Liquidators Cash In, FB Ravages, & More Healthcare Distress
|May 8 at 12:00 pm||Public post|| 2|
💰Retail Roundup (Long $FB, Long $RILY, Short Retail)💰
In “Thanos Snaps, Retail Disappears👿“ and “Even Captain America Can’t Bring Back This Much Retail (Long Continued Closures)“ we listed out the stupendous volume of retail closures that have transpired already in 2019. As we’ve stated before, there are no signs of this trend abating. Indeed, since the second piece shipped on April 28, 2019, several more companies have announced closures.
For instance, Francesca’s announced the closure of 20 stores. Regis Corporation ($RGS), the owner of Supercuts, is shedding 330 locations and, like so many other corporates, offloading risk onto unsuspecting franchisees. While its stock performance is strong, Carter’s Inc. ($CRI) closed a net 10 stores amid negative 3.7% comps. Sally Beauty Holdings Inc. ($SBH) closed a net 69 stores in the last year, primarily under its Sally Beauty Supply outlet. Outside of the conventional retail space, CVS Health Corporation ($CVS) is closing 46 locations this quarter.
One beneficiary of all of this: the liquidators. We can put some numbers around this.
Back in March, B. Riley Financial Inc. ($RILY) reported fiscal 2018 earnings. On the earnings call, the company noted the following:
Last year was also a banner year for our Great American Group retail liquidation division. We successfully completed the liquidation of the inventory assets of Bon-Ton Stores. For a sense of scale Bon-Ton was one of the largest U.S. liquidations in retail history by inventory value.
We completed the liquidation of over 200 stores with associated inventory value at approximately $2.2 billion. In 2018, we also participated in the liquidation of Toys "R" Us which contributed to our strong results in the segment. Momentum in this business is carrying forward into 2019 as a liquidation of Bon-Ton real estate assets continues to be under way and with our recently announced participation in the liquidations of Gymboree and Payless Shoes.
The Payless store closing event, which began on February 17, is the largest liquidation by store count in retail history with sales being conducted at approximately 2,100 stores and associated inventory value at over $1 billion. In January, the firm announced participation in the liquidation of 798 Gymboree and Crazy 8 stores across the U.S. and Canada.
RILY reported Q4 revenues of $10.1mm, a meaningful uptick from the $4.2mm the company reported in Q4 ‘17. Income rose from $0.1mm to $2.3mm YOY. For the year, revenues were $55mm and income was $27mm, a solid 49% margin. As for guidance, the company foreshadowed:
…momentum has already carried over into 2019. We expect to realize significant contributions from the Bon-Ton liquidation results for the first half, in addition to the results from our current involvement in Gymboree and Payless liquidations. We expect to see high levels of market activity to continue through Q2 as distressed retailers continue to focus on retail – real estate consolidation and purging excess inventory.
Last week, RILY reported Q1 ‘19 earnings and Great American Group continued to crush it. The “auction and liquidation segment” generated $20.7mm in revenue — double what it did in Q4 and more than 25% better YOY. Income increased to $11.5mm, or approximately 5x the income reported in Q4. This adds up to a margin of 55%.
Think about those numbers for a second: while retail employees are getting steam-rolled, stores are closing everywhere, malls are undeniably shaken and CMBS investors are, by necessity, vigilantly monitoring credit with a watchful eye, here is Great American Group absolutely rolling in dough on account of these retail liquidations. Great revenue, great income. Stellar margins.
Now, as we’ve discussed previously, there is an anti-competitive element in all of this. Rather than face off against one another and compress those beautiful margins, the liquidators all continue to engage in club deals for these big retailers. If the revenue, income and margin is THAT good, doesn’t that mean that debtors — and by extension, creditors thereof — are leaking a significant amount of value? 🤔
Meanwhile, the news out of Facebook Inc. ($FB) probably had the liquidators over at Great American Group licking their chops. This week, Instagram is rolling out the ability for influencers to tag specific products in their photos, enabling consumers to click a photo, see what’s for sale, and purchase that product without ever leaving the Instagram feed. For those of you with zero design sensibility, suffice it to say that this is a big deal. No more friction of going back and forth between Instagram and external check out pages. This is going to mint tons of cash by the Kardashian and other influencer-influenced faithful.
