemic.

As for the Creditntell / F&D Reports universe, those retailers with a strong balance sheet and liquidity should be able to weather this first wave of closures and severe reductions in sales. Retailers with operating and / or leverage issues -- a D rating or less -- are the ones to watch closest. Nonetheless, current credit ratings are largely reflective of historical results; many of these ratings may see sharp downgrades at the end of next quarter. We have also identified a number of private companies that may be a near-term risk. Even with a flat-curve scenario, there will be casualties among companies that do not have the balance sheet and working cash flow to survive the short-term business impact and attack on liquidity. Many economists are already predicting a domestic and global recession, which could have a long-term effect on employment, consumption, and overall economic growth. While the situation plays out in the coming weeks and months, most retailers are withdrawing guidance in an environment impossible to predict; many companies will then assess the aftermath, likely resulting in a sharp increase in store closures and bankruptcies. Some research predicts that more than 15,000 stores could close in 2020, well above the rate from 2019 when store closures topped a record 9,300. Unemployment may see a sharp rise from the current historic low; this could combine with dwindling consumer investment and savings accounts as well as rising personal debt to erode consumer sentiment. The Economic Policy Institute forecasts three million job losses in the U.S. by the summer. Mass layoffs within the restaurant and retail sectors have already begun. As a result, even if the virus is contained by this summer, there is still the risk that this event will result in a long-term negative hit to the consumer, making a sustained V-shaped recovery in the second half less likely. Furthermore, once the virus is contained, there may be residual influence, as consumers’ shopping preferences could, in some instances, permanently shift to online. Accordingly, there is potential that the list of business failures will expand over the next 6 to 24 months.

· Many retailers are taking a direct hit, with stores fully closed for two weeks, three weeks, and possibly longer. Others will experience a sharp decline in demand, while a few may capitalize on new consumer trends / needs.

· The government is looking to inject capital, liquidity, and some confidence into the system. Companies are drawing down their available credit as a protective measure (stay tuned for our upcoming Credit Facility Special Analysis). The smaller, less established companies with weaker operations and balance sheets are less likely to overcome the impact in direct correlation to the length of time disrupted.

· Companies that provide consumer staples / necessities (groceries) are seeing a huge spike in demand. While sales are elevated, the costs to meet this demand will likely curtail margin improvement.

· Retailers that have focused on maximizing their online offering may have somewhat of a safety net to preserve sales volume. However, even online players are not immune to lost traffic, and the more discretionary the product / format, the more vulnerable.

· The residual impact will continue to play out, as entire supply chains will need to clear out unsold inventory.

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OVERVIEW

Lord & Taylor (Private Company)Store Count: 246

New Sears (Private Company)Store Count: ~180

J.C. Penney Credit Rating: E1Store Count: 846Interest Coverage: 1.9xDebt / TTM EBITDA: 6.5x% Avail (revolver): 59%

Neiman Marcus (Private Company)Credit Rating: E1 Store Count: 69

Lord & Taylor was acquired by Le Tote from Hudson’s Bay in November 2019. The Company has stopped providing financial disclosure, but reports indicated that liquidity was running below projections. Given the impact of COVID-19 and the fact that Lord & Taylor is well behind competitors on the omnichannel side, liquidity will most likely be constrained. The Company has temporarily closed all stores.

New Sears has not had the liquidity to pay vendors and was waiting for asset sales to close. Negative free cash flow will only be exacerbated by the Coronavirus slowdown. The Company hasn’t announced store closures due to COVID-19, but Simon has closed all of its malls, and other mall owners are expected to follow suit.

J.C. Penney’s efforts to control costs and inventory led to a modest improvement in fiscal 2019 EBITDA. However, management’s broader initiative to regain store traffic could be seriously jeopardized due to COVID-19. Financially, the Company has limited flexibility, with what modest free cash flow it was able to generate in the prior year ($118.0 million) likely now turning negative. However, the Company ended the year with $1.80 billion in total liquidity, which should be sufficient for the short-term.

Neiman Marcus has stopped filing its financial statements with the Securities and Exchange Commission. We have obtained some highlights; as of November 1, 2019, there was liquidity of $354.0 million, up from $347.0 million at the end of the prior quarter but down from the $570.5 million at the end of the first quarter last year. Additionally, in the past management has stated that their business model is somewhat recession proof, but is impacted by steep declines in the stock market, which is obviously occurring now. The Company announced that all U.S. stores will be closed through March 31. Online sales accounts for approximately 35% of the Company’s revenue.

Traditional department stores have been under competitive pressures from off-price, fast fashion and online retailers. The sector has also been hit by decreasing mall traffic, as consumers changed not only how they shop but what they buy, while overall apparel sales declined. International tourism was a significant revenue driver for a number of retailers, and even before COVID-19, those sales had decreased. Retailers in the sector have generally done a good job with omnichannel, and online sales account for 25% to 35% of revenue, which may provide a slight cushion as social distancing and store closures significantly impact short-term revenues. With a recession almost a certainty, the sector will see sales slow as consumers cut back on discretionary spending.

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COVID-19: RETAILERS MOST AT RISK

DEPARTMENT STORES

Academy Ltd. (Private Company)Store Count: 253 Debt / TTM EBITDA: Est. 5x-6x% Avail (revolver): Est. 80%

Academy Ltd. continues to struggle with competition from Dick’s Sporting Goods and online competition. Cash flow and liquidity have been adequate; however, the Company is highly leveraged, and private equity sponsor KKR has aggressively directed store openings. The biggest concern looms a little over two years from now when a large term loan is scheduled to mature. The website is much less well developed than the one operated by Dick’s Sporting Goods, and it is unlikely to be the first choice of consumers who may be forced to shop online. Academy may see some benefit from a jump in firearms sales in response to the COVID-19 outbreak.

