Dive Brief:
- Charming Charlie is trying to wrangle a $15 million to $20 million loan ahead of the holiday season, The Wall Street Journal reported late last week, citing unnamed sources. Securing a loan could help the retailer through the holiday season, but sources told the Journal that "an in-court restructuring hasn’t been ruled out."
- The accessories and jewelry retailer is quickly burning through cash and faces a heightened risk of default, according to the Journal, which cited a downgrade by ratings firm S&P. Earlier in October, S&P analysts led by Adam Melvin wrote that they expect "higher cash use and [loan] covenant compliance tightening, which could lead to a covenant breach in 2018" for Charming Charlie, according to a report emailed to Retail Dive. Those events could, in turn, lead to a debt restructuring next year, the analysts added.
- Debtwire last week also reported that the retailer’s investment banker, Guggenheim, was trying to raise capital "amidst a looming liquidity crunch," according to a story emailed to Retail Dive. The news service also reported that Charming Charlie recently agreed to an amendment in its loan that loosened the maximum leverage test through 2018, but negotiations over that amendment "masked a broader issue that the retail company was close to fully tapped on its [asset-backed loan] and its cash was running thin."
Dive Insight:
Charming Charlie is among the retailