Zoe's Kitchen, American Tire, Tweddle Group & Element Behavioral Health
|May 30 at 12:00 pm||Public post|
Curated Disruption News
Midweek Freemium Briefing - 5/30/18
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News of the Week (4 Reads)
1. Is Delivery Killing Fast Casual Too? (Long Busted Narratives)
Fast casual is supposed to be a bright spot for restaurants. But as the segment has grown in recent years, there are bound to be winners and losers. Zoe’s Kitchen Inc., a fast casual Mediterranean food chain with 250 locations in 20 states ($ZOES), is increasingly looking like the latter.
Last week the company reported sh*tty earnings. Comp restaurant sales declined by 2.3% despite rising prices pushed on to the consumer. The decline is attributable to the usual array of externalities (e.g., weather) but also location cannibalization. Apparently, the company’s growth strategy is pulling consumers from previously established locations. Moreover, the company noted “inflationary pressures in produce and freight costs, that are expected to impact cost of goods sold for the balance of the year.” Wages also increased 3.3%, an acceleration from the 2.9% realized in Q4 ‘17. Accordingly, adjusted EBITDA decreased 30.9%. The net loss for the quarter was $3.6mm or -$0.19/share. The company lowered guidance. The stock tumbled.
Before you get too excited, note that this is a debt-light company: it currently has a ‘22 $50mm revolving credit facility with JPMorganChase Bank NA, of which $16.5mm is outstanding (with $3.7mm of cash on hand, net debt is only $12.8mm). It also, believe it or not, has covenants — leverage and interest coverage, among others — and the company is in compliance as of April 16, 2018. It also plans to continue its expansion: in the sixteen weeks ended 4/16/18, the company opened 11 company-owned restaurants with a plan to open approximately 25 (inclusive) over the course of fiscal year ‘18. That said, it does intend to rationalize existing locations (and expects some impairment charges as a result), cut G&A and take other operational performance improvement measures to combat its negative trends. There’s a potential opportunity here for low-to-middle-market FAs and real estate advisors.
For our part, we found this bit intriguing (unedited):
We are definitely seen more competitive intrusion, more square footage growth in some of those smaller kind of mid to kind of large markets where we've been there for some time now that's a little bit of what we're seeing in those markets.
We've also seen more competitive catering competition as every ones ramped up catering. And also the value and discounting as we spoke to in the call, in the prepared remarks we've seen that $10 check with that single user kind of moving around and we think that's so from the new competition square footage growth, the value and discounting and then the delivery interruption, we've seen or felt that in many of our markets.
There’s a lot to unpack there. Clearly competition, as we noted upfront, is increasing in the $10-check size cohort of fast casual. Catering is always a competitive business for restaurants like this too. But, the point that really got out attention was that about delivery. The company says pointedly, “We also believe that disruption from delivery and discounting has created headwinds.” The company further states,
Digital comps were 26% positive in Q1 as we leverage improvements from last year's investments in web and mobile platforms to build greater convenience for our guests. Early in Q2, we relaunched and upgraded our loyalty program, which is expected to help drive traffic by making it easier and clearer for our guest to earn and redeem rewards. Delivery sales grew in both our non-catering and catering businesses by 155%. And we have a clear plan to build out the channel for more profitable growth in 2018.
The impact of mobile food ordering and the need for delivery cannot be overstated. Companies need to act fast to activate delivery capabilities that makes sense to a mobile consumer who, more and more, goes to Postmates, Caviar, UberEats and other food delivery services for discovery. This is precisely why Shake Shack ($SHAK) is now on Postmates and Chipotle Mexican Grill Inc. ($CMG) is now available on Doordash. Others, like privately-owned Panera Bread are taking a step farther by building out its own delivery infrastructure in an attempt to own all its data and deliver without owing a cut to a middleman. Query whether this is far too much dependence on the likelihood of people to go directly to Panera’s app when they’re hungry…?
It sounds like the Zoe folks are increasing their focus on delivery. The question is whether they can execute fast enough to offset in-store dining declines. And whether they can do it on their own.