Taylor Lorenz at The Atlantic writes:
Millions of users rely on influencers to sift through products and make recommendations. But until now, figuring out, for instance, exactly what shade of lipstick an influencer is wearing has been hard. Apps such as LikeToKnowIt, which allows you to shop influencers’ posts by taking screenshots, have garnered millions of users by providing a stopgap solution. Brand-specific social-shopping platforms such as H&M’s Itsapark have also stepped into the market. Still, many would-be consumers spend hours commenting on influencers’ Instagram posts asking for more product information, or fruitlessly attempting to locate a product online.
Interestingly, the influencers “won’t receive a cut of the sales their posts generate.” They will, however, get access to advanced metrics that may (or may not, as the case may be) arm them with leverage in negotiations with ad buyers. More from Lorenz:
“As an influencer, I don’t care if I don’t get a cut [of the sales] at the moment,” Song continued. “If it makes my followers’ life easier and they don’t have to message me asking ‘Where do you get that product?,’ I’m okay with doing it for free for now.” Many influencers are also betting that the increased engagement and spike in followers they’ll likely get by incorporating shoppable posts will more than pay off in the short term.
Color us skeptical. Much like the media is grappling with having a more direct relationship with its readers and that notion is pushing more and more writers to newsletters/subscriptions and away from advertising, we can’t help but to wonder how long influencers will be okay peddling other people’s products without getting a cut. With products like Shopify Inc. ($SHOP) enabling basically anyone the ability to create a direct-to-consumer business, it doesn’t stretch the imagination to conclude that a number of influencers are going to start getting into their own private label wares, if they haven’t already. It’s not like Kylie Jenner was having trouble moving product before: this gives her a shot of steroids.
What does this mean for retail? For starters, they’re going to be paying Facebook an awful lot of money out of their advertising budgets in the short term. In the longer term, however, they may find newfound competition from the likes of various Gen Z influencers that Gen X may have never even heard of. If malls are having trouble drawing traffic now, just imagine how much harder it will be when its easier for teen age Molly to just click on Instagram, scroll to her favorite influencer, and click through to some makeup without even interrupting continued scrolling. Facebook is savage.
Reminder: Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.
🥛How’s Steak ‘N Shake Doing? (Long Horrific Corporate Governance)🥛
Back in July 2018 in “🍟Casual Dining Continues to = a Hot Mess,” we noted that certain lenders were agitating to engage Steak N’ Shake in restructuring discussions, which is owned by Biglari Holdings ($BH). At the time, the casual dining chain (i) had somewhere between 580 and 616 locations, (ii) was pivoting towards franchisee-owned stores rather than company-owned stores (even though, at the time, the overwhelming majority were company-owned), and (iii) had $183.1mm outstanding on a $220mm term loan due 3/21 that had dipped into the mid-80s, dangerously close to stressed levels. Significantly, the term loan is NOT guaranteed by Biglari Holdings. A big cause for concern? The company also had consecutive years of declining same store sales. We wrote:
In a February shareholder letter, Biglari Holdings Chairman Sardar Biglari channeled his inner-Adam Neumann (of WeWork), stating:
We do not just sell burgers and shakes; we also sell an experience.
Given all of the above and the perfect storm that has clouded the casual dining space (i.e., too many restaurants, the rise of food delivery and meal kit services, the popularity of prepared foods at grocers), lender activity at this early stage seems prudent.
Biglari reported Q1 earnings on May 3, 2019, and revenues for “restaurant operations” were down by over $20mm. Why? Good question. Allow us to show you:
That is some serious hemorrhaging. Same-store sales were down 7.9% with a 7.7% decrease in customer traffic. On the costs side, higher wages and benefits led to costs increasing as a percentage of sales by 3.6%.
And, now a quick break for PETITION’s Opportunity of the Week:
Source: “Nation’s Restaurant News”
Wow. That’s almost too good to refuse! As noted above, a key component of Sardar Biglari’s turnaround plan for Steak ‘N Shake is the conversion of company-owned restaurants to franchises. Because, like, there’s nothing like offloading exposure and suckering some poor saps into a franchisee arrangement to stabilize revenues and lessen exposure. 🖕🖕
And, yet, interestingly, franchise royalties and fees were also down. That conversion plan, therefore, must not be going so well — even with the company having 12 more franchisee-owned locations as of March 31, 2019 than it did on March 31, 2018. For what it’s worth, the company also has 48 fewer company-operated stores (44 of which are in limbo, “temporarily closed until such time that a franchise partner is identified.”). Given the deterioration of the Steak ‘N Shake enterprise, those locations may be closed for a long time.
