💊How's GNC Doing (Long Online Supplements, Short Fitness Stores)?💊

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A quick recap of PETITION’s coverage of everyone’s (cough, no one’s) favorite supplements slinger.

In August 2017 in “GNC Holdings Inc. Needs Some Protein Powder,” we wrote:

GNC Holdings Inc. ($GNC) remains in focus as it reported its Q2 numbers this past Thursday. In summary, decreased consolidated revenue, decreased domestic (company-owned and franchised) same-store sales, decreased net income and operating income, decreased manufacturing/wholesale business...basically a hot mess. Limited bright spots included China sales and the new GNC storefront on Amazon. You read that right: the storefront on Amazon. Ugh. The company has $52mm of cash, $163.1mm available under its revolver and a robust $1.5b of long-term debt on its balance sheet. The stock traded down 7% after the announcement (but was up on the week).

In February 2018 in “GNC Makes Moves (Long Brand Equity, Meatheads & Chinese Cash),” we introduced the great strides GNC was undertaking to avoid a bankruptcy filing. These actions included (a) paying down its revolving credit facility, (b) moving towards an amend-and-extend transaction vis-a-vis its term loan, (c) obtaining a $300mm capital infusion by way of issuance of a perpetual preferred security to CITIC Capital, a Chinese investment fund and controlling shareholder of Harbin Pharmaceutical Group, and (d) the formation of a JV in China whereby it would slap its brand on Harbin’s product.

The following month in “GNC Holdings Inc. & the Rise of Supplements,” we highlighted that the amend-and-extend got done. And this:

Concurrently, the company entered into a new $100 million asset-backed loan due August 2022 and engaged in certain other capital structure machinations to obtain $275 million of asset-backed “first in, last out” term loans due December 2022. Textbook. Kicking. The. Can. Which, of course, helped the company avoid Vitamin World’s bankrupt fate.  Goldman Sachs!

We also noted a number of DTC supplements companies that were juiced by financings or acquisitions, citing them as headwinds to GNC and GNC’s nascent DTC business. The stock traded at $3.97/share back then. And we wrote:

Perhaps those restructuring professionals disappointed by Goldman Sachs’ success in securing the refinancing should just put that GNC file in a box labeled “2021.”

We revisited GNC in May 2018 in “GNC Holdings Inc. Isn’t Out of the Woods Yet.” At that time, the stock hovered around $3.53/share and the company reported more bad news including (i) 200 store closures, and (ii) declining revenue, same store sales at domestic franchise locations, and net income. We wrote:

Clearly GNC’s future — now that it has some balance sheet breathing room — will depend on its ability to capture new international markets, e-commerce growth primarily through its private label, innovation around product to combat DTC supplements brands, and continued cost controls. It will also need to execute on its goal of translating e-commerce sales to foot traffic. To accomplish this Herculean task, GNC may just need some supplements.

Last July, we noted that revenue continued its downward trend but earnings generally beat (uber-low) expectations. In August, we highlighted how Goldman Sachs was acting very “Goldman-y,” given that Goldman Sachs Investment Partners was a major investor in DTC vitamins and supplements startup Care/of, which had just raised a $29mm Series B round. We’ve slacked on our coverage since.

So, like, what’s up with GNC now?

It reported earnings back in July and continued to show weakness. Quarterly consolidated revenue and adjusted EBITDA declined meaningfully — the latter down 3% YOY. Same store sales were down 4.6%. E-commerce was down 0.2%. Revenue from franchise locations decreased 1.8%.

The company blamed promotional offers it implemented at the beginning of the quarter for the lousy same-store sales results.

Early in the second quarter, we made some adjustments to some of our promotional offers and our marketing vehicles, and we saw a direct negative impact to the top line. We quickly course corrected and saw sales strengthen throughout the remainder of the quarter.

PETITION Note: somebody must have gotten fired. Hard. Nothing like dropping an idea that is so horrifically bad that it immediately resulted in a “direct negative impact to the top line.” YIKES.

Speaking of yikes, mall performance is, like, YIIIIIIIIIIIKES:

In addition, the negative trends in traffic that we've seen in mall stores over the past several years has accelerated during the past few quarters putting additional pressure on comps. As part of our work to optimize our store footprint, we're increasing our focus on mall locations. And as you know, we have a great deal of flexibility to take further action here due to the short lease terms we have across our store portfolio.

It's important to note that our strip center locations are relatively stable from a comparable sales perspective. As a reminder, 61% of our existing store base is located in strip centers while only 28% reside in malls.

