Home Heritage Group & Cherokee Inc.
|Aug 1, 2018||Public post|
Disruption from the Vantage Point of the Disrupted
Midweek Briefing - 8/1/18
Read Time = 5 a$$-kicking minutes
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In our Members’-only Sunday briefing we asked “⚡️Is PG&E in Trouble?⚡️” and discussed PG&E, Evercore, Houlihan, Moelis, Amazon, Uber & the future of transportation, New York City’s effedness, GNC Holdings and more. If you’re not a Member, you missed it. Congratulations. You’re willfully dumber than the competition.
If you have ten or more interested folks at your firm, email us for a group quote: firstname.lastname@example.org.
Reminder: we have some tech maintenance to do this weekend and so there’ll be no Members’-only briefing this Sunday, August 5.
🗞News of the Week (2 Reads)🗞
1. Add Furniture to the List of Disrupted Categories (Home Heritage Group Inc. Filed for Bankruptcy)
“New Chapter 11 Filing!” Or is it technically a Chapter 22? 🤔
We know what you’re thinking. You’re thinking “this filed a few days ago and I’ve already read all about it.” You may have read something about it, but not like this. Bear with us…
Home Heritage Group Inc. (“HHG”) is a North Carolina-based designer and manufacturer of home furnishings; it sells product via (i) retail stores, (ii) interior design partners, (iii) multi-line/independent retailers, and (iv) mass merchant stores.” In addition, the company has an international wholesale business.
Why do we mention Chapter 22? For the uninitiated, Chapter 22 in bankruptcy doesn’t actually exist. It is a somewhat snarky term to describe companies that have round-tripped back into chapter 11 after a previous stint in bankruptcy court. That, to some degree, is the case here.
WAAAAAAAY back in November 2013, KPS Capital Partners LP formed the newly bankrupt HHG entity to acquire a brand portfolio and related assets out of the bankruptcy estate of Furniture Brands International Inc. (“FBI”). FBI had been, in the early 2000s, a very successful purveyor of various furniture brands — to the tune of $2b in annual sales. But in the 12 months prior to the acquisition, the company’s sales were down to $940mm and, more importantly, its EBITDA was negative $58mm. At the time of filing, it had $142mm in total funded debt outstanding, $200mm in unfunded pension obligations and another $100mm in general trade obligations.
Given this debt, a decline in sales at the time was devastating. The company noted in its court filings on September 9, 2013 (Docket #16):
As a manufacturer and retail of home furnishings, Furniture Brands’ operations and performance depend significantly on economic conditions, particularly in the United States, and their impact on levels of existing home sales, new home construction, and consumer discretionary spending. Economic conditions deteriorated significantly in the United States and worldwide in recent years as part of a global financial crisis. Although the general economy has begun to recover, sales of residential furniture remain depressed due to wavering consumer confidence and several, ongoing global economic factors that have negatively impacted consumers’ discretionary spending. These ongoing factors include lower home values, prolonged foreclosure activity throughout the country, a weak market for home sales, continued high levels of unemployment, and reduced access to consumer credit. These conditions have resulted in a decline in Furniture Brands’ sales, earnings and liquidity.
Sales have continued to be depressed as a result of a sluggish recovery in the U.S. economy, continuing high unemployment, depressed housing prices, tight consumer lending practices, the reluctance of some households to use available credit for big ticket purchases including furniture, and continuing volatility in the retail market.
PETITION Note: My, how things have changed. Just reflect on that synopsis of the economy a mere five years ago. The company also noted that:
…some of the Company’s larger brands have lost some of their market share primarily due to competition from suppliers who are able to produce similar products at lower costs. The residential furniture industry is highly competitive and fragmented. Furniture Brands competes with many other manufacturers and retailers, some of which offer widely advertised, well-known, branded products, and other competitors are large retail furniture dealers who offer their own store-branded products.
All of these factors stormed together to constrain the company’s liquidity and force a chapter 11 filing and eventual sale. KPS purchased several of the FBI brands for $280mm (subject to working capital adjustments), including Thomasville, Broyhill, Lane, Drexel Heritage, Henredon, Pearson, Hickory Chair, Lane Venture, and Maitland-Smith. In other words: brands that your grandfather would know and you would shrug at the mere mention of. Well, some of you anyway.
Fast forward five years and the successor entity HHG has $280mm of debt and…you guessed it…severe liquidity constraints. In its first day filing papers, HHG notes that the previous bankruptcy continues to have lasting effects on its business; it highlights:
Following years of sales declines, many furniture retailers had lost faith in the ability of the Company to produce, deliver, and service its products, and the bankruptcy led many of them to shift their purchases to a variety of competitors or even further utilize their own private label offerings.