2. Where’s the Auto Distress? (Short PETITION’s Prognistications)
Back in October, we asked “Is Another Wave of Auto-Related Bankruptcy Around the Corner?” The (free) piece is worth revisiting — particularly in light of Tesla’s recent travails. Among many other things, we wrote:
Supply Chain Distress. Last year we saw DACCO Transmission Parts Inc. file for bankruptcy. During the Summer, Takata Inc. filed for bankruptcy (on account of a massive liability, but still) and Jack Cooper Enterprises Inc., a finished-vehicle logistics/transportation provider, reached a consensual agreement with its noteholders that kept the company out of bankruptcy court. For now. Then, a little over a week ago, GST Autoleather Inc. filed for bankruptcy, citing declining auto output. Is this the canary in the coal mine? Hard to say. Literally on the same day that GST filed for bankruptcy - again, citing declining auto output - General Motors, Ford and other OEMs reported the first YOY sales increase (10%), surprising to the upside. It seems, however, that the (sales) uptick may be artificial: in part, it's attributable to (a) Hurricane Harvey damage and mass vehicle replacement; and (b) heavy vehicle discounting. On a less positive note, Ford announced that it will be slashing billions in costs to shore up its financial condition; it also announced back in September that it would slash production at five of its plants. And General Motors Co. announced earlier this week that it would be idling a Detroit factory and cutting production. Production levels, generally, are projected to decline through 2021. Obviously, reduced production levels and idled plants portend poorly for a lot of players in the auto supply chain.
But, with limited exception (like Nissan’s announcement this week that it would cut U.S. production by 20%), the auto world has been largely quiet since then. Another exception: International Automotive Components Group S.A., a Detroit-based interior parts manufacturer with 77 manufacturing plants worldwide, announced, in April, a new financing transaction through the issuance of $215 million of ‘23 second lien notes funded by Gamut Capital Management LP. Perhaps we just need to be more patient?
Rumblings abound around two more names that may be in more near-term trouble. First, American Tire Distributors’ suffered downgrades on the heels of the announcement that Goodyear Tire & Rubber Co. ($GT) opted to discontinue use of ATD as a distributor. Notably, GT’s stock, itself, is down 20% in the last year:
The news cratered the market value of ATD's $975 million of bonds and its $700 million term loan. S&P Global Ratings quickly cut the company's credit grade deeper into junk and Moody's followed suit, saying its capital structure was no longer sustainable.
Then, on May 9, the 800-pound gorilla entered the industry, as Amazon.com Inc. teamed up with Sears Holdings Corp. to allow customers to buy replacement tires online and have them installed at the troubled department store.
The moves signal radical changes in the replacement-tire market. Manufacturers are taking control of their own distribution, cutting out wholesalers like ATD, and along with retailers are developing their own internet capabilities to reach consumers directly, according to New York-based research firm CreditSights.
Ah, there it is: Amazon ($AMZN). Is a PETITION entry complete without the mandatory Amazon reference? Indeed, Moody’s noted,
“All else being equal, the magnitude of the associated earnings and cash flow decline will compound an already levered financial risk profile, rendering a pre-emptive debt restructuring increasingly likely, in our estimation.”
The Huntersville North Carolina company is a wholesale distributor of tires, custom wheels and other related auto equipment; it is a behemoth with $5.3 billion in revenues in 2017 and 140 distribution centers located across the U.S. and Canada. It also happens to have $1.8 billion of debt. The company is equally owned by private equity firms Ares Management LP and TPG Capital.
The debt — coupled with the loss of a major customer — is a big concern. More from Crain’s,
But ATD's capital structure is stretched tight, said Lawrence Orlowski, a director in corporate ratings at S&P. While the company has access to $465.4 million in asset-based lending facilities and $22.7 million in cash as of the end of 2017, even that liquidity may not be enough to stay solvent if ATD permanently loses Goodyear's business or if any other major tire makers pressure the company for concessions, according to Orlowski.
Something tells us (restructuring) advisors may be circling around trying to determine whether it can get together a group of the company’s term lenders.
Second, Tweddle Group Inc., a The Gores Group-owned manufacturer of automotive owners’ manuals (that nobody ever reads) likewise suffered a disastrous blow when Fiat Chrysler Automobiles N.V. announced back in April that it was no longer using Tweddle’s services. Fiat reportedly accounted for 40% of Tweddle’s 2017 revenue and will be hard to replace. Consequently, Moody’s issued downgrades noting,
“The downgrades reflect a credit profile that is expected to be significantly weakened following Tweddle's loss of certain work from a key customer, and the resultant mismatch between the company's earnings and cash flow prospects and its now much more levered balance sheet.”
This reportedly put pressure on the company’s $225mm ‘22 first lien term loan and now the company reportedly has hired Weil Gotshal & Manges LLP for assistance. While it will likely take some time for the loss or revenue to trip any leverage ratios in the company’s credit agreement, this is a name to watch.
Finally, Bloomberg New Energy Finance recently released its “Electric Vehicle Outlook 2018” report. Therein in noted that there are a variety of factors driving EV sales forward:
Lithium-ion battery prices have tumbled, dropping 79% in seven years. Meanwhile, the batteries’ energy density has improved roughly 5-7% per year.