As a result of the current mall traffic trends, it's likely that we will end up closer to the top end of our original optimization estimate of 700 to 900 store closures.

Mall landlords everywhere were like:


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💥PE Recruiting, Business Development & Retail Trends (Long Fiction Becoming Reality)💥

Summer is now long over which means we just went through all of the “holy sh*t, it’s only the beginning of September and private equity is ALREADY recruiting “talent” for 2021” puff pieces (paywall). Every year, recruiting season gets earlier and earlier and yet the business media still acts surprised/incredulous:

We swear BusinessInsider recycles this piece every single year. It’s like Runner’s World or Women’s Health publishing their “workout of the year” which is almost always the same “workout of the year” from last year.

Recruiting shenanigans have been going on now for years. And we’ve been all over it. Here’s what we wrote in June 2017 (Job Trends (Short Junior Associates/Analysts:)):

Despite rising junior associate salaries - which, notably, one loyal reader says is almost always a leading indicator of an oncoming downturn - millennials don't want that stinkin $180k starting salary, constantly-buzzing iphone, and flimsy business card. The beard is the new business card, brah. Just as investment bankers compete with Silicon Valley "tech" startups that drone deliver pinatas filled with kale chips (maybe we're kidding...maybe we're not), law firms are also struggling to retain young "talent." Why? Because millennials purportedly want to just mix drinks, cut hair, and have ephemeral existences. Good luck with the next recruiting season.

Then in mid-September 2017, we wrote in “Private Equity Recruiting is Bananas: M*therf*ckers Have Lost Their G*d-damned Minds”:

There is so much to unpack in this stupid piece about the annual private equity recruiting frenzy. First, let's stop calling kids who are weeks out of college "talent" merely because they got a job in an investment bank trainee program. They haven't proven that they're talented at anything just yet. Going to an ivy league school, having a trust fund and being a douche isn't dispositive of anything. So, everyone chime the f*ck down please. Second, these folks get paid $200k? And people say there's no wage inflation? Third, the idea that an ibanker trainee is going to be appreciative for the two years of training a bank has given them and, in turn, give later private equity business to said bank is ludicrous. As a practical matter, his/her connection to that bank lasts a mere few weeks prior to them securing the next bigger, better and more Tinderable gig with which they prefer to identify. This seems like an outdated model with bad assumptions baked into it. The only sure thing seems to be that no matter which one of the PE firms these trainees land at, they'll be hiring Kirkland & Ellis LLP as bankruptcy counsel for one of their busted portfolio companies. Fourth, we love this bit about recruiting being earlier than ever "after an agreement to hold back fell apart." Hahahaha. So, private equity firms - KNOWN FOR DEAL-MAKING - couldn't even come to a deal amongst themselves?? This is like mutually assured destruction among KKRWarburg PincusCarlyle Group LPApollo Global Management LLCBain CapitalBlackstone Group LPTPG and Golden Gate Capital. Here's a great idea: lets trip over ourselves - and each other - to hire people with literally "no work experience." Those interviews must be PAINFUL AF. And, oh, hey you Managing Director. We love that you're "often forced to cancel business meetings last-minute to interview candidates." We're sure a multi-billion dollar transaction can wait for some piss-ant Harvard bro who inexplicably and unnecessarily writes equations on glass to regale everyone with his rad math skills. So lit. On what basis are these kids REALLY getting hired then? We think it’s probably pretty obvious. And it’s questionable how this BS still flies. What does any of this have to do with disruption? Well, when you're competing with venture capital and tech to acquire "talent," desperate times seemingly call for desperate measures. Logic has been disrupted. And it's absurd.


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💥What to Make of the Credit Cycle. Part 30. (Long Signs of Coming Pain?)💥

This week the market got qualitative and quantitative signals that were decidedly mixed.

On Tuesday, the ISM U.S. manufacturing purchasing managers’ index registered 47.8% for September, the lowest reading since June ‘09, and the second straight month of deceleration. A number below 50% suggests economic contraction. Economists all over Wall Street bemoaned tariffs for diminished activity, with one Deutsche Bank economist noting “the recession risk is real.” President Trump, of course, parried, saying that higher relative interest rates and the strong dollar are to blame.

Similarly, pundits dismissed this data’s importance, noting that the US economy is more services-based (70% of growth) than manufacturing-oriented. In addition, a competing survey from IHS Markit showed some positivity, reflecting that “though the sector remains in contraction, the index rose for the second straight month.” It concluded that the US, China and emerging markets are all simultaneously improving. Ah, qualitative reports. Insert grain of salt here. 😬

On Thursday, the ISM non-manufacturing index — a widely watched measurement of the services sector — came out and the numbers were 💩. Like weakest in 3 years 💩💩💩 .

