👞UGGs & E-Comm Trample Birkenstock👞

Nine West, The Walking & Weinstein Companies, HCR ManorCare

Curated Disruption News
Midweek Freemium Briefing - 3/7/18
Read Time = 4.63 a$$-kicking minutes

ICYM Sunday’s Briefing:

This past week we discussed the convergence of Spotify’s long-anticipated direct listing in the public markets with iHeartMedia’s bankruptcy. We also discussed The Weinstein Company (update below), Doordash’s new round of venture capital financing and more.

Other recent awesome content:

  1. WeWork Invents a New Valuation Methodology

  2. Tops, Toys, Amazon and Owning the Robots

  3. Gibson Brands’ Swan Song

News of the Week (4 Reads) - Sponsored by B. Riley FBR

1. HCR ManorCare Inc. & 4 West Holdings Inc. (Finally, Healthcare Action)

Earlier this week, the Ohio-based Carlyle-backed long-term care provider of 450 (i) skilled nursing and impatient rehab facilities, memory care facilities and assisted living facilities (the "Long-Term Care Business"), (ii) hospice and home health care agencies, and (iii) outpatient rehab clinics filed a prepackaged bankruptcy after months of back-and-forth with its REIT-parent and Master Lease counterparty, Quality Care Properties Inc. ($QCP). The bankruptcy will effectuate a transaction pursuant to which QCP will shed its REIT status and take on 100% of the stock in the reorganized HCR - a path that some speculate was paved, in part, by tax reform.

Interestingly, retailers aren't the only businesses capitulating under the weight of their rent. Here, the revenues generated by the Long-Term Care Business weren't generating sufficient revenues to cover ordinary course operating expenses and monthly rent obligations to QCP. By way of illustration, 

"For the twelve months ended December 31, 2017, the Company had revenues of approximately $3.741 billion, 82% of which derived from the Long-Term Care Business, and reported a consolidated pre-tax loss from continuing operations of approximately $267.9 million. As of December 31, 2017, the Company had approximately $4.264 billion in total assets and approximately $7.118 billion in total liabilities, debt and financing obligations...."

Rough. In 2016, HCR paid approximately $442mm ($37mm a month) in minimum rent to QCP. In 2017, after extensive negotiations, the amount dipped to $290mm ($24mm a month). With amounts that staggering, no wonder the company struggled. 

The relationship between QCP and HCR emanates out of a 2011 sale-leaseback transaction. After said transaction, QCP became an independent publicly traded company. Significantly,

"At the time of the 2011 Transaction, the business environment in the post-acute/skilled nursing sector was favorable due to a number of factors, including an aging population, expected increases in aggregate skilled nursing expenditures, and supply constraints in the skilled nursing sector due to substantial barriers to entry. The parties negotiated the amount of rent payable under the MLSA against this background."

But, as we consistently point out here at PETITION, projections don't always pan out as planned. Indeed, after the consummation of the 2011 transaction, 

"...the operating environment for post-acute/skilled nursing facility operators has become significantly more challenging. Unfavorable trends for operators of skilled nursing facilities include (a) a shift away from a traditional fee-for-service model toward new managed-care models, which base reimbursement on patient outcome measures; (b) increased penetration of Medicare Advantage plans, which has reduced reimbursement rates, average length of stay and average daily census; (c) increased competition from alternative healthcare services such as home health agencies, life care at home, community-based service programs, senior housing, retirement communities and convalescent centers; and (d) reductions in reimbursement rates from government payors."

Obviously this is a bit of a problem when your have a month rent nut of $37mm. 

You can find a case roster for the matter here.


At the time of publication, another skilled nursing operator called 4 West Holdings Inc. filed for bankruptcy in Texas. It, too, is affiliated with a publicly-traded REIT, Omega Healthcare Investors, Inc. ($OHI). You can find a brief summary of the matter here.

2. The Walking Company Inc. (Long Retail Bankruptcies)

Another retailer - this time a repeat offender - walked into bankruptcy court (see what we did there?). Here, the California-based once-publicly-traded ($WALK) manufacturer of footwear like Birkenstock and ASICS has filed for bankruptcy with a plan on file and an equity sponsor in tow to the tune of $10mm. 

This is a story of staggered disruption. In the first instance, the company expanded via acquisition and grew from 2005-2008 to over 200 stores. To fund the expansion, the company issued $18.5mm of convertible notes and transferred the proceeds of the liquidation of its Big Dog entity to The Walking Company, the use of proceeds including the buildout of omni-channel distribution and vertical integration. But,

As a result of many factors including- among them, challenging negotiations with landlords which did not provide the Debtors with the rent relief they believe they needed, and the state of the national economy, by late 2008 TWC found that nearly 100 of the newer stores it opened during this expansion period were not generating the sales and profits expected.