Chinese and European policies are pushing fleet electrification.
Automakers are aggressively pushing the electrification of their fleets. Choice bit: “The number of EV models available is set to jump from 155 at the end of 2017 to 289 by 2022.”
Our latest forecast shows sales of electric vehicles (EVs) increasing from a record 1.1 million worldwide in 2017, to 11 million in 2025 and then surging to 30 million in 2030 as they become cheaper to make than internal combustion engine (ICE) cars.
Marinate on that for a second. That is a massive 10x increase in the next 7 years followed by an additional 3x increase in the following 5 years.
By 2040, 55% of all new car sales and 33% of the global fleet will be electric.
But what about President Trump (#MAGA!) and efforts to limit future alternatives subsidies?
The upfront cost of EVs will become competitive on an unsubsidized basis starting in 2024. By 2029, most segments reach parity as battery prices continue to fall.
So, sure. Distressed activity thus far in 2018 has been light in the automotive space. But dark clouds are forming. Act accordingly.
3. EBH Topco LLC is Latest Healthcare Bankruptcy (Short Mattress Companies)
ICYMI, last week healthcare distress finally started to live up to the hype. In a year largely dominated by retail distress (with pockets of power, oil and gas, and restaurants), EBH Topco LLC (a/k/a Element Behavioral Health Inc.) is the latest healthcare bankruptcy filing of 2018, following Wachusett Ventures LLC, Orion Healthcare Corp., 4 West Holdings LLC, and HCR Manorcare Inc.
EBH Topco LLC is a behavioral health services and residential drug and alcohol addition treatment provider in 13 treatment centers across 8 states. If that sounds dry: it's because it is. Which would explain why the Wall Street Journal felt compelled to drop in that it is also the family of facilities that treated Britney Spears and Lindsay Lohan, among others. The WSJ’s SEO just shot through the roof on an otherwise mundane bankruptcy report!
Anyway, the company stated,
While the Company has had ongoing financial difficulties, the overall census of the facilities and revenue has declined since 2017. The decline in out-of-network admissions, lower reimbursement rates by insurance providers and the decline in the average length of stay were all contributing factors to the financial losses of the Company. While the Company attempted to increase census through ongoing marketing efforts of its in-house sales team and internet advertising, the increased cost of these efforts did not result in the increase in revenue to improve the financial results of the Company and offset the Company’s cash burn. Financial performance for the fiscal year 2017 was $103.7 million in revenue, $129.6 million in expenses, and EBITDA of $(25.9) million with a total net income/(loss) of $(51.2) million.
Given that the company started in 2008 and then pursued an acquisition-based growth strategy, it seems like they didn't underwrite to current conditions. Ouch.
Just a few weeks ago, Project Build Behavioral Health, LLC (“PBBH”) purchased the first lien paper and after an initial buyer of the assets fell through, agreed to be the company's stalking horse bidder in bankruptcy subject to an expedited sale process (the sale hearing is slated for late June); PBBH intends to credit bid its debt. The company has a proposed $14.2 million DIP credit facility lined up to fund the cases. This ought to be short trip through BK.
4. Plant Growers Aren’t Impervious to Debt (Short Usury)
Sometimes distress comes from unexpected places. On Tuesday, Color Spot Holdings Inc., a "leading" grower and distributor of quality live plants in the western and southwestern United States filed for bankruptcy. The company's products include bedding plants, e.g., (i) annuals, perennials and poinsettas and other holiday plants (70% of revenue) and (ii) flowering and ornamental shrubs (30% of revenue).
In its First Day Declaration, the company noted:
"In 2016 and 2017, the Debtors had sales of about $268 million and $248 million, respectively. The Debtors’ industry is expanding due to, among other things, an ongoing focus by consumers on caring for their yards and outdoor spaces, favorable demographic shifts, and increasing housing stock. The Debtors are poised to capture upside from this industry growth."
Curiously that expansion and growth didn't point to expanded and grown sales. And that is despite having a heavy hitter client list, including The Home Depot ($HD), Lowe's Companies, Inc. ($LOW), Costco ($COST), Target ($T), and Walmart ($WMT). And this is despite the company's internal logistics infrastructure which includes 75% of product distribution handled by its internal fleet. This shields the company from rising trucking costs which, as PETITION has noted elsewhere, is more and more of an issue for a variety of businesses.
To fund its highly seasonal business, the company is a party to three different credit facilities, some components of which applied (cough, usurious) interest rates at 12+%. This is a big part of the problem. In addition, we like to joke a lot about how every business under the sun blames weather for its poor earnings reports. Here, though, it truly makes sense. Indeed, the company blames the long California draught and Texan storms in 2015 and 2017 for significant operational issues. Apparently, the company also experienced declining customer service as it grew. It's hard to get good help these days, it seems.