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🤪A Break from Regularly Scheduled Programming (Long Life, Death, Sex & Work).🤪

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We can think of some pretty horrific ways to meet one’s maker — a snake jumping out of a plane toilet bowl, a crane falling on your head while you walk down the street, a sinkhole opening up and swallowing you hole — but we reckon that dying at your desk is up there on the list. Top 5, no doubt. We can picture it: you’re sitting there pencil-f*cking some wholly-unnecessary-lost-cause-hail-mary pitch deck or useless-bill-the-client-anyway associate memo and boom! Your head plops to the desk and you’re a goner. Godspeed to whomever inherits that luck-filled office. Chill vibes!

There are many ways that Europe has the US beat (and vice versa) but you really have to hand it to France’s liberal work-related incident policy. Check it: in “A French worker died after sex on a business trip. His company is liable” we learned…ah…wait. Just marinate on that headline for a second. It’s just too good.


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💥Another Gangbusters Quarter from Pier 1 (Long Slow Deaths)💥

Callback to previous Pier 1 Imports ($PIR) coverage here (Q1 ‘19 earnings summary), here (Q4, fiscal ‘18), and here ($71mm in cash remaining). Unfortunately, this will be our last coverage of the retailer because it appears to have pulled off a miracle turnaround of epic proportions: it CRUSHED Q2 earnings and appears to be well on its way to reclaiming “iconic” status!

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THIS THING IS A STEAMING TURD.

It’s even worse than we initially tweeted. Gross profit was 16.7% vs. 26.3% last year. The company’s operating loss expanded to $93.1mm compared to $62.5mm a year ago; it reported a net loss of $100.6mm or $24.29/share ($51.1mm and $12.68/share loss last year). The company noted “lower average customer spend” and “decreased store traffic.” And it sank $7mm into professional fees to help it right the ship. Management surely would’ve gotten torn up on the earnings call except, well, only one analyst was actually on the call. Nobody cares anymore. Anywho…


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🎯Experiences Galore: Dave & Buster’s Complains of Cannibalization (Short Arcades)🎯

We all know the pervasive narrative: when faced with a decision between purchasing expensive new dress shoes (a/k/a “deal sleds”) or tickets to Coachella, a lot of people today opt for those festival tickets. Why? Experiences. Everything today is apparently about experiences.

McKinsey & Company once wrote that:

Over the past few years, personal-consumption expenditures (PCE) on experience-related services—such as attending spectator events, visiting amusement parks, eating at restaurants, and traveling—have grown more than 1.5 times faster than overall personal-consumption spending and nearly 4.0 times faster than expenditures on goods.

This strong growth in demand for experiences had, for some time, shown well for those already situated in the space. The surging demand for experiences, however, has attracted new entrants, and may soon produce winners/losers in the space. Dave & Busters Entertainment Inc. ($PLAY) — a family-friendly chain offering a sports-bar-style setting for American food & arcade games — acknowledges this potential, among other things, in its most recent earnings call, announcing disappointing numbers


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⚡️Update: What's Up With Francesca's ($FRAN)?⚡️

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We first wrote about Houston-based Francesca’s Holdings Corp. ($FRAN) back in February when (i) the stock was trading at $0.92/share, (ii) the company had announced that it had retained Rothschild & Co. and Alvarez & Marsal LLC, and (iii) the company was coming off of a quarter where it (a) reported -14% same store sales, -10% net sales, and a net loss of $16mm, (b) acknowledged that 17% of its retail footprint was “underperforming,” and (c) blew out its fifth CEO in seven years. That’s all.

A lot has transpired since then. Going into its second quarter ‘19 earnings, the stock — after declining 80% over the last year — was suddenly and mysteriously on a small August upswing, reaching as high as $5.16/share on September 9 (PETITION Note: the company did a mid-summer 12-for-1 reverse stock split so that mostly explains the recovery from the $0.92/share level we’d previously written about but the upswing continued thereafter).

Then some weird sh*t happened. The company issued earnings and comp store sales were down 5% and net sales decreased 6%. Gross margins were also down.