This is what people still nostalgically refer to as “bankruptcy stigma.” Indeed, it still exists. The company continued:
In addition, the Company’s operations and performance depend significantly on economic conditions, particularly in the United States, and their impact on levels of existing home sales, new home construction, and consumer discretionary spending. Although economic conditions have been steadily improving in recent years, the Debtors have struggled to adjust to certain shifts in consumer lifestyles, which include: (i) lower home-ownership levels and more people renting; (ii) more apartment living and single-person households; (iii) older consumers that want to age in place; and (iv) cash-strapped millennials that are slow in forming households relative to prior generations.
Haha! The poor millennials. Apparently an entire generation is “cash-strapped” and prefers to sleep in a tent under their WeWork desks. Blame the avocado toast and turmeric lattes. But, wait, there’s more:
Consumer browsing and buying practices are rapidly shifting as well toward greater use of social media, internet- and app-based catalogs and e-commerce platforms, and the Company has been unable to develop a substantial sales base for its brands through this key growth channel.
Furthermore, the residential furniture industry is highly competitive and fragmented. The Company competes with many other manufacturers and retailers, some of which offer widely advertised, well-known, branded products, and other competitors are large retail furniture dealers who offer their own private label products. This competitive landscape has proved challenging for some of the Company’s larger brands as well-capitalized competitors continue to gain market share at the expense of the Debtors. (emphasis added)
PETITION Note: My, how things have remained the same. Sound familiar? Have to hand it to the professionals here: why reinvent the wheel when you can just crib from the prior filing? We guess being a repeat customer in bankruptcy has its benefits!! Chapter 22!!!
<p>Meanwhile a short digression relevant to those last two quoted paragraphs. According to Statista, worldwide online furniture and homewares sales are expected to be close to $190 billion. Take a look at this chart:
E-commerce furniture sales have emerged as a major growth area, rising 18% in 2015, second only to grocery, according to research from Barclays.
Accordingly, GartnerL2 cautions that:
…home brands now have an outsized onus to produce best-in-class product pages for the influx of online shoppers. However, many brands have failed to deliver and aren’t keeping pace with industry disruptors.
Sounds like HHG has, admittedly, fallen into this category.
GartnerL2 highlights the disparate user experiences offered by Williams-Sonoma-owned West Elm and Chicago-based DTC disruptor Interior Define, which was founded in 2013 and has raised $27mm in funding (most recently a Series B in March). The latter offers extensive imagery, a visual guide and an augmented reality mobile app. All of these things appeal to the more-tech-savvy (non-cash-strapped??) millennial buyer.
And that is precisely the demographic that La-Z-Boy Incorporated ($LZB) is going after with its purchase of Joybird, a California-based direct-to-consumer e-commerce retailer and manufacturer of upholstered furniture. Founded in 2014, its $55mm in reported revenue last year took a chunk out of, well, someone. Other players in that space include Burrow ($19.2mm in total funding; most recent Series A in March from New Enterprise Associates) and, of course, Amazon’s in-house furniture brands, Rivet and Stone & Beam. <p><end>
All of these factors resulted in continual YOY declines in sales and a liquidity squeeze. Now, therefore, the company is in bankruptcy to effectuate a sale — or sales — of its brands to prospective bidders. It has one purchaser in line for the “Luxury Group” and, according to the court filing, appears close to an agreement with a stalking horse buyer of the Broyhill and Thomasville & Co. properties. In the meantime, the company has a commitment from prepetition lender PNC Bank NA for a $98mm DIP, of which $25mm Judge Gross granted on an interim basis.
2. One Brand Portfolio is Circling the Toilet (Short Tony Hawk’s Landing)
The question surrounding all of these direct-to-consumer e-commerce companies is whether their “brand” will be long-lasting and continue to resonate with consumers for years to come. Any company with a schlocky or tarnished brand won’t survive. And if you’re a company that holds assets in the form of a portfolio of brands…well, likewise. Your success is derivative of the underlying portfolio. Case and point: Home Heritage Group, noted above.
Enter Cherokee Global Brands ($CHKE). CHKE is a global marketer and manager of a portfolio of fashion and lifestyle brands it owns including Cherokee, Hi-Tec, Magnum, 50 Peaks, Interceptor, Hawk Signature, Tony Hawk, Liz Lange, Completely Me by Liz Lange, Everyday California, Carole Little, Sideout and others we’d never be caught dead wearing or spending money on. As of June, the company boasted of 54 license agreements in approximately 80 countries and does business with the likes of Walmart ($WMT), TJ Maxx ($TJX), Big 5 Sporting Goods ($BGFV), and Lidl.
