Claire’s Stores Inc. bondholders are signaling their distress as the girls-jewelry retailer’s least-profitable holiday season in five years prompts the company to turn to its third chief executive (CLE:US) officer since 2007.
Weighed down by $2.4 billion of debt after its buyout by Apollo Global Management LLC (APO:US), yields on the company’s most-widely traded bonds due March 2019 surged to 12.6 percent today. The bonds, which yield more than 10 percentage points above similar-maturity Treasuries, now join Claire’s longest-maturity notes among securities considered distressed.
The company, whose same-store sales fell 10.7 percent in its fiscal fourth quarter as a global expansion failed to improve earnings, is now seeking to lure customers with an exclusive jewelry line with singer Katy Perry and a partnership with Dylanâs Candy Bar, the confectioner run by the daughter of designer Ralph Lauren, Claire’s chief financial officer, J. Per Brodin, said during a conference call with analysts and investors yesterday. Beatrice Lafon, president of Claire’s European unit, is taking over as CEO following the resignation of James Fielding.
“The magnitude of the same-store sales decline was meaningfully below our expectations,” David Kuntz, an analyst with Standard & Poor’s, said in a telephone interview. The Katy Perry and Dylan’s Candy lines can help “pique people’s interest,” pulling shoppers into the retailer’s 3,535 stores.
Claire’s same-store sales, revenue at locations open at least one year, fell 12 percent in North America and 8.5 percent in Europe in the fourth quarter, according to an April 1 company statement. The company’s 28 percent drop in adjusted earnings before interest, taxes, depreciation and amortization to $93 million exceeded the 10 percent decline expected by KDP Investment Advisors Inc.
Leslie Loyet, a spokeswoman for Hoffman Estates, Illinois-based Claire’s, and Fran McGill, a spokesman for Apollo who works for Rubenstein Associates Inc., declined to comment.
Lafon began her new role as CEO yesterday, replacing Fielding, who joined in 2012 from Disney Stores Worldwide Sales, where he helped increase profitability by focusing on children aged two to 12. Fielding took over from Gene Kahn, who Apollo installed at the time of its $3.1 billion buyout seven years ago and oversaw its European expansion.
Katy Perry’s collection of jewelry and fashion accessories, which are inspired by her 2013 album, PRISM, will debut next month, with the start of her world tour, according to a statement on her website. The singer’s first concert is scheduled in Belfast on May 7.
The new Katy Perry and Dylan’s Candy lines “differentiate us, give us something that is unique and it really tends to resonate with our customer,” Brodin said on the teleconference to discuss fourth-quarter results.
Claire’s, which sells jewelry and accessories to girls in a targeted age range of three to 18 years old, had a $65.3 million loss in the fiscal year ended Feb. 1, its first in four years, according to data (CLE:US) compiled by Bloomberg.
“We had a difficult fourth quarter,” Brodin said on the call, partly blaming “heavy snow and extreme cold weather across most of our markets.”
The company is shutting its 17 stores in China along with its Shanghai office after suffering an $8 million Ebitda loss in 2013, it said in a statement. Claire’s had zero stores in the country in October 2012.
“They got into some operational difficulty that made them reevaluate their Chinese strategy,” said Kuntz.
During the fourth quarter, the retailer (CLE:US) opened 28 new stores, with 16 in Europe, 11 in North America, and one in China. It also closed 32 locations, bringing company-operated stores to 3,114, Brodin said on the call. There are also 421 franchised locations, according to the April 1 statement.
“The pace of new store openings is decelerating globally,” said S&P’s Kuntz. “The core of the business is North America and Europe, and that’s what makes and breaks their performance.”
Claire’s burned $95.3 million of cash in the year ended Feb. 1, according to KDP, its first free-cash deficit in five years after “surprisingly weak” results in the fourth quarter. Free cash is money that can be used to retire debt, reward shareholders with dividends and buybacks, or reinvest in the business.
The Montpelier, Vermont-based research firm said yesterday that it’s keeping its “sell” recommendation on Claire’s $320 million of 7.75 percent unsecured notes due June 2020. Those bonds were quoted at 72.3 cents on the dollar today at 3 p.m. in New York to yield 14.7 percent, according to prices compiled by Bloomberg.
The retailer’s 8.875 percent second-lien notes due in 2019 fell to 86.5 cents at 3:26 p.m. in New York, from 93 cents on March 31, the day before Claire’s reported its fourth-quarter earnings, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
“We continue to look for international franchise opportunities,” Brodin said on the call yesterday. “During the fourth quarter, our Balkans partner opened its first store in Serbia.”
Claire’s has also made “significant investments” in online advertising as part of its e-commerce strategy to reach its customers and increase sales amid a decline in mall traffic, according to Brodin.
S&P said yesterday it expects performance will remain weak over the next couple of quarters as Claire’s may need to increase “promotional activity” to work through its now elevated inventory. It maintained a B- grade on the company, citing sufficient cash on hand and availability under its revolving credit line.
‘Clearly there was some weakness in traffic and consumers were spending less when they did go shopping,’’ Kuntz said. “The value-price consumer is still stretched.”
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