Here is a snapshot of the company’s sales growth / (decline) over the years:

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The company noted a decrease in margin’s due to aggressive markdowns, here are EBITDA margins over the last few years:

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Here is the overall performance over the years:

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And yet the stock popped on the report:

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That’s right. It got as high as $18.14/share on this report. We know what you’re thinking: “that report sucks, the numbers were terrible.” Yes, yes indeed, they were. But, on a relative basis, this marked a dramatic improvement.


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💊Pushed Pills Pressure Purdue Pharma💊

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Long time PETITION readers should be, if they’re paying attention, identifying recurring themes confronting the various sectors of distress we cover. In retail bankruptcy, for instance, the stories generally contain the same elements: some combination of too much leverage (especially if PE-backed), too large an uneconomical brick-and-mortar footprint, slow adoption of e-commerce, poor supply chain management, awful off-trend product assortment, and disruptors (i.e., Amazon Inc., resale, DTC, etc.). In oil and gas, too much leverage backing capital intensive exploration and production initiatives, an unfavorable commodity environment, bloated SG&A, and too much money chasing outsized returns. In biopharma, new drugs are expensive and time-intensive to produce and often, despite potentially valuable IP and viable use cases, companies run out of money (and/or bust convertible debt) and are unable to continue paying to push their products through the regulatory framework absent a chapter 11. In healthcare, rollups of behavioral health, CCRC, rehab centers, etc., layer on too much debt on top of questionable business models in the face of an uncertain regulatory atmosphere.

And then there is another category: companies with little to no funded debt, minimal trade debt, an ability to fend off competition, and a viable product. What’s their problem? As we’ve seen in recent cases, i.e., Takata CorporationImerys Talc America Inc. (also discussed here), Insys Therapeutics Inc.The Diocese of Rochesterthose companies tend to get sued into oblivion on the basis of shady-as-sh*t business practices or other general degenerative scumbaggery.

And so it should come as absolutely no surprise to anyone* that Oxycontin manufacturer, Purdue Pharma, has joined the fray, filing for bankruptcy this past week in the Southern District of New York (before the same judge administering the Sears sh*t show). Hold on to your butts people, this one ought to be interesting.

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Unless you’re a total ignoramus, you know by now that the country has been ravaged by an opioid epidemic. Here is 60 Minutes doing a deep dive into the issue. Here is the White House talking about “[e]nding America’s Opioid Crisis.” And here is John Oliver doing the John Oliver thing while talking about opioids.

We mean, you have to be willfully unaware or just plain stupid if you don’t know that this is a big problem. While numerous companies are implicated in this ever-visible scandal, Purdue Pharma is the biggest fish to fall to date (query how long that lasts). But, as noted above, Purdue Pharma generates a ton of money, has no funded debt, etc. So what it needs — and what it gets from a chapter 11 bankruptcy filing — is a break from the deluge of lawsuits against it. All 2,625 of them.

For the uninitiated, a bankruptcy filing triggers an automatic stay pursuant to section 362 of the bankruptcy code. This is an injunction, of sorts, that draws a line in the sand and prevents creditors from rushing to enforce their claims against a debtor. The idea is that by halting this rush and providing the debtor a “breathing spell,” the debtor will have a better opportunity to configure a go-forward strategy that is not only to its benefit, but also treats similarly situated claimants fairly. As you might imagine in a litigation scenario where there are literally thousands of potential judgement creditors scattered across various state and federal courts across the country, this is a powerful tool. It prevents Mia Wallace, plaintiff #1, from winning a huge judgement and collecting against that judgement to the point of siphoning away all of the debtors’ asset value before Vincent Vega, plaintiff #2, has had his day in court.** It also helps the debtors triage the outrageous expense involved with defending heaps of lawsuits all across the country; indeed, the Purdue Pharma debtors note that they spend $5mm/week — A WEEK! — defending themselves against litigation. They project to spend approximately $263mm on legal and related professional costs in 2019. That’s no typo, folks. Biglaw lawyers charge mint.

Here’s the thing about that “automatic stay” thing, though: there are exceptions to it — including, most relevant here, one that’s commonly referred to as the “police and regulatory power exception” (section 362(b)(4)). To preempt the applicability of this section, the debtors have already filed a “preliminary injunction motion,” seeking to enjoin continued prosecution of active governmental litigation against them (and a long slate of related parties, i.e., the entire Sackler family tree).***


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🤔A GameStop Turnaround Story? (Long Skepticism)🤔

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PETITION is generally about disruption and one notable retail business is clearly in the midst of a secular sea change*…

On September 10, GameStop Corp. ($GME) reported Q2 ‘19 earnings. They weren’t, to put it kindly, dogsh*t. The results reflected a sharp decline in sales -14.3% from $1,501mm in Q2 ‘18 to $1,286mm, driven by a 41% drop in console sales and 18% reduction in pre-owned sales. Comparable same stores sales declined 11.6%. To make matters worse, GameStop gave investors lower guidance than expected. On last Tuesday’s earnings call management noted:

We are approaching the end of the current console cycle with nice generation consoles slated to be available in late 2020, and as such we expect our year-over-year sales to be down over the next three or four quarters, reflecting the end of that cycle.