In recent years, the sporting goods sector has been contending with a marked shift to online, and manufacturers increasingly selling direct to consumers (DTC). In addition to those with a D or lower credit rating, retailers that lack a unique merchandise mix and/or a compelling or experiential format to differentiate from the competition will be pressured. Many heretofore stable credit risks could also be exposed. Specifically, those with a strong experiential offering, where customers are encouraged to linger in stores for hours. With school, college, and professional sporting leagues canceled, participation trends are going to drop significantly. Many companies stand to lose 50% or more in sales, if the 80% drop in China’s February sporting goods sales is any indicator. Still, a strong online offering provides some protection. Dick’s is best positioned here; its digital sales grew to 25% of total 4Q19 sales, and it recently added two new ecommerce fulfillment centers. However, all consumer discretionary spending is at risk. Firearm retailers had a difficult 2019, notably from heavy discounting as many big-box players like Dick’s and Walmart reduced their exposure. However, the current situation has sparked a resurgence in demand. We had already viewed the sector as generally over-spaced, and further expansion as somewhat irrational, given the overriding industry trends. As a result, the longer this situation plays out, the more likely we would see sporting goods retailers rationalize.

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SPORTING GOODS

Stage Stores Credit Rating: F2Store Count: 772Interest Coverage: 1.1xDebt / TTM EBITDA: 20.8x% Avail (revolver): 22%

Stein Mart Credit Rating: E1Store Count: 283Interest Coverage: 3.1xDebt / TTM EBITDA: 5.0x% Avail (revolver): 23%

After a disappointing holiday season, Stage Stores stopped communicating; there is no release scheduled for 4Q results. Reports indicate the Company has been searching for new financing, without success. Complicating matters, Stage Stores has a significant percentage of stores in oil-producing states where the economy will be battered by the Coronavirus and collapsing oil prices. The Company was not able to obtain new financing pre-virus; it is difficult to believe it can do so post-virus. Stage Stores has scaled back its Gordmans conversions from 700 to 500 and, as a result, will close more than 200 locations in the first half of the year.

Stein Mart’s efforts to improve inventory management and control costs have been outpaced by its inability to gain top-line traction, and fiscal 2019 EBITDA fell modestly. Additionally, management’s initiatives to improve sales could be seriously jeopardized due to COVID-19. The Company ended the quarter with $65.0 million of liquidity, but its modest free cash flow has likely now turned negative. A longer-term period of store closures could create a liquidity crisis. It appears its going private transaction scheduled for the second quarter will, at the very least, be postponed.

Big 5 Sporting Goods Credit Rating: C2Store Count: 434Interest Coverage: 9.0xDebt / TTM EBITDA: 2.3x% Avail (revolver): 56%

Camping World Credit Rating: E1Store Count: 175Interest Coverage: 1.9xDebt / TTM EBITDA: 10x% Avail (revolver): 30%

JackRabbit/Olympia Sports(Private Company)Store Count: 63

Big 5 is already one of the retailers being hit hard by the shift to online and manufacturers selling direct. Its limited ecommerce business makes it susceptible to further competition and will not provide any cushion for alternative purchases in the current “stay at home” environment. As of its FYE, the Company had limited debt, mostly related to a $140.0 million revolver that matures in September 2022.

Camping World is already dealing with an industry slowdown in RV volume, coupled with more promotional pricing. The balance sheet is leveraged, and liquidity is limited, beyond its floor plan, or RV inventory financing lines of credit. Fortunately, the Company recently completed a refinancing, which pushed out most of its major maturities to 2023; a $35.0 million revolver matures in November 2021.

COVID-19 came during a challenging time for JackRabbit. The Company is still digesting the ambitious acquisition of about 75 Olympia Sports stores, which more than doubled its store count. A new $40.0 million credit facility should support at least short-term liquidity, but the balance, controlled by private equity company CriticalPoint Capital, is assumed to be leveraged.

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Bass Pro Shops (Private Company)Store Count: 172 Debt / TTM EBITDA: Est. 6x

Bass Pro’s operating trends eroded in 2019, with both sales and EBITDA underperforming. The highly cyclical business, experiential format, and limited digital penetration make it particularly vulnerable to both the short and longer-term impacts of the COVID-19 outbreak. The balance sheet is highly leveraged, although there are no major debt maturities until 2022. Coming into 2020, liquidity was strong, and the Company was generating some positive free cash flow. Bass Pro may be seeing a short-term boost from an increase in firearm sales in response to COVID-19.

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Sportsman’s Warehouse Credit Rating: D1Store Count: 103 Interest Coverage: 6.5xDebt / TTM EBITDA: 2.7x% Avail (revolver): 31%

Sportsman’s Warehouse has been dealing with increased online competition and encroachment from Dick’s. The Company opened four stores in 2019 and acquired eight Field & Stream stores from Dick’s, followed by two more this month. The Company may be seeing a short-term bump in revenues from an increase in firearm sales in response to the COVID-19 outbreak. Free cash flow has improved but remains low and is at risk from a slowdown in overall store sales. No near-term debt maturities; debt is tied to a $250.0 million revolver and a $30.0 million term loan that mature in May 2023. Management has focused on growing digital sales, but those sales still only represent a mid-single-digit percentage of total revenue.

Christopher & Banks Credit Rating: E1Store Count: 447 Interest Coverage: Neg. EBITDA

Debt / TTM EBITDA: Neg. EBITDA

% Avail (revolver): 30%

Francesca’sCredit Rating: E1Store Count: 714 Interest Coverage: 12.0xDebt / TTM EBITDA: 1.8x% Avail (revolver): 48%

Christopher & Banks was just beginning to make progress. Although EBITDA remained negative, the Company achieved positive comps for fiscal 2019. Cash burn slowed to near breakeven, and subsequent to quarter-end, Christopher & Banks entered into a new $10.0 million term loan to enhance liquidity. The reduced traffic due to COVID-19 will put a strain on liquidity, even accounting for the proceeds from the new term loan. Additionally, online revenue is small and won’t provide a cushion. The Company has closed all locations through at least March 31.

Francesca’s has made progress in recent quarters, as it returned to its fast fashion business model. Comps were positive for the first time in 10 quarters, and fewer markdowns led to improved EBITDA. The Company had slowed cash burn, and new debt enhanced liquidity. The expected traffic declines will strain liquidity, and Francesca’s has been having assortment issues with its website, which accounts for less than 10% of revenue.