It also has a market capitalization of approximately $5mm — based on a stock price of $0.43/share (as of Monday). Which is meaningfully off its 52-week high of $5.50/share. 😬This is the stock chart:
The market reaction is appropriate considering the company is in the midst of an operational restructuring that has, to date, included headcount reductions, op-ex decreases, and asset sales (i.e., Flip Flop Shops). The company deployed the asset sale proceeds towards debt reduction. Currently, the company has funded secured debt of $49.1mm by way of a 11.5% 2021 revolving and term loan credit facility with Cerberus Business Finance LLC. Because of a going concern opinion the company got tagged with, the company is now in default on that facility. In other words, this is Cerberus’ ship to steer. No doubt there are restructuring advisors standing on the bridge.
We made a mistake in Sunday’s (otherwise) a$$-kicking Members’-only briefing:
In today’s newsletter we accidentally said Amazons Q2 revenue was $52.9mm rather than billion. Apologies. We guess we are officially fake news!
(Screw that: mistakes happen).
In response to your Sunday article on PG&E, my friends in the Bay Area tell me the following: If the legislature does not pass a PG&E bailout by the end of August (unlikely), PG&E will request a capital structure waiver and be closer to Chapter 11.
We have compiled a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. You can find it here. We recently added to books that we intend to read: 1) “Subscribed” by Tien Tzuo and Gabe Weistert (WSJ review here); and 2) “High Growth Handbook” by Elad Gil (Tomasz Tunguz review here).
😎Notice of Appearance😎
PETITION: What is the best piece of advice that you’ve been given in your career?
NN: Seek out the trifecta! Pursue a career path that perfectly aligns with your passion, capabilities and ability to do well from a financial perspective.
Along the way -be honest and authentic with yourself and others.
PETITION: What is the best book you’ve read that’s helped guide you in your career?
This book contains very simple but powerful lessons that can be applied to both personal and professional development every single day. It’s a book that I read early in my career and has served me well on countless occasions.
PETITION: What is one notable trend you expect to see in the second half of ’18 or first quarter of '19 that not enough people are talking about?
NN: I spend a decent amount of time in the restaurant industry dealing with all sorts of real estate issues centered on restructurings, acquisitions, financings, etc. It’s no secret that there has been a tremendous amount of distress/chaos in the casual dining arena which will certainly continue. One trend I’m starting to see are real cracks in the quick service (fast food) industry which should create opportunities for players in the restructuring/financing community over the next twelve months.
PETITION: What is one longer-term disruptive trend that scares you?
NN: Changes in consumer behavior as it relates to how and where they shop and eat are creating numerous challenges to the way real estate is supposed to traditionally function. If you are a retailer or a restaurant operator – how do you successfully navigate and modify your business model and associated real estate strategy based on these ongoing changes?
PETITION: On the flip side -- as a restructuring professional -- that excites you?
NN: For sure - with those challenges, come opportunities to assist in the repositioning of that real estate via our advisory group or potentially deploy capital.
PETITION: Outside of real estate – what area of the financial markets are you paying close attention to?
NN: Based on some recent calls I’ve been getting from workout professionals - there are a handful of BDCs (Business Development Companies) and other non-bank lending groups that have some real loan issues in their portfolio. In many cases – there were aggressive, covenant friendly loans made to private equity sponsors to support an acquisition or recapitalization. The business underlying these loans faced some sort of hiccup or head-wind that has now resulted in an overleveraged situation where the equity sponsor is pretty much out of the money and doesn’t necessarily want to put new money in. In this setting – there is a lack of liquidity and options available to fund the ongoing working capital and operations of the business. With interest rates going up – this trend should likely increase and create numerous opportunities for the restructuring community.
PETITION is looking for a unicorn who wants to help build something from scratch. We are a revenue generating startup with a lot of vision for what comes next. If you have a background in finance, law, or consulting and want to be a utility player helping us build out our content, sales/marketing infrastructure, partnerships, ops, and whatever else we conjure up in our big domes, ping us. All inquiries will be handled on a strictly confidential basis. Preference will be given to MEMBERS. How else can you be educated about what we’re doing and how we’re doing it if you’re only seeing part of the picture?!
If your firm has job opportunities, please email us at email@example.com.