Such confidence and enthusiasm!! The shift to digital video games is clearly cutting GameStop out as the middleman, and increased competition is eating up its market share: the business is becoming increasingly cyclical.**

On the earnings callBen Schachter, equity analyst at Macquarie Group, had some questions for management about the shift to digital in the video game industry and how $GME is going to adapt:

Can we talk about high-level -- the shift to digital, and then how it impacted the business? So a few questions on that. One, when you think about the next cycle, what percentage of total game, do you think are going to be sold physically versus digital? And what your share might look like in that? Two, how do you expect to participate in digital? How will that evolve for you guys versus what it is today? And then three, around the used business, what does that look like as we move more to digital?

Management responded:


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PG&E Picks Up the Pace (Long Seth Klarman)

 
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Well, that sure didn’t last long. In “Is it a Plan or a Placeholder?,” we discussed the recently proposed plan of reorganization filed by PG&E Corporation and Pacific Gas and Electric Company ($PCG). We wrote:

Moreover, the plan also depends on the “Subrogation Wildfire Claims” — claims “held by insurers or similar entities in connection with payments made to others on account of damages or losses arising from such wildfires” — coming in at a max $8.5b.[] Will these numbers hold? We suspect the answer is an emphatic ‘no.’

As much as we like being right, we certainly weren’t expecting it to happen so soon.

A mere few days after filing its plan of reorganization, PG&E announced an $11b settlement with parties representing 85% of the Subrogation Wildfire Claims. This settlement, still subject to the approval of the Bankruptcy Court, would satisfy and discharge all insurance subrogation claims against the Debtors arising from the 2017 Northern California wildfires and the 2018 Camp fire.” Per Reuters:

The company also amended its equity financing commitment agreements to accommodate the claims, and reaffirmed its $14 billion equity financing commitment target for its reorganization plan.

One amendment was an increase in the “Wildfire Claims Cap” to $18.9b from $17.9b. The debtors understand the signaling here: with the subrogation claimants almost immediately getting $2.5b more than what was in the plan, they prudently indexed higher to account for wildfire claimant expectations.

Despite the assumption of $3.5b more in liabilities (exclusive of earlier settlements), this is a net positive for PG&E. They removed one constituency from the board (assuming they don’t trade out of their claims and blow up the settlement), got a legitimate impaired accepting class to help usher the plan through, and moved themselves closer to a global settlement.

Anyway, the stock — somewhat mysteriously considering the marked INCREASE in liabilities — reacted favorably to the news, up over 11% on the week and erasing Monday’s post-plan blistering:

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Previously in PETITION. Part II (Short Tony the Tiger)

In June 23rd’s “Plastic is Ripe for a Reckoning (Long Ridiculous Branded Water)and in a short follow-up on June 30, we talked about how plastic has a bullseye on it. In the latter, we wrote:

Meanwhile, we were curious whether all of this talk about aluminum and glass taking over for plastic was having an effect elsewhere. Compare the bids for Anchor Glass Container Corp’s $150mm second lien term loan maturing 2024:

On May 6, the bid was 55.6 with a yield-to-worst of 25.2%.

On June 24, the bid was 71.4 with a yield-to-worst of 18.5%.

Long bullishness on glass containers?

S&P clearly doesn’t think so:

Here is where the second lien term loan traded this week: 70.7.

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☁️WeWork (Long Corporate Governance Wonks)☁️

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Surely you're sick of WeWork — uh, excuse us, “The We Company” — by now. There's been more drama surrounding its upcoming IPO than an episode of The Hills. You’ve likely heard about the $60b-to-$47b-to-$20b-to-$10b valuation drop, the wave pool, the dual-class voting structure, the insider deals between Adam Neumann, landlord, and Adam Neumann, tenant, and so on and so forth. We won’t rehash it all for you. We do have some word limitations. 

We do wonder if the events of the past two weeks are a sign of less frothy times ahead. After all, investors -- equity and bonds -- have gotten so accustomed to getting bent over the last several years that we're going long rheumatologists. Knees must be hurting.


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🤖How is Tech Doing? (Long Self-Imposed Pain)🤖

Silicon Valley Bank ($SIVB) recently issued its “State of the Markets” report, reflecting tech-related activity over the first six months of 2019. Suffice it to say, despite a number of potential headwinds, e.g., trade wars and fears of stagnating global growth (particularly in Europe and China), tech continues to thrive. The question is: can that continue? Here are some key charts from the report:

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As we were writing this China announced that it would retaliate with tariffs on $75b more of US goods (with US auto taking a large hit of 25% on cars and 5% on parts).* As you no doubt know, President Trump responded in his usually temperate manner:

…blah blah blah…something fentanyl…blah blah blah. The stable genius and “Chosen One” then moved the US closer to the easily winning the trade war (cough) by imposing 30% tariffs on $250b of Chinese goods and 15% tariffs on an additional $300b of goods. Anyway, it’s safe to say that these headwinds will only get stronger and will have a big effect on tech.** To point, tech names got battered post-tweets:

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Why? Well…

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But, sure, tweets and stuff. Nothing to see here. Anyway, give the presentation a gander: it has some good slides on the state of venture capital, enterprise vs. consumer IPOs, and international developments.

*****

Meanwhile, The Information came out with this doozy earlier this week:


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☎️Who Knew? People Don’t Use Landlines Anymore? (Short the Peso, Short US-denominated EM Debt).☎️

We’re all for a reprieve from retail and energy distress. Hallelujah.

Maxcom USA Telecom Inc. is a telecommunications provider deploying “smart-build” approaches to “last mile” connectivity (read: modems, handsets and set-up boxes) for enterprises, residential customers and governmental entities in Mexico — which is really just a fancy way of saying that it provides local and long-distance voice, data, high speed, dedicated internet access and VoIP tech, among other things, to customers.* It purports to be cutting edge and entrepreneurial, claiming “a history of being the first providers in Mexico to introduce new services,” including (a) the first broadband in 2005, (b) the first “triple-play” (cable, voice and broadband) in 2005, and (c) the first paid tv services over copper network using IP…in 2007. That’s where the “history” stops, however, which likely goes a long way — reminder, it’s currently the year 2019 — towards explaining why this f*cker couldn’t generate enough revenue to service its ~$103.4mm in debt.** Innovators!!

And speaking of that debt, it’s primarily the $103.4mm in “Old Notes” due in 2020 that precipitated this prepackaged bankruptcy filing (in the Southern District of New York).***

The Old Notes derive from a prior prepackaged bankruptcy — in 2013 (PETITION Note: not a “Two-Year Rule” violation) — and were exchanged for what were then outstanding 11% senior notes due in 2014. These Old Notes have a “step-up interest rate,” which means that, over time, the interest rate…uh…steps up…as in, increases upward/up-like. The rate currently stands at 8%. Unfortunately, the company doesn’t have revenue step-ups/upwardness/upseedayzee to offset the interest expense increase; rather, the company “…incurred losses of $4.9 million for the three months ended June 30, 2019, as compared to losses of $2.9 million for the three months ended June 30, 2018, and losses of $16 million for the year ended December 31, 2018, compared to losses of $.8 million for the year ended December 31, 2017….” Compounding matters are, among other things, the negative effects of decreased interest income and foreign currency exchange rates (the dollar is too damn strong!).**** The closure of the residential segment also, naturally, affected net revenue.


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❓How’s Oil and Gas Doing. (Spoiler Alert: Not Well)❓

Callback to May 12’s “Fast Forward - Oil & Gas is SO 2019.” We wrote:

In March’s “Oil and Gas Continues to Crack (Long Houston-Based Hotels),” we wrote:

The bankruptcy waiting room is becoming standing room only for oil and gas companies despite oil resting near 2019 highs (even after a rough 2% decline on Friday). We’ve previously mentioned Jones Energy ($JONE)Sanchez Energy Corporation ($SN)Southcross Energy Partners LP ($SXEE)Vanguard Natural Resources, Alta Mesa Holdings LP ($AMR) and Chaparral Energy Inc. ($CHAP) in “⛽️Is Oil & Gas Distress Back?⛽️.” Based on earnings reports or other SEC filings this week, add Emerge Energy Services LP ($EMES), EP Energy Corporation ($EPE) and Approach Resources Inc. ($AREX) to the list.