The apparel segment has been challenged by unconventional competitors, including mass merchants, online, fast fashion, and off-price retailers, which has resulted in significant promotional activity and margin pressure. This, on top of rising input costs from tariffs and labor, will disrupt legacy retailers and those slow to adapt to consumer trends. While many retailers and brands have announced plans to temporarily close stores as COVID-19 infections have spread, the industry is well positioned to capitalize on e-commerce demand, given that roughly 30% of apparel sales come from the digital channel. Still, customers will be expecting free delivery and extended returns dates to compensate for potential shipping delays and supply chain disruptions, which could further impede margin amid store revenue losses. With consumers staying inside and apparel being a discretionary purchase, we remain skeptical in these retailers’ ability to capture sales during this uncertain period.

APPAREL RETAIL

J.Jill Credit Rating: C2Store Count: 287 Interest Coverage: 3.4xDebt / TTM EBITDA: 3.6x% Avail (revolver): 96%

Le Chateau, Inc. Credit Rating: F2Store Count: 714 Interest Coverage: Neg. EBITDA



J. Crew Credit Rating: E2Store Count: 493 Interest Coverage: 1.7xDebt / TTM EBITDA: 7.2x% Avail (revolver): 25%

rue21(Private Company)Store Count: 678

As a result of COVID-19, J.Jill closed all of its locations, effective March 18 through March 27. The escalation of the outbreak will worsen the Company’s situation, as it had been struggling with declining traffic even before the outbreak. The one bright spot is their growing direct-to-consumer channel, which represented 43.7% of net sales in FY19.The online channel (43.7% of net sales) will remain open. J.Jill’s 4Q comps were down 2.8%, with EBITDA down more than 35% given the top-line headwinds and merchandising missteps that led to increased promotional activity. The eroding profitability increased leverage up to 3.6x. The nearest debt maturity is in May 2022 for its $239.3 million term loan. Given management’s initial guidance of FY20 comps to be down in the 3% to 5% range, the escalation of COVID-19 is expected to further weigh down the already-negative operating trends. In response, management elected to draw down $33.0 million from its revolver and subsequently had more than $50.0 million in cash. The Company is currently under review for a one-notch downgrade to D1.

Even before the impact of COVID-19, operating losses, tight liquidity, and uncertainty around the upcoming June 2020 refinancing of its revolver and subordinated debt put this Company at our most critical credit rating of F2. With little e-commerce presence, the anticipated sharp drop in mall foot traffic related to the virus will worsen the financial picture.

J. Crew’s business improved in fiscal 2019, especially in the back half of the year, and full-year EBITDA more than doubled to $250.0 million. Although the Company reported positive free cash flow in fiscal 2019, liquidity was a little tight at $120.7 million. However, the COVID-19 crisis will likely push cash flow in negative territory, potentially creating some near-term liquidity issues.

The Company has not provided financial disclosure since emerging from bankruptcy in September 2017 and has gone through a number of c-suite changes, including naming an interim CEO in February. That kind of turnover is usually an indication that issues remain. With store traffic declining precipitously around the country, rue21’s liquidity will most likely come under pressure.

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Tailored Brands Credit Rating: C2Store Count: 1,451 Interest Coverage: 4.3xDebt / TTM EBITDA: 3.6x% Avail (revolver): 83%

Tuesday Morning Credit Rating: D1Store Count: 705 Interest Coverage: 25.3xDebt / TTM EBITDA: 0.3x% Avail (revolver): 51%

We believe Tailored Brands (C2) faces the most substantial risk, as it has sold assets to generate cash to transform business operations. The Company announced the temporary closure of its e-commerce fulfillment center and its 1,451 retail stores in the U.S. and Canada, effective March 17, through March 28. Additionally, Tailored Brands borrowed $260.0 million on its $550.0 million ABL facility to fund working capital needs amid COVID-19 uncertainty. While this action provides some cash cushion, e-commerce deliveries and in-store sales have been halted. Customers will also have no incentive to purchase, given event and conference cancellations, social distancing, and quarantines, which eliminates the need for formal dressing and threatens more than 76% of its business tied to men’s tailored and non-tailored clothing products. In response, the Company is honoring orders for postponements and distributing gift cards and a 20% discount for order cancellations. We have considered future credit downgrades, if operations continue to worsen.

Tuesday Morning will see a slowdown in sales and margins as shoppers stay home and stores are closed. Still, as an off-price sector retailer it may do better at retaining shoppers when they return to stores. Further, the Company could buy packaway inventory for next year and beyond from other distressed retailers. Fiscal 2020 has started off poorly, and Tuesday Morning is hoping its new chief merchant will be able to improve its merchandise and store experience to lift sales. The Company has $3.60 billion of debt outstanding, with its nearest maturity not until 2024.

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Off-price has remained one of the strongest sectors in retail. The value proposition along with the treasure hunt shopping experience has allowed the sector to drive traffic and grab market share, especially from traditional department stores. The one area of concern during the COVID-19 crisis is the lack of an online presence. Online sales account for only 1% to 2% of revenue at TJX and Ross. Burlington Stores, where online revenue is 0.5% of sales, is eliminating its online presence. The top three players, TJX, Ross and Burlington, have announced that all stores will be temporarily closed, with TJX also shutting down its website, and all three companies have drawn down on their revolving credit facilities to enhance liquidity.

OFF-PRICE

GNC Credit Rating: F1Store Count: 7,779 Interest Coverage: 1.5xDebt / TTM EBITDA: 4.3x% Avail (revolver): 84%

Regis Corporation Credit Rating: C2Store Count: 7,152 Interest Coverage: N/ADebt / TTM EBITDA: 1.1x% Avail (revolver): N/A

GNC has significant indebtedness that it may struggle to repay, beginning with debt maturing next year. As for the $155.0 million bond coming due in August, the Company commented that it does have sufficient funds to repay the upcoming maturity. However, in its delayed 10K filing, management noted a “substantial doubt about its ability to remain a going concern” unless it is either fully acquired by or able to refinance its debt with China’s Harbin Pharmaceutical Group, which currently owns 40% of the retailer. In addition to the $155.0 million bond, the Company has about $700.0 million in additional debt, including a $440.0 million term loan due March 2021.

Regis Corporation (C2), one of the largest haircare service providers, may be disrupted amid reduced store hours and halted services. Additionally, franchisees could be crippled amid potential revenue losses, despite requiring less capital from the Company. There could also be fewer start-ups, especially in the short-term, due to high pre-opening costs and limited customer demand. Regis is facing deteriorating comps and EBITDA, but its leverage ratio remains solid. In response to COVID-19 uncertainty, the Company borrowed $183.0 million on its $295.0 million revolver to support working capital needs. Additionally, ad fund fees received from franchisees were temporarily suspended from March 1, through June 30 to help them alleviate current business challenges. As of March 19, liquidity consisted of $61.0 million in cash on hand and the aforementioned revolver borrowing, resulting in $244.0 million.

Despite the beauty industry’s defensive nature, otherwise noted as the “Lipstick Effect,” during times of economic duress, beauty retailers face increased risks associated with its in-store services. Many had invested in omnichannel and in-store services, such as hair, makeup, skin, and brows, to mitigate the spike in online and digitally native brand competition and to drive store traffic, but the spread of COVID-19 will halt these initiatives. Subject to local and state regulations, nationwide hair and nail salons are beginning to see forced closures to contain the spread of the virus, which could devastate their business models amid revenue losses and stylist layoffs.

Regis Corporation (C2), a hair-care service provider, lacks an integrated e-commerce site to sell haircare and styling products and relies on its Company-owned stores and local franchise owners to support sales growth. Of its total store base, 67% of salons are franchises and 33% are owned, with almost all of its stores in North America (98% of its store base) as of December 31, 2019. Sally Beauty Supply’s (C2) products business for professional stylists, Beauty Systems Group, may face sales disruption amid potential salon closings and lack of incentive for salon stylists to purchase. However, the Company could buffer this headwind with its consumer products business, Sally Beauty Supply (58.1% of 1Q20 sales), as beauty enthusiasts experiment with styles at home amid social distancing. Other beauty retailers, like Ulta Beauty (A2), are responding to COVID-19 by announcing the temporary closure of all stores. LVMH (B1), owner of Sephora, has transitioned perfume factories to hand-sanitization production to address demand shortages. These two retailers will be able to respond to customer demand, as they have abundant loyalty members, robust supply chains, and relevant consumer product offerings. As customers stay home, they may bulk up on face masks and “self-care” skin care products. While makeup sales could continue to tumble due to fewer reasons to keep up appearances, customers may still purchase cosmetics to practice.

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HEALTH & BEAUTY

AMC Entertainment Credit Rating: C2Store Count: 1,004 Interest Coverage: 2.6xDebt / TTM EBITDA: 6.3x% Avail (revolver): 96%

CEC Entertainment Credit Rating: D1Store Count: 741Interest Coverage: 2.1xDebt / TTM EBITDA: 5.2x% Avail (revolver): 93%

COVID-19 has had a significant impact on AMC. Given the closure of all locations for at least the next 6 to 12 weeks, the Company will have to deal with a material decline in attendance through the quarter and full year, following the 5.3% decline in 4Q19. The balance sheet has remained highly leveraged, rising to more than 6x in FY19. However, the nearest debt maturities are in September and November 2024, for its $600.0 million and $655.8 million Senior Notes, respectively. The Company ended FY19 with sufficient liquidity of $490.5 million.

CEC has been completely hamstrung by COVID-19, as the Company closed dine-in, entertainment, and arcade services at all locations through at least the end of March. While the Company is offering take-out/delivery and “birthday celebration packages,” these cannot be expected to generate noticeable sales. Off-premise accounted for only 0.4% of sales in 4Q19. Following an August 2019 refinancing, the Company’s revolver and term loan do not mature until 2024 and 2026, respectively. Liquidity included $34.8 million in cash and $105.5 million in revolver availability as of December 29, 2019.

The theater segment has been significantly impacted by COVID-19, with all of the largest theater circuits in the country, including AMC, Regal, and Cinemark, temporarily closing all locations. The closures will only exacerbate the attendance headwinds facing the industry. Attendance in 2019 was already down 4.6%, with box-office revenue down 4%, partially due to the rise in popularity of streaming platforms such as Netflix and Disney+; the latter has already grown to more than 28 million users since launching in late 2019. As Disney Studios dominates the box office, there are growing concerns of a decreased window between a film’s box office run to a streaming platform. As a result of COVID-19, theater operators must now deal with the material unanticipated headwinds, in addition to the ongoing structural headwinds. As a result, both AMC and Cinemark have experienced roughly 70% and 80% drops in their stock prices, respectively, since the beginning of the year. COVID-19 has also impacted M&A activity in the industry, as there is now some uncertainty regarding Cineworld’s acquisition of Canadian operator Cineplex. While both parties still plan to follow through with the transaction and expect it to close in the first half of the year, some are saying the deal will be delayed, including JP Morgan.

Much of the casual dining industry has been struggling with declining traffic due to a saturation of competition within the sector and an increase in options outside of restaurants. The biggest losers have typically been traditional casual-dining chains, which have lost volumes to fast-casual concepts. Some of the better-performing operators have been those that have leaned toward off-premise sales to allow customers to order online for take-out or delivery. This may prove critical in the coming months, as the COVID-19 pandemic has caused many states to ban dine-in services, but take-out and delivery may still be permitted. QSRs are likely to be better positioned, as a high percentage of their sales already fall into the latter categories. The closure of schools, offices, sporting events, and all other social events will have dire impacts to those players relying on such business.

