📦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.

😬Decreased Birth Rates, Diminished Sales & Distressed Signs: Destination Maternity Deteriorates (Short Turnaround BoD Types)😬


Per NPR:

The U.S. birthrate fell again in 2018, to 3,788,235 births — representing a 2% drop from 2017. It's the lowest number of births in 32 years, according to a new federal report. The numbers also sank the U.S. fertility rate to a record low.

Not since 1986 has the U.S. seen so few babies born. And it's an ongoing slump: 2018 was the fourth consecutive year of birth declines, according to the provisional birthrate report from the Centers for Disease Control and Prevention.

Birthrates fell for nearly all racial and age groups, with only slight gains for women in their late 30s and early 40s, the CDC says.

These statistics must really suck for any business that generates revenue off of the maternity cohort.

Enter Destination Maternity Corporation ($DEST), a retailer of maternity apparel with a nationwide chain of specialty stores. As of May 4, 2019, the Moorestown New Jersey company had 998 retail locations, including 452 stores in the US, Canada and Puerto Rico, and an additional 546 leased departments located within department stores (eg., Macy’sBoscov’s) throughout the US and Canada. It has also been kicking around on distressed retail lists for quite some time now. Unfortunately, the business keeps deteriorating: last week the company joined a recent retail wave and reported some truly dogsh*t numbers.

The company reported Q1 ‘19 results that included (i) $94.2mm in sales, a $9mm YOY decrease (-8.7%), (ii) a 5.2% comp store sales decline, (iii) an 12.5% e-commerce sales decline, (iv) increased inventory (+$5.7mm), and (v) increased debt levels and interest expense (up ~$300K). Sales declines permeated throughout the enterprise, including leased department store sales. The only uptick in sales was in wholesale, which is primarily done through Amazon Inc. ($AMZN). On the plus side, the company enjoyed increased gross margin and meaningfully decreased SG&A (down 6.5%). Gross margin increased due to a pullback in promotional activity; nevertheless, gross profit declined by 6.9% due to the overall decrease in sales. As for SG&A, the reduction is attributable to employees getting the shaft and the company shedding leases like its 2019. Indeed, the company cut 32 stores and 88 leased department locations in the twelve month period. While the company wouldn’t articulate its portfolio strategy going forward, the company did expressly state that it expects additional store closures through the end of 2019.

So, what’s the debt look like? Well, for starters, this is a public company and so we don’t have a private equity sponsor strangling the company with too much debt, dividend recapitalizations, management fees and any of that other fun stuff. So, here, the company doesn’t have a patsy to blame for its woeful performance. Only itself and its revolving door of management teams.

The company’s capital structure looks like this:

  • $50mm ‘23 Revolving Credit Facility (of which $26.2mm is funded and $6.297mm is outstanding as letters of credit)(Agent: Wells Fargo Bank NA). The company has $10.1mm of availability pursuant to its borrowing base limitation. In other words, the company’s lenders are increasingly minimizing their exposure by limiting the company’s ability to borrow the full extent of the committed facility. Indeed, the facility was, in connection with a 2018 amend and extend exercise, ratcheted down from $70mm. The lenders aren’t fooling around here. The weighted interest rate is 4.53%.

  • $25mm ‘23 Term Loan Facility (Agent: Pathlight Capital LLC). The interest rate is LIBOR plus 9%.

  • The company has a couple of other financing agreements totaling approximately $4mm.