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$1.6 Billion in Debt Buries Nine West

Women's Apparel Wholesaler Closing Down all 70 Brick and Mortar Locations
April 9, 2018
Another weekend, another major retail bankruptcy. This time it was privately held Nine West Holdings Inc., a women's shoe and apparel wholesaler, which filed for bankruptcy after racking up about $1.6 billion in debt, the second-largest amount of debt on rating agencies' list of 'loans of concern' last year.

Coincidentally, the company also reported $1.6 billion in revenue in fiscal 2017.

Private equity firm Sycamore Partners Management acquired the company and affiliated brands in the 2014 for $2.2 billion.

In total, approximately $925 million of new debt and equity was raised in connection with the 2014 acquisition. Its current annual interest expense is approximately $113.9 million, compared with just $88.1 million of adjusted EBITDA in fiscal year 2017.

Over 80% of Nine West's sales come from wholesale distribution and sales to department stores, off-price retailers and mass merchants. Its wholesale units include such brands as Anne Klein, Bandolino, Gloria Vanderbilt and Jessica Simpson.

However, it also operates 70 brick and mortar retail stores - all of which it plans on closing and has petitioned the courts to allow it to cancel the leases on those stores.

Nine West Group has experienced significant headwinds in the last several years, according to its interim CEO Ralph Schipani, who cited the general shift away from brick-and-mortar shopping as well as a shift in consumer demographics away from branded apparel, and changing fashion and style trends.

Not only did its own retail sales suffer but its wholesale operations saw declines at many of its large distributors, such as Sears, Bon-Ton, and Macy’s, according to Schipani in a bankruptcy court statement. Those declines hit two of Nine West's most notable product groups as well, shoes and jeans.

Nine West attempted to right those trends by introducing a new brand, Easy Spirit, designed for a "younger, more fashionable consumer," but missed the mark in predicting their preferences, Schipani said, and the effort failed. The brand lost $20 million in 2016. The losses were further exacerbated by a substantial inventory purchase that ultimately did not meet sales expectations.

At this point, the company would require substantial capital and operational investments to turn around the Nine West Group business, capital the debtors do not have, Schipani said, adding the debtors "believe this time, attention, and money would be better spent on their historically stable jeanswear, apparel and jewelry businesses."

Going forward, Nine West hopes to be able to gain bankruptcy court approval to sell its brands to Authentic Brands Group LLC for $200 million.

If approved, Nine West will shutter its existing retail store operations. Rejecting the retail leases will save Nine West approximately $3 million in rental and operating expenses per month. The stores posted just $125 million in revenue in fiscal 2017.

The store closures hit two publicly traded retail landlords hardest. Simon Property Group (NYSE:SPG) will lose 35 stores. Tanger Factory Outlet Centers. (NYSE:SKT) will see 19 stores closed. However, neither of the REITs listed Nine West among their 10 largest tenants.

Nine West Holdings' bankruptcy propelled the institutional loan retail default rate to 8.6% compared to the overall rate of 2.7%, Fitch Ratings reported today.

The filing lifted the total retail term loan volume to $5.9 billion.

"Our retail sector institutional term loan default rate forecast is 10%, equating to $7 billion of volume, which would surpass the 8.2% rate the sector set in 2017," Fitch reported.

Fitch anticipates more large retail chains to file bankruptcy this year. About 10% of the retailers in Fitch's market index are listed on Fitch's Top Loans of Concern list, indicating a material default risk. These retail chains include: Neiman Marcus Group, Sears Holdings, FullLBeauty Brands, David's Bridal, Toms Shoes, Indra Holdings, Everest Holdings, Things Remembered, NYDJ Apparel and Vince.

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