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MOVIE THEATERS

CASUAL DINING

Dine Brands Credit Rating: D1Store Count: 3,628 Interest Coverage: 4.3xDebt / TTM EBITDA: 5.3x% Avail (revolver): 99%

Fiesta Restaurant Group Credit Rating: C2Store Count: 345Interest Coverage: 15.0xDebt / TTM EBITDA: 1.3x% Avail (revolver): 48%

Noodles & Company Credit Rating: D1Store Count: 457Interest Coverage: 13.2xDebt / TTM EBITDA: 1.1x% Avail (revolver): 72%

Red Robin Credit Rating: C1Store Count: 556Interest Coverage: 11.4xDebt / TTM EBITDA: 2.0x% Avail (revolver): 70%

Traffic has been weak at both of Dine Brands’ banners, Applebee’s and IHOP, and management has mainly been relying on promotions to reverse that trend. As a result, off-premise remains a relatively small percentage of overall sales, at 12.6% and 9.5% for Applebee’s and IHOP, respectively. Management planned to return to a normalized amount of about 10 Applebee’s closures in 2020, but the COVID-19 impact may force additional closures, especially among smaller franchisees that may not be able to handle the loss of dine-in services. 51% of the 1,718 franchised Applebee’s are operated by the five largest franchisees, and 1,596 are operated by the top 33 franchisees.

Fiesta has been struggling for several years even after closing a significant amount of underperforming stores, the latest including 19 Taco Cabana stores in January 2020. Fiscal 2019 comps were down 1.8% at Pollo Tropical and 4.1% at Taco Cabana, and the COVID-19 impact will likely keep both in negative territory. While management is developing its off-premise capabilities, the Company is way behind its peers, with only about 5% of revenues generated through these avenues.

Noodles & Company was making progress at improving traffic and comp growth with the introduction of new menu items and an embrace of off-premise options. Comps were up 5.8% in early 2020 through February 25 after just 1.5% growth in 2019, but the suspension of dine-in services across the entire chain will squash that progress. The Company may be better positioned to handle the COVID-19 impact because 58% of its sales are already off-premise. Liquidity at year-end was supported by $10.5 million in cash and $54.0 million in revolver availability.

COVID-19 hit at an inopportune time for Red Robin, as the Company is in the early stages of a turnaround effort that included the closure of 18 underperforming restaurants in 2019 and significant investments to add Donato’s Pizza products to the menu. Comps had returned to positive territory in 3Q19 and 4Q19, but the ceasing of dine-in services will stifle that progress. Off-premise accounted for 13.9% of sales in 4Q, but management hoped to increase that with the rollout of a delivery service in January, where customers ordered through the Company’s website, but the actual delivery was outsourced to third parties.

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At Home Credit Rating: D2Store Count: 213 Interest Coverage: 3.3xDebt / TTM EBITDA: 3.9x% Avail (revolver): 30%

Steak ‘n Shake (Biglari) Credit Rating: E2Store Count: 555Interest Coverage: 2.6xDebt / TTM EBITDA: 9.3x% Avail (revolver): N/A

Bed Bath & Beyond Credit Rating: C2Store Count: 1,524 Interest Coverage: 2.9xDebt / TTM EBITDA: 2.4x% Avail (revolver): 100%

At Home is already facing significant competitive risk and had to slow its unit growth to divert capital investment to developing its omnichannel infrastructure and marketing program (these will cut into margins). Due to growing job and wage losses, consumers will pull back on home spend. At Home’s margins have little room for exogenous shocks, evidenced by the impact of tariffs in 2019. The Company caters to a lower-income consumer, who will be most pressured by layoffs, limited sick leave, etc. The fallout from COVID-19 forced the Company to drawn down an additional draw $55.0 million, leaving it with approximately $71.0 million of availability remaining under its $425.0 million revolver. The Company has $648.0 million of debt outstanding with its nearest maturity in 2022.

Steak ‘n Shake was already struggling before COVID-19, with traffic down 11.2% in fiscal 2019. The Company temporarily closed 107 restaurants in the first half of 2019, with the aim of re-franchising them in the future, and re-franchised 29 other Company-owned units. Nonetheless, further re-franchising will likely decelerate, and those temporary closures may ultimately become permanent. Liquidity consisted of only $112.6 million in cash at year-end; Steak ‘n Shake does not maintain a revolver. The Company’s $181.5 million term loan matures in March 2021. Drive-thru and take-out orders represented more than half of revenues in fiscal 2018.

Bed Bath & Beyond’s operational struggles will be exacerbated by store closures and a pullback in spending, especially as it has already struggled to drive traffic lost to rivals. New CEO Mark Tritton’s strategy to add private label and improve its omnichannel infrastructure is necessary for long-term growth, but will cause sales and margin pressure in the interim and will not be able to lift traffic in the near term. Perhaps there may be a slight uptick from consumers picking up kitchen gadgets in order to execute the new eat-at-home dynamic. The Company has $1.49 billion of debt outstanding, with its nearest maturity in 2024.

The home segment is under significant competitive pressure from mass merchants (e.g., Target and Walmart) and digital players (e.g., Amazon and Wayfair), which offer large assortments at compelling prices. Amazon, Target, and Walmart also have large loyal customer bases that are already shopping these merchants in other categories, making customer acquisition even easier. As there is no real brand loyalty in the sector, customers make purchases based on visual presentation, their style aesthetic, and price. Driving traffic, managing and driving consumer loyalty, and creating desirable merchandise is challenged by marketing and omnichannel development costs. Store closures related to COVID-10 and the discretionary nature of the products will drag sales in the near and medium term. As the economy restarts, consumers will be focused on paying down debt and managing other necessary costs such as housing and medical.

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HOME SEGMENT

Kirkland’s Credit Rating: D1Store Count: 432Interest Coverage: Neg. EBITDA



Pier 1 Imports Credit Rating: DIPStore Count: ~500

Wayfair Credit Rating: D2Interest Coverage: Neg. EBITDA



Kirkland’s saw a resurgence into positive territory for its 4Q comps specifically in December and January. However, the Company did not include any potential impact in its guidance from COVID-19 and will likely see top-line weakness in Q1 and Q2, as demand pulls back and consumers stay home. The Company continues its rent negotiations, which should aid margins. There is a potential for more leeway by landlords, who might be working to mitigate vacancies, especially as their other tenants also seek relief. On March 19, the Company disclosed that it had drawn down $40.0 million of its $75.0 million revolving credit facility, increasing its cash on hand to $52.0 million.