And:

Here’s the bottom line: both amend-and-extended and formally restructured oil and gas companies were an option on oil prices. That option is out of the money for a number of these companies. The end result will be an uptick in Texas’ hotel reservations and bankruptcy fees. And soon.

We also wrote:

Legacy Reserves Inc. ($LGCY) is yet another E&P company that looks like it may be destined for the bankruptcy bin. The company announced this week that it is evaluating strategic alternatives. It subsequently filed its 10-K which included going concern language and, significantly, confirmation that the company’s lenders had agreed to extend the company’s maturity under its credit agreement from April 1 to May 31, 2019. This is like a good movie needing a bit more production time prior to theatric release: usually, the movie ultimately it gets released. Likewise, this will ultimately end up in bankruptcy court.

Let’s take stock of the bankruptcy bodybag count since then:

  • Jones Energy ✅;

  • Southcross Energy Partners LP ✅;

  • Vanguard Natural Resources ✅;

  • Sanchez Energy Corporation ✅;

  • Emerge Energy Services LP ✅;

  • Legacy Reserves ✅.

Meanwhile, EP Energy Corporation ($EPEG) reportedly just missed its $40mm interest payment due under the indenture governing its 8.000% 1.5 Lien Notes due 2025 (due on August 15, 2019). Of course, there’s also been a number of private oil-and-gas companies 


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💩Yes, Let’s Get Right to It: Retail Blows. The End.💩

 

You have to respect the brevity deployed by Lolli and Pops Inc., the sweets retailer that filed for bankruptcy in the District of Delaware on Monday. In a shockingly-yet-refreshingly terse 8-page first day declaration, the company and its affiliated debtors’ CRO justified the bankruptcy filing by saying, in effect, the following: retail blows. The funny thing is that the document could have been even shorter. We’ll give it a shot:


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⚡️Summer Announcement⚡️

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As we’ve previously announced, we’re a bit more bandwidth constrained now that we’re deep into summer and so we’re going to use this opportunity to, among other things, (a) update some processes on the backend and (b) experiment with content distribution. For instance, we never actually A/B tested whether recurring Wednesday and Sunday a$$-kicking briefings were the right way to deliver our content. What’s an A/B test, you ask?

Consider a scenario where you know you’re going to be pitching juicy retail mandates 20 straight times against XYZ Group, a competitor restructuring advisor. You can go in with the same basic pitch framework each time and roll the dice but, ultimately, you’ll have no data to judge your strategy. You might as well just be throwing darts.


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📦Nerds Lament: Subscription Box Company Goes BK📦

We’re old enough to remember when subscription boxes were all the rage. The e-commerce trend became so explosive that the Washington Post estimated in 2014 that there were anywhere between 400 and 600 different subscription box services out there. We reckon that — given the the arguably-successful-because-it-got-to-an-IPO-but-then-atrocious-public-foray by Blue Apron Inc. ($APRN) — the number today is on the lower end of the range (if not even lower) as many businesses failed to prove out the business model and manage shipping expense.

And so it was only a matter of time before one of them declared bankruptcy.

Earlier this morning, Loot Crate Inc., a Los Angeles-based subscription service which provides monthly boxes of geek- and gaming-related merchandise (“Comic-con in a box,” including toys, clothing, books and comics tied to big pop culture and geek franchises) filed for bankruptcy in the District of Delaware.* According to a press release, the company intends to use the chapter 11 process to effectuate a 363 sale of substantially all of its assets to a newly-formed buyer, Loot Crate Acquisition LLC. The company secured a $10mm DIP credit facility to fund the cases from Money Chest LLC, an investor in the business. The company started in 2012.

Speaking of investors in the business, this one got a $18.5mm round of venture financingfrom the likes of Upfront VenturesSterling.VC (the venture arm of Sterling Equities, the owner of the New York Mets), and Downey Ventures, the venture arm of none other than Iron Man himself, Robert Downey Jr. At one point, this investment appeared to be a smashing success: the company reportedly had over 600k subscribers and more than $100mm in annualized revenue. It delivered to 35 countries. Inc Magazine ranked it #1 on its “Fastest Growing Private Companies” listDeloitte had it listed first in its 2016 Technology Fast 500 Winners list. Loot Crate must have had one kicka$$ PR person!

But life comes at you fast.