...by 2008, Big Dogs' business had collapsed more rapidly than the Debtors had anticipated. Big Dogs was in the business of selling moderately priced, casual apparel through a chain of specialty retail stores (Big Dogs stores) located around the country. The rapid growth of big-box, mass-market retailers during this period put great pricing pressure on retailers of moderately priced, casual apparel, putting many of them out of business.

Walmart ($WMT). Target ($TGT). Just say it broheims. Never understand the reluctance in these filings. Anyway, the upshot of all of this? Once the Great Recession hit, mall traffic fell off a cliff, revenue declines accelerated, landlords proved obstinate, and the company filed for bankruptcy in December 2009. 

In bankruptcy, the company reached accommodations with certain landlords and received a $10mm capital infusion from Kayne Anderson Capital Advisors LP

Subsequent to the bankruptcy, the company apparently thrived from 2013 through 2017. It had a better rent structure, it ceased expansion, and it focused on successful brands (e.g., ABEO) and the wholesaling and international licensing thereof. But then the realities of e-commerce struck. Per the company,

During this period, however, the increasing power of Internet retailers made traditional business of retail stores selling products manufactured by others increasingly difficult, and it also had an increasingly negative impact on customer traffic in shopping malls. 

Indeed, Deckers Outdoor Corporation ($DECK)(the manufacturer of UGG footwear) terminated its relationship with the company - presumably to take greater and direct control of the relationship with the end-purchaser. TWC couldn't replace those lost sales fast enough - through third party or private label sales - and the dominos started to fall. The company sought rent concessions and landlords, for the most part, told it to pound sand. Holiday sales declined. Appraisers reduced the valuation of inventory and, in turn, the company had diminished access to its bank credit line. Cue the Scarlet 22.

The company intends to use the bankruptcy to obtain "substantial rent relief by conforming their lease portfolio to market rents." Notably, two of the initial 5 leases that the company seeks to reject in the first instance are Simon Property Group locations in Dallas and Oklahoma City and one Taubman location. Other creditors appear to be your standard retail slate: Chinese manufacturers, trade vendors (ECCO, Rockport) and other landlords ((General Growth Properties ($GGP) is a prominent one with locations listed as 9 of the top 30 creditors)). 

The company otherwise has agreement with its large shareholders (including another $10mm equity infusion) and Wells Fargo ($WFC) to provide DIP and exit credit facilities to finance the company during and post-bankruptcy, respectively. 

You can find a case roster for the matter here.

3. The Weinstein Company

What. A. Sh*t. Show.

4. Nine West & the Brand-Based DTC Megatrend

The Walking Company. Payless Shoesource. Aerosoles. The bankruptcy court dockets have been replete with third-party sellers of footwear with bursting brick-and-mortar footprints, high leverage, scant consumer data, old stodgy reputations and, realistically speaking, limited brand value. Mere days away from a Nine West bankruptcy filing, we can’t help but to think about how quickly the retail landscape is changing and the impact of brands. Why? Presumably, Nine West will file, close the majority of - if not all of - its brick-and-mortar stores and transfer its brand IP to its creditors (or a new buyer). For whatever its brand is worth. We suppose the company’s lenders - likely to receive the company’s IP in a debt-for-equity swap, will soon find out. We suspect “not a hell of a whole lot”.

Back in December, we snarked about Proctor & Gamble’s efforts to innovate around cheaper razors in the face of competition from digitally-native vertical brands like (now Unilever-owned) Dollar Shave Club and Harry’s. The struggle is real. Per the Financial Times,

In 2016, revenues of the large consumer good companies — from beer to soft drinks, food and household products — grew at their slowest rate since 2009, when the recession took hold. The 207 results for many of those companies that have reported remain weak.

A few weeks ago the Interactive Advertising Bureau released a new study entitled, “The Rise of the 21st Century Brand Economy.” It is well-worth perusing. In fact, we’re a bit late to the game here because we wanted to give it an earnest review. The upshot? Consumption habits are rapidly shifting away from third-party wholesalers like Nine West towards direct-to-consumer relationships. With nimble, oft-outsourced supply chains, DTC e-comm brands are stealing market share from consumer products manufacturers and distributors. In the aggregate, it’s creating real shocks. Some significant themes:

Economic benefits are accruing to firms that create value by tapping into low-barrier-to-entry, capital-flexible, leased or rented supply chains. These include thousands of small firms in all major consumer-facing categories that sell their own branded goods entirely or primarily through their owned-and-operated digital channels.