Pier One’s ability to exit the bankruptcy process as a going-concern is unlikely, given the high level of competition and poor positioning prior to its insolvency. The COVID-19 impact will result in declining consumer spending due to layoffs and missed wages, which will exacerbate poor top-line sales and traffic trends. Further, the brand name does not resonate with younger consumers.

Home is an extremely discretionary category, with Wayfair surely seeing demand compression as consumers unsure about economic position pullback on spending. The Company can mitigate supply chain issues with inventory in their own CastleGate facilities until the broader supply chain improves. 2020 adjusted EBITDA margin will be lower than guided, given exposure in the U.S., Canada, the U.K. and Germany -- all seeing surges in COVID-19 cases. The lack of an in-store presence alleviates the rent pressure other retailers face as consumers stay home. Wayfair has full access to its $165.0 million revolver and cash of nearly $1.00 billion, with $1.46 billion of debt outstanding and its nearest maturity in 2022.

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84 Lumber Credit Rating: C2Store Count: 244 Interest Coverage: 4.6xDebt / TTM EBITDA: 2.4x% Avail (revolver): 63%

ACE Hardware Credit Rating: C2Store Count: 5,366 Interest Coverage: 12.3xDebt / TTM EBITDA: 1.4x% Avail (revolver): 70%

True Value (Private Company)Store Count: ~4,500 Debt / TTM EBITDA: 6.1x

84 Lumber is coming off a decent fiscal 2019, but much depends on the housing outlook for 2020. We could see delayed or cancelled construction projects. Commodity deflation has been both a help and a hindrance, as lower prices stymied revenue but helped margins. Store count has leveled off, and the Company does not seem to be in an expansion mode. With significant business tied to the SFR market, the Coronavirus could dampen demand during the upcoming busy building season. There also may be supply chain disruptions from the virus should lumber imports fall off and tariffs still remain in place on many imported materials. The Company has no pending maturities and adequate liquidity.

Ace turned in a good 4Q and FY, with revenues up about 6% in both. The Company is modestly leveraged, with strong coverage. Ace is consumer-spending dependent and could fall victim to customers displaced by job loss during the pandemic. Discretionary improvement projects could be put on hold, and store growth could come to a halt, as anyone thinking about a new franchise may have reservations. Ace does nominal business online (less than 2%). The Company’s three revolvers all mature in 2022.

In April 2018, the True Value Co-op sold 70% of itself to private equity investor ACON. This has led to reduced transparency of its financial performance. Still, based on previous financials and the data we have on the structure of the transaction, we believe True Value remains fairly leveraged. Store growth appears to have slowed somewhat, and similar to Ace, the Company may have trouble recruiting new stores to the banner.

The building materials and home improvement sector was supported by strong economic trends in 2019, although it was a bumpy ride. Housing starts had slowed mid-year but then finished 4Q strong. The ISM index also inched above 50 in January 2020 for the first time since July 2019. The rosy outlook at the end of 2019 has now been tempered by trade tensions and the Coronavirus outbreak. The recently signed Phase I agreement with China did little to alleviate the tariffs on items used in home construction. The pandemic could put a damper on what was expected to be a strong year for new home construction. What remains uncertain is the effect this will have on the DIY market, as people out of work may be hesitant to take on new projects. Smaller projects may go forward.

BUILDING MATERIALS AND HOME IMPROVEMENT

Nontraditional contenders to the pet sector, such as grocery and mass merchants, will likely benefit from customer stockpiling during the COVID-19 outbreak, given pet food and medication are essential purchases for animals’ survival. Pet specialty stores, like Petco (private) and Pet Supply Plus (private), may be challenged due to the rise in e-commerce and temporary store closures enforced by local governments. Chewy (C2) is expected to benefit from this surge in demand, especially as Amazon faces third-party supplier bottlenecks, price gouging, and prioritizes essential-only items, like medical supplies and household staples, for fulfillment until April 5. PetSmart’s (private) stake in Chewy will also help sales, given the Company’s private-label products are sold on Chewy.com. Chewy’s autoship subscription business (over 70% of total 3Q sales) may prompt add-on purchases, as many consumers are forced to stay home. The Company’s loyal customer base, broad product offerings, and price ranges will allow existing customers to trade down amid squeezing discretionary budgets.

Fitness operators have been significantly impacted by COVID-19, as social distancing has led to the closure of gyms across the country. Planet Fitness, the largest operator with more than 2,000 locations, formally announced the closure of all 98 of its corporate-owned locations and is advising all franchisees to do the same. The Company’s stock fell more than 70% over the past month. The outbreak could potentially increase the industry’s already high, roughly 29% attrition rate – especially for boutiques such as Orangetheory. In addition, the sector’s generally high level of operating leverage could further pressure the profitability and consequently the leverage metrics and balance sheet health of many operators, such as Town Sports International and 24 Hour Fitness. Both had a difficult 2019, as waning membership resulted in significant declines in core earnings. We recently issued a business update on 24 Hour Fitness, indicating the Company had been reportedly delaying rent payments given poor 3Q operating results. COVID-19 could intensify the situation for many fitness operators, including 24 Hour Fitness, as operating headwinds can quickly translate into elevated leverage metrics and fixed cost coverage troubles, given the industry’s generally top-heavy capital structure.

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PETS

FITNESS

United Hardware Credit Rating: D2Store Count: 610Interest Coverage: 1.8xDebt / TTM EBITDA: 8.5x% Avail (revolver): 63%

United has struggled with sales growth, as Co-op members have left for greener pastures. 2019 fared a little better, with sales up about 4% through July 2019 (eight months), though EBITDA generation still remains low. As a Co-op, United Hardware tries to keep costs down for its members, driving the lower returns. It does maintain an online presence but does not disclose a revenue breakout. The only debt carried is under its revolver, which matures in 2022.