By 2018, the wheels were already coming off. Mark Suster, a well-known and prolific VC from Upfront Ventures, stepped off the board along with two other directors. The company hired Dendera Advisory LLC, a boutique merchant bank, for a capital raise.** As we pointed out in early ‘18, apparently nobody was willing to put a new equity check into this thing, despite all of the accolades. Of course, allegations of sexual harassment don’t exactly help. Ultimately, the company had no choice but to go the debt route: in August 2018, it secured $23mm in new financing from Atalaya Capital Management LP. Per the company announcement:

This financing, led by Atalaya Capital Management LP ("Atalaya") and supported by several new investors (including longstanding commercial partners, NECA and Bioworld Merchandising), will enable Loot Crate to bolster its existing subscription lines and improve the overall customer experience, while also enabling new product launches, growth in new product lines and the establishment of new distribution channels.

Shortly thereafter, it began selling its boxes on Amazon Inc. ($AMZN). When a DTC e-commerce business suddenly starts relying on Amazon for distribution and relinquishes control of the customer relationship, one has to start to wonder. 🤔

And, so, now it is basically being sold for parts. Per the company announcement:

"During the sale process we will have the financial resources to purchase the goods and services necessary to fulfill our Looters' needs and continue the high-quality service and support they have come to expect from the Loot Crate team," Mr. Davis said.

That’s a pretty curious statement considering the Better Business Bureau opened an investigation into the company back in late 2018. Per the BBB website:

According to BBB files, consumers allege not receiving the purchases they paid for. Furthermore consumers allege not being able to get a response with the details of their orders or refunds. On September 4, 2018 the BBB contacted the company in regards to our concerns about the amount and pattern of complaints we have received. On October 30, 2018 the company responded stating "Loot Crate implemented a Shipping Status page to resolve any issues with delays here: http://loot.cr/shippingstatus[.]

In fact, go on Twitter and you’ll see a lot of recent complaints:

High quality service, huh? Riiiiiiight. These angry customers are likely to learn the definition of “unsecured creditor.”

Good luck getting those refunds, folks. The purchase price obviously won’t clear the $23mm in debt which means that general unsecured creditors (i.e., customers, among other groups) and equity investors will be wiped out.***

Sadly, this is another tale about a once-high-flying startup that apparently got too close to the sun. And, unfortunately, a number of people will lose their jobs as a result.

Market froth has helped a number of these companies survive. When things do eventually turn, we will, unfortunately, see a lot more companies that once featured prominently in rankings and magazine covers fall by the wayside.

*We previously wrote about Loot Crate here, back in February 2018.

**Dendera, while not a well-known firm in restructuring circles, has been making its presence known in recent chapter 11 filings; it apparently had a role in Eastern Mountain Sports and Energy XXI.

***The full details of the bankruptcy filing aren’t out yet but this seems like a pretty obvious result.

⚡️Here a Sale. There a Sale. Everywhere a Sale Sale! (Long Bankruptcy Code Section 363)⚡️

In a nutshell, bankruptcy code section 363 allows a debtor to sell assets free and clear of liens and encumbrances.

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In other words, a company can sell itself and the buyer can leave a bunch of bad sh*t behind. It’s a powerful tool and helps the buyer avoid any sort of “fraudulent conveyance” liability down the road. We’re seeing a proliferation of 363-based bankruptcy cases. In the last week, for instance, Barneys New York Inc., iPic-Gold Class Entertainment LLC, and Perkins & Marie Callender’s LLC all filed with the intent of pursuing sales (PETITION Note: see, also, Jack Cooper Ventures Inc. below).


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⛽️Halcon Resources Poised to be the Next Oil & Gas Chapter 22 (Long Kerosene)⛽️

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Nearly three years after its last prepackaged plan of reorganization wiped $1.8 billion of debt off of the company’s balance sheet, onshore E&P company, Halcon Resources Corporation ($HKRS), is once again on the bankruptcy courthouse steps with another prepackaged bankruptcy. This company is burning debt like a baaaaaaaaaaaawse.

In the prior bankruptcy, the company eliminated $1b of 13% ‘22 senior secured third lien notes, $316mm of 9.75% ‘20 senior notes, $297mm of 8.875% ‘21 senior notes, $37mm of 9.25% ‘22 senior notes, and $290mm of 8% ‘20 senior convertible notes. The majority of the equity in the reorganized entity went to the third lien noteholders, with other equity going to unsecured holders (15.5%), convertible noteholders (4%) and common stockholders (4%). That equity holds very little value today. The stock traded publicly up until July 23, 2019, when the Nasdaq delisted the company’s shares ($HR) and the stock began trading on OTC pink sheets under the $HKRS symbol.

Meanwhile, here’s what the company’s current debt sitch looked like this as of the most recent 10-Q:


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