Andrew Walker@AndrewRangeleyThis was incredible. The Fyre Festival Of Capitalism - ValueSeeker64 | Seeking Alpha https://t.co/yhht8Rfe0g
We don’t typically lend much credence to SeekingAlpha content but when someone entitles a post, “The Fyre Festival of Capitalism” — a clear riff on the “Woodstock of Capitalism” moniker conferred upon Warren Buffett’s Berkshire Hathaway annual meeting — we have to take a gander. AND. BOY. WAS IT WORTH IT. The piece is a summary of the Biglari Holdings investor meeting that recently took place.
Some choice bits describing “perhaps, the worst corporate governance in America”:
One shareholder asked if Steak n Shake would introduce “vegan hamburgers.” Another questioner asked for applause for the company’s management, a request which was greeted with awkward silence. One shareholder was displaying a copy of John Carreyrou’s Theranos book “Bad Blood” and was asking if people thought Biglari Holdings’ board was like Theranos’ board and if Sardar Biglari was like Elizabeth Holmes (and another shareholder then referenced this in a question).
My perception of Sardar Biglari’s attitude towards Biglari Holdings shareholders reminded me of John Updike’s great line about Ted Williams refusing to respond with a hat-tip to the pleading ovation of Red Sox fans after Williams’ home run in the last at-bat of his career: “Gods don’t answer letters.” This meeting made this point crystal clear: Sardar does not answer to shareholders, nor does he work for them. You [shareholder] want me [Sardar] to buy stock back to close what you perceive as a price-value gap, too bad, I’m not going to do it. If you are upset because the share price went down 58% last year and then the board increased my compensation, sell your shares in the company. If you have any questions about me [Sardar] earning something like $80 million over the previous few years while the market cap of the company is like $250 million, or the employment of Sardar’s family members for “consulting services”, or the company’s Netjets membership, or the opening of Biglari Café so Sardar can spend time in the Port of Saint-Tropez, or anything else for that matter – then sell your shares. If you wonder if he should be spending more time on Steak n Shake after a year in which it lost 7% of its customer-traffic and a three-year period in which it lost 12% of its business – and you have some doubt that his plan to install new milkshake machines (yes this is his turnaround plan) will succeed in stopping the bleeding – then you just don’t believe in his vision and you should sell your shares. If you bought your shares seven years ago and have a significantly negative return on them and suggest to Sardar that it would be great to get a positive return on them at some point, then you just don’t share the same time horizon as Sardar. If you wonder why he calls Biglari Holdings an acquirer but they have only ever done a couple of tiny deals and haven’t made an acquisition of any size in over five years, then you just don’t understand his “program of conglomeration.”
While there is no mention of this in the company’s SEC filings, the second prong to Mr. Biglari’s turnaround strategy for SNS is…wait for it…new milkshake equipment!! That’s right. New milkshake equipment. And it will only cost $40mm to implement (or $100k per store). Super compelling! Sign us up for one of those available franchises stat!!
So after losing over 7% of their customers last year, 13% of its customers since 2015, and over three straight years of negative customer-traffic and same-store-sales numbers during which time Steak n Shake went from profitable to unprofitable, what is Sardar’s plan to turn around Steak n Shake? What he said at the meeting is that he has a plan to turnaround Steak n Shake and one of the main elements of it is fixing the milkshake making process – so they are creating a new milkshake making process. This is not a joke, this is what his plan is. They are also trying to make homemade ice cream at Steak n Shakes. They think this and other similar improvements is the crux of the turnaround plan (along with the franchise partner plan).
It gets better:
One shareholder commented on how last year, his turnaround plan to fix Steak n Shake was thicker cheese and better bacon – but then they lost 7% of their customers in that year. And the year before his turnaround plan was a new menu launch, but that seemed to accelerate the customer-traffic and same-store-sales losses, or at least did not halt them. Why was this year’s turnaround plan – new milkshake processes and homemade ice cream – going to work when the last few did not?
Spoiler alert: it won’t.
But…maybe cut some cherries?