Town Sports International Credit Rating: D1Store Count: 187Interest Coverage: 3.2xDebt / TTM EBITDA: 3.9x% Avail (revolver): 83%

We expect COVID-19 to have a material impact on Town Sports International’s operations. Even before the outbreak, Town Sports struggled in FY19 and was downgraded to a D1 in December 2019. Comparable club revenues declined 2.9% in its most recent 3Q reporting period, and EBITDA fell more than 31%, given higher club operating costs and increasing market spend to draw in new members. The eroding profitability deteriorated leverage metrics to almost 4x. Additionally, the Company’s $178.2 million term loan is set to mature later this year, on November 15. Town Sports had $33.4 million in liquidity as of 3Q19, significantly lower than the comparable period’s liquidity of $90.9 million (revolver size was lowered from $45.0 million to $15.0 million, given deteriorating credit quality). In January, the Company agreed to purchase Flywheel Sport’s Studio business at an undisclosed price (either party has the right to terminate the purchase agreement before May 1). If completed, the purchase would further increase leverage which, combined with declining liquidity, puts Town Sports in a difficult position to successfully navigate the COVID-19-affected retail environment.

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Planet Fitness Credit Rating: C1Store Count: 2,001 Interest Coverage: 5.3xDebt / TTM EBITDA: 6.0x% Avail (revolver): 100%

Despite a banner FY19, COVID-19 is expected to materially impact Planet Fitness’ operations through the near future. The Company formally announced that it has closed all 98 of its corporate locations through March 31 and is strongly encouraging its franchisees to do the same. Planet Fitness has been operating with elevated leverage of 6x, although debt service remains adequate at 5.3x. Additionally, the nearest maturity for about $1.19 billion in debt is far out into September 2048. The Company’s liquidity also remains strong at $553.8 million.

24 Hour Fitness (Private Company)Store Count: 430

We expect COVID-19 to materially impact 24 Hour Fitness. The Company had already been struggling prior to the outbreak, and according to sources, had started delaying rent payments. Growing competition from budget gym operators combined with the industry’s high attrition rate, resulted in a difficult 3Q19; membership dropped by about 100k since the beginning of the year, which led to a 25% decline in EBITDA. The Company’s bonds fell to distressed levels after trading above par in early 2019, reflecting an ongoing decline in credit quality. As all locations were temporarily shuttered starting March 16 until further notice, we expect liquidity to become greatly pressured and credit quality to further deteriorate. As of September 30, 2019, the Company had liquidity of $95.7 million, though it reportedly had already become more reliant on its $120.0 million revolver during 4Q19.

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Jo-Ann Stores (Private Company)Store Count: 867

Michaels Companies Credit Rating: C2Store Count: 1,274Interest Coverage: 5.2xDebt / TTM EBITDA: 3.4x% Avail (revolver): 90%

Jo-Ann Stores is a distant #3 to Hobby Lobby and Michaels. Margins have been on the decline for several years, with the latest year hit hard by China tariffs that the Company is still working through. The latest COVID-19 impact resulted in store closures and consumers encouraged to stay home. Jo-Ann’s discretionary product offering will not help preserve sales. The Company has over $1.20 billion in debt, with its revolver maturing in October 2021. Leonard Green and Partners have held this investment for eight years. An exit strategy has eluded them and a further financial commitment would seem unlikely.

While Michaels is in a tough segment considering its offering of discretionary goods and the continued impacts from China as well as significant leverage, the Company was still operating with solid margins, liquidity was substantial, and it faces no maturities for several years.

The arts & crafts segment has been challenged by online and mass merchant options as well as significant exposure to tariffs, which has pressured margins over the last few years. While some sales have been transitioning online, the pure players have been slow to adapt and comprise a small percentage of overall sales. Hobby Lobby (private) is believed to have a very solid balance sheet, unlike A.C. Moore (private), which is in the midst of liquidation and Jo-Ann Stores (private), which is substantially leveraged and was already experiencing operational challenges.

ARTS & CRAFTS

Casper Credit Rating: E1Store Count: 60Interest Coverage: Neg. EBITDA



We expect the COVID-19 outbreak to moderately impact Casper. While the Company is a digitally focused mattress retailer, it does have a physical presence of more than 60 retail stores. Management has seen digital sales grow 100% faster in cities with a physical presence, and accordingly had plans to expand to over 200 locations across North America. The outbreak could slow these plans, at least over the short term, and impact sales growth, given an expected reduction in discretionary spending for high-end mattresses. Additionally, the Company is not profitable, with EBITDA significantly in the red, and now likely to move further in the wrong direction. Slowing growth could further weigh down the already pressured equity value of the Company, making it difficult to find the adequate financing it needs to “disrupt the mattress industry.”

SPECIALTY / OTHER

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Guitar Center(Private Company)Store Count: ~500

Guitar Center has been very heavily leveraged for years, and though performance had stabilized in the last few years, it was not enough to improve its balance sheet. With the Company’s product offering deemed especially discretionary, its outlook could severely jeopardize debt refinancing coming due, starting with the $418.0 million in notes in October 2021.

Hudson, Ltd. Credit Rating: C1Store Count: 1,028 Interest Coverage: 8.3xDebt / TTM EBITDA: 2.3x% Avail (revolver): 14%

Party City Credit Rating: D2Store Count: 777Interest Coverage: 2.3xDebt / TTM EBITDA: 6.3x% Avail (revolver): 56%

With more than 1,000 stores in airports, commuter hubs, landmarks and tourist destinations, Hudson’s exposure to the battered travel industry amid the COVID-19 outbreak is expected to take a significant toll on the Company’s performance. Hudson maintains a moderately leveraged balance sheet with no immediate debt maturities. Any outstanding debt is due to its controlling shareholder Dufry (a global travel retailer operating approximately 2,300 stores in 64 countries), including $503.0 million due in 2022. Additionally, the Company has access to Dufry’s $2.74 billion credit facilities maturing in 2022. Given that Hudson is not a U.S. entity, U.S. government support may not be on the table for the Company.

Party City already faced a steep challenge, with significant debt and poor Halloween and Christmas seasons, with margins taking a beating. While the COVID-19 situation will be a challenge for nearly all retailers, there are not likely to be many parties in the works due to calls for social distancing along with a weary consumer. Party City has now temporarily closed all of its U.S. locations through at least the end of March. About one-third of its debt, $720.0 million, comes due in August 2022.