Consequently, the company has been in the midst of an operational restructuring; it has closed 33% of its nurseries and fixed its product mix. It has also been seeking a buyer. No stalking horse buyer is lined up, however, and the expressions of interest that the company has obtained don't appear likely to cover the Wells Fargo-funded debt. Consequently, the company intends to use bankruptcy to pursue an expedited sale process supported by the use of cash collateral with the hope of improving upon the prepetition interest and setting the business and its new owners up for success in the upcoming season. By late July, we'll know whether they were successful.
We have compiled a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. You can find it here. We recently added four new books on our “to-read” list: (1) “When the Wolves Bite” by Scott Wapner (about the Carl Icahn/Bill Ackman Herbalife battle), (2) “I Love Capitalism!: An American Story” by Ken Langone, (3) “Factfulness” by Hans Rosling (recommended recently by Bill Gates) and (4) “Enlightenment Now” by Steven Pinker (recommended recently by Warren Buffett). We’ve added “Bad Blood: Secrets and Lies in a Silicon Valley Startup” by John Carreyrou. He tells the story of Theranos’ Elizabeth Holmes’ epic deception. We are definitely adding this to our list of beach reads.
💥Notice of Appearance💥
PETITION: What is the best advice you’ve gotten in your career?
Jeremy: Listen before you speak. Many times when people first meet me they think I’m quiet, reserved, and even shy. They couldn’t be more wrong. Early on in my career, I learned it's infinitely more important to understand what the other person is saying before formulating a response -- especially if there's conflict involved. Having a thoughtful response can go a long way towards building mutual understanding.
PETITION: What is the best book you’ve read that’s helped guide your career?
Jeremy: Who Moved my Cheese by Spencer Johnson. When I’m in a rut, approaching a decision, or seeing change on the horizon, a quick visit with this book greatly helps frame my perspective. The concepts in this book led to my two career changes including entering the restructuring industry. Understanding that I am solely responsible for my personal and professional success, and that I’m not owed anything from anyone is the key here. Get to a point where no one — or no set of circumstances — can take away your cheese.
PETITION: What is one notable trend you’re seeing in ‘18 that not enough people are talking about?
Jeremy: Deal flow seems to be getting more and more consolidated making it harder for mid-level, thirty-something, restructuring professionals to figure out the best way to land new engagements and cases. Many of us have been told: "Start by doing good work, network, attend industry conferences, volunteer, etc.... and it will all come together." But should those of us under forty rethink this formula? Do we need to finally understand personal branding and how to promote ourselves? Should we be expanding the list of organizations we actively participate in beyond the restructuring community? Do we really understand what the decision makers are looking for? All good questions when our industry is evolving.
PETITION NOTE: Jeremy is the most “junior” person we’ve had in this NOA section and provides some on-point perspective. Thanks, Jeremy.
Many people are concerned about the dearth of deal flow and the concentration of (the limited) deal flow among a few select power players. Jeremy is correct: nobody owes you anything: you need to go out and make your own opportunities. What can you do — given the realities of the industry today — to win new business? What are realistic assumptions given your platform, your methods, and your teammates? What differentiates you from the rest of the pack? There are plenty of people networking and providing solid service. What other edge do you have? Aside from what your platform provides: what investments are you making in your own career? Who have you gotten in your corner to support you? All good questions.
AlixPartners is a global provider of turnaround and restructuring (TRS) solutions to Fortune 1000 companies facing critical business issues. Our TRS teams navigate matters that affect the future of organizations, often in situations of extreme pressure and high stakes. Having people who know how to get things done in a diverse world is vital to our shared success. Our business is built on relationships and we genuinely care about our clients. We’re hiring! Seeking candidates with 3+ years of relevant experience in finance, restructuring and turnaround. For more details please visit https://www.alixpartners.com/careers/ or contact Alix at TRSRecruiting@alixpartners.com.
Evercore (EVR) is a leading global independent investment banking advisory firm. Evercore advises a diverse set of investment banking clients on a wide range of transactions and issues and provides institutional investors with high quality equity research, sales and trading execution that is free of the conflicts created by proprietary activities. Evercore seeks to hire the following for its NY office:
Vice President with 3-5 years of relevant experience. For requirements and other specifications, please click here.
Associate with relevant experience. For requirements and other specifications, please click here.
Lincoln International, a global investment bank specializing in M&A, restructuring, debt advisory and private capital raising, is seeking a Senior Associate or Vice President for its rapidly growing NY office. Candidates should have 6-10 years of experience. For other requirements and specifications, please visit here.
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