Sardar Biglari at one point said that Steak n Shake spends $1 million per year on cherries for milkshakes and that he would love to get rid of that $1 million. Three different shareholders pointed out, in conversations, how ridiculous that sentiment is. Decrying having to spend $1 million for cherries on milkshakes while spending $8.4 million on administrative expenses to manage the Lion Fund, spending lavishly on hiring his brother and father at Steak n Shake consultants, maintaining an office in Monaco, the company’s opening of Biglari Café on the Port of Saint-Tropez and the Netjets memberships that the company apparently pays for – anyway, given all of that, shareholders were pointing out that maybe there is a better way to save $1 million rather than eliminating cherries from Steak n Shake’s milkshakes.
More from the shareholder meeting:
The bottom line to me is it seems that Steak n Shake’s problems have not abated – but probably have gotten worse in 2019. He refused to say how they were doing so far in 2019. He just said, “The turnaround is going to take a while.”
How could that be?! With such a rock solid strategy of new milkshake equipment, selling melting ice cubes to franchisees, and cutting cherries?!?
This should be a lightning fast turnaround.
😷New Chapter 11 Bankruptcy Filing - Hospital Acquisition LLC😷
Texas-based Hospital Acquisition LLC and dozens of other affiliated companies operating in the acute care hospital, behavioral health and out-patient would care space have filed for bankruptcy in the District of Delaware.* The debtors operate 17 facilities in 9 states for a total of 865 beds; their revenue “derives from the provision of patient services and is received through Medicare and Medicaid reimbursements and payments from private payors.”
Technically, this is a chapter 22. In 2012, the debtors’ predecessor reeled from the effects of Hurricane Katrina and reduced reimbursement rates and filed for bankruptcy. The case ended in a sale of substantially all assets to the debtors.
So, why is the company in bankruptcy again? Well, to begin with, re-read the final sentence of the first paragraph. That’s why. Per the company:
…internal and external factors have lead the Debtors to an unmanageable level of debt service obligations and an untenable liquidity position. In 2015, Medicare’s establishment of patient criteria to qualify as an LTAC-compliant patient facility led to significant reimbursement rate declines over the course of 2015 and 2016 as changes were implemented. Average reimbursement rates for site neutral patients, representing approximately 57% of 2016 cases, is estimated to drop from $23,000 to $9,000 across the portfolio. When rates declined sharply, the Debtors were unable to adjust. Further, the number of patients that now qualify by Medicare to have services provided in an LTAC setting has declined substantially, resulting in a significant oversupply of LTAC beds in the market.
To offset these uncontrollable trends, the company undertook efforts to convert a new business plan focused around, among other things, closing marginally performing hospitals and diversifying the business into post-acute care “to compete in the evolving value-based health care environment.” To help effectuate this plan, the debtors re-financed its then-existing revolver, entered into its $15mm “priming” term loan, and amended and extended its then-existing term loan facility. After this transaction, the company had total consolidated long-term debt obligations totaling approximately $185mm.
So, more debt + revised business plan + evolving macro healthcare environment = ?? A revenue shortfall, it turns out. Which put the debtors in a precarious position vis-a-vis the covenants baked into the debtors’ debt docs. Whoops. Gotta hate when that happens.
The debtors then engaged Houlihan Lokey to explore strategic alternatives and engaged their lenders. At the time of filing, however, the debtors do not have a stalking horse agreement in place; they do hope, however, to have one in place by mid-July.
*There are also certain non-debtor home health owners and operators in the corporate family that are not, at this time, chapter 11 debtors.
😷New Chapter 11 Bankruptcy Filing - Altria Health😷
Astria Health, a large non-profit healthcare system based in Eastern Washington, has filed for bankruptcy along with a dozen or so affiliates. The company blames its chapter 11 filing on regulatory approval processes that stunted expansion plans, poor collections on accounts receivable, and charitable care that, despite best efforts, hadn’t been offset by charitable contributions. All of these issues have squashed cash flow and triggered issues with the debtors’ secured debt, part of which is uber-expensive. The debtors intend to use their DIP credit facility to take out their expensive “high cost of capital” MidCap Financial Trust-provided (and other) debt; they also hope to use the “breathing spell” provided by the automatic stay to remedy their collections problems and march towards a plan of reorganization within 150 days.
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.
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