First-party data relationships are important not for their marketing value independent of other functions, but because they fuel all significant functions of the enterprise, including product development, customer value analysis, and pricing.

An arms race for first-party data is influencing strategy, investment, and marketing strategies among major incumbent brands across all categories.

The significance of these themes cannot be overstated. Putting some numbers around them:

In the razor category, Gillette’s share of the U.S. men's-razors business fell to 54% in 2016, from 70% in 2010. Almost all of that share has shifted to Dollar Shave Club, Harry’s, and several other digital primary sellers.

In pet food, subscription service The Farmers Dog is averaging 40-50% revenue growth monthly, in a U.S. pet food market projected up 4.4% in 2018.

Grocery store revenue growth is projected to be about 1 percent annually through 2022. Over that same period, the market for Meal Kits is expected to grow by a factor of 10x.

Amazon ($AMZN) has meal kits. Walmart ($WMT) just launched meal kits. Albertsons purchased Plated. Meanwhile, the bankruptcy courts have a laundry list of grocers on their dockets.

Saving the most relevant to Nine West for last,

Sales at U.S. shoe stores in February 2017 fell 5.2%, the biggest year-over-year tumble since 2009. Online-only players like Allbirds, Jack Erwin, and M.Gemi have gained nearly 15 percentage points of share over five years.

Yes, the very same Allbirds that is so popular that it is apparently creating wool shortages. Query whether this factor will be featured in Nine West’s First Day Declaration with such specificity. Likely not.


In writing about L.L. Bean’s decision to cancel their lifetime guarantee, we questioned whether return policies are a big influence on purchasing decisions. Several of you wrote in asking whether we’d lost our minds. Here’s one:

Are you kidding? It's absolutely a factor in deciding whether I buy something online. If it's on Amazon but not Prime or Prime but not shipped by Amazon (even on Amazon you have to be careful), or if I have to pay for return shipping, or worst of all, if it's not returnable, I think twice before buying. (That's why companies like Zappos rule, even if they're marginally more expensive. Free return shipping every time, no small print. I buy ten pairs at a time and return nine--ok, maybe eight. But I digress.)

Less of an issue for store-bought items since (1) who has time to actually set foot in a store and (2) most stores offer some sort of (perpetually shrinking) window in which to return stuff unless it's final sale (and if you're there and the goods are tangible, you can make an educated decision). - Partner, Biglaw

PETITION Response: Maybe we should have been clearer. In the wise words of Omar Little, “A man got to have a code” as much as a retailer must have clear-cut, fair policies. L.L. Bean has an extremely generous lifetime policy. And so, naturally, people then dumpster dive and return something that was purchased 12 years ago. And then when the liability hits $250mm annually and people lose jobs, other people complain about how big business doesn’t care. There’s something a bit wrong with that isn’t there? Remember: the new policy is a year - pretty generous in the scheme of things. Now, again, L.L. Bean went about it the wrong way: from a messaging standpoint, it would’ve been more prudent to maintain the lifetime guarantee and have people register their product (does anyone actually even register?). The fact that L.L. Bean took a lot of heat for this change given the retail malaise is, in our view, a bit absurd. 

What’s also interesting about your comment is that what you wrote is precisely why (i) Amazon ($AMZN) - and Zappos by extension (owned by Amazon) - doesn’t make money on retail (their margin/profit, a new phenomenon in its 20 year history, for the record, all comes from AWS), (ii) $UPS’ stock has been hammered (even they can’t handle more expensive B2C delivery and then 9 shoe box returns), and (iii) more and more retailers are folding (including Nine West - callback to the above). Not to guilt trip you. There’s just no easy answers when customers are used to getting so much for free. We are literally combatting that in real time right now with our subscription launch. The saying, “nothing in life is free,” doesn’t apply to a whole new generation. Everything is free - well, unless you factor in that you’re paying with your data and lack of privacy. But now WE digress. In sum, we would love to get a peek at your shoe closet.

Want to tell us we're morons? Or praise us? Cool, either way: email us

Resource Recommendations

It was clear from our survey results that people are hungry for a$$-kicking resources on the topics of restructuring, tech, finance, and disruption. We went ahead and started compiling a "reading list," of sorts for your benefit. You can find it here. What is the best book you’ve read on any of these topics recently? Email us at petition@petition11.com.