Carnival Credit Rating: B1Interest Coverage: 29.7xDebt / TTM EBITDA: 2.1x% Avail (revolver): 0%

Norwegian Cruise Lines Credit Rating: B2Interest Coverage: 7.4xDebt / TTM EBITDA: 3.2x% Avail (revolver): 0%

The ongoing effects of the Novel Coronavirus on Carnival’s operations and global bookings will have a material negative impact on financial results and liquidity. At fiscal 2019 year end, total debt to EBITDA resided in comfortable territory at 2.1x. Prior to COVID-19, liquidity was ample heading into 1Q20, supported by $518.0 million in cash and $2.80 billion in revolver availability. However, subsequently, Carnival drew down its $3.00 billion revolver in full for a period of six months to increase its cash position and preserve financial flexibility. Additionally, the Company is reducing capex, cutting costs, and pursuing additional financing. That said, 16 new ships are scheduled for delivery through 2025. About $1.83 billion of Carnival’s total $11.50 billion in debt is due in fiscal 2020. As of February 29, 2020, the Company had a total of $11.70 billion of liquidity, including $3.00 billion of immediate liquidity plus $2.80 billion and $5.90 billion from committed export credit facilities that are available to fund ship deliveries for the remainder of 2020 and planned deliveries thereafter, respectively.

Similar to its peers, Norwegian Cruise Lines (NCL) had to suspend all its voyages amid the pandemic. These measures and high uncertainty with regard to COVID-9, threaten the Company’s operational and financial viability. As of December 31, 2019, NCL’s liquidity was $1.10 billion, consisting of $252.9 million in cash and full availability under the Company’s $875.0 million secured revolver. Given the increased refinancing risk, NCL added an additional $675.0 million in revolving credit facilities maturing March 4, 2021. Subsequently, the Company drew down the full amount of $1.55 billion under its credit facilities. At fiscal 2019 year end, NCL had total debt of $6.80 billion, including about $746.4 million due in 2020. The Company has 10 ships on order for delivery as of December 31, 2019 for approximately $8.30 billion.

The Coronavirus (COVID-19) is causing unprecedented disruption to the cruise industry, which was one of the first to be affected by the escalating outbreak, forcing the cancellation or modification of most sailings in Asia beginning in early January. Meanwhile, containment efforts, including travel bans, and the increased erosion of consumer confidence are leading to cancellations of voyages across the world and are impacting global cruise bookings. Following two widely publicized quarantines on board Carnival’s Diamond Princess off the coast of Japan and Grand Princess off the coast of California, which demonstrated the high risk of infection among cruise passengers, the U.S. State Department issued a travel advisory warning against cruise travel. A federal bailout of the cruise ship industry may be unlikely since the big three cruise companies are not U.S. entities and are largely exempt from federal income taxes. Any government support, if any, may be provided due to its impact on U.S. job and wage creation. According to the Cruise Lines International Association (CLIA), the cruise industry in the U.S. had an economic impact of more than $52.70 billion in total contributions in 2018, generated 421,711 jobs across the U.S., and contributed more than $23.15 billion in wages and salaries.

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CRUISE LINES

Royal CaribbeanCredit Rating: C1Interest Coverage: 9.0xDebt / TTM EBITDA: 3.3x% Avail (revolver): 44%

Royal Caribbean was also forced to suspend all of its voyages due to COVID-19. The Company warned that if these travel restrictions continue for an extended period of time, they could have a material impact on the overall financial and operational performance. Royal Caribbean’s ongoing new ship borrowings led to a fairly leveraged balance sheet, with total debt to EBITDA of 3.3x at fiscal 2019 year end. About $2.62 billion in debt is due in 2020. At December 31, 2019, the Company had liquidity of $1.50 billion, consisting of $243.7 million in cash and $1.30 billion available under its unsecured credit facilities. Due to the financial impact of COVID-19 and increased refinancing risk, Royal Caribbean has subsequently increased its revolver capacity by $550.0 million.

In addition, the Company plans to reduce capex and operating expenses, and take other actions to improve liquidity by at least another $1.70 billion in 2020. On March 23, 2020, Royal Caribbean Cruises Ltd. entered into a $2.20 billion 364-day secured term loan facility, to further enhance the Company’s liquidity position due to COVID-19 uncertainty. The facility can be extended at the Company’s option for an additional 364 days. Royal Caribbean has borrowed the full amount available under the new term loan, and the Company now has over $3.60 billion of liquidity comprised of cash and its existing undrawn revolving credit facilities (net of outstanding commercial paper). Royal Caribbean also plans to cut 2021 costs and capex. As of December 31, 2019, the Company had 17 ships on order for an aggregate cost o approximately $14.80 billion. Significant short-term risk remains; this, coupled with a potential longer-term negative psychological effect on consumer demand for cruises, could threaten the Company’s overall financial viability.

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PLEASE READ THE BELOW DISCLAIMER CAREFULLY

This Special Analysis is issued to subscribers only, for their exclusive use. The financial and other information contained herein is compiled from sources which Information Clearinghouse Incorporated [ICI], 310 East Shore Road, Great Neck, NY 11023 does not control and unless indicated is not verified. ICI, its principals, writers and agents do not guarantee the accuracy, completeness or timeliness of the information provided nor do they assume responsibility for failure to report any matter omitted or withheld. This report and/or any part thereof may not be reproduced, and/or transmitted in any manner whatsoever. Any reproduction and/or transmission without the written consent of ICI is in violation of Federal and State Law.

This Special Analysis is issued to subscribers only, for their exclusive use. The financial and other information contained herein is compiled from sources which Information Clearinghouse Incorporated [ICI], 310 East Shore Road, Great Neck, NY 11023 does not control and unless indicated is not verified. ICI, its principals, writers and agents do not guarantee the accuracy, completeness or timeliness of the information provided nor do they assume responsibility for failure to report any matter omitted or withheld. This report and/or any part thereof may not be reproduced, and/or transmitted in any manner whatsoever. Any reproduction and/or

transmission without the written consent of ICI is in violation of Federal and State Law.

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