Charlotte Russe Heads for Choppy Waters After Restructuring Debt


As of Thursday, December 21, 2017

Charlotte Russe, the San Francisco–based teen retailer that got a lifeline by restructuring its debt without filing bankruptcy, is now headed for a tough time as it tries to convince shopping-mall owners to give it a break on store rents.

If the company can’t get a rent reprieve, that might jeopardize its recent move to reduce its term-loan debt from $214 million to $90 million in exchange for its lenders getting 100 percent ownership of Charlotte Russe. The loan, instead of being due in 2019, would now be owed in 2022. This reduces the annual interest rate on the loan by 50 percent.

But for this all to happen, it is subject to Charlotte Russe reducing its operating expenses.

Some are doubtful that this move will keep Charlotte Russe out of the bankruptcy courts. “The mathematical odds are not good,” said Howard Davidowitz, chairman of Davidowitz & Associates, a New York retail industry consulting and investment banking firm. “Reducing debt and closing bad stores is good. But at the end of the day, you have to attract customers. You have to sell them full-price merchandise to be viable. You have to reinvent yourself, and no one else has been able to do that. They have taken steps to move forward, but the record says this is a very tough road.”

Following the restructuring announcement, Moody’s Investor Service downgraded its ratings for Charlotte Russe’s senior secured term loan B facilities to Ca from Caa1, which means it is in danger of imminent default with little prospect for recovery. Its probability of default rating also was downgraded to D-PD from Caa1-PD.

But company officials were optimistic. “We have a number of strategies to enhance and grow our business. The new capital structure, as proposed, will not only improve our financial position but will allow for targeted investments in our brand and customer-centric initiatives,” according to a company spokesperson. “We are excited about the opportunities ahead and look forward to working together with our new board and owners to drive our business forward in the evolving retail space.”

Retail for the teen market is challenging, and Charlotte Russe finds itself following the same path of many other teen-based mall retailers that see their customers gravitate toward the Internet for online purchases and fast-fashion.

The Wet Seal, a teen retailer formerly based in Irvine, Calif., filed for bankruptcy in January and closed all its stores. In March, Gordon Brothers, a Boston finance company, acquired The Wet Seal’s brand for $3 million.

Also in January, the long-running The Limited, serving a younger customer, filed for bankruptcy and closed 250 stores. One month later, buyout firm Sycamore Partners acquired its intellectual-property rights and e-commerce rights for $26.8 million with plans to reintroduce the brand at a later date.

BCBGMaxAzria, another mall-based retail chain and wholesaler to department stores, crumbled under a mountain of debt and filed for Chapter 11 bankruptcy protection in February. Prior to filing for bankruptcy, it closed some 120 stores in the United States.

In August, Marquee Brands announced it had acquired the entire portfolio of brands once owned by the BCBG Max Azria Group for $108 million. In addition, Global Brands Group paid $23 million to secure certain operating assets and inventory of BCBG with plans to keep open between 40 to 50 BCBGMaxAzria stores.

Charlotte Russe operates 545 stores in 45 states and Puerto Rico as well as 11 Peek Kids stores, a childrenswear concept launched in 2016, and an e-commerce site. For the year ending Oct. 27, 2017, the retail chain had revenues of approximately $949 million, according to Moody’s.

The string of stores was founded in 1975 by the Lawrence brothers, who named the company after their favorite childhood dessert. Their first store opened in San Diego and was aimed at attracting customers between the ages of 18 to 24.

While Charlotte Russe is facing several problems, getting a $124 million reduction on debt is a big deal, said Rob Greenspan, president of Greenspan Consult, which provides financial and strategic advice to apparel-related companies. “They have a chance, and obviously the lender thought it was a better move to restructure the debt than liquidating the stores,” he said. “But it is a tough retail environment out there, and nobody has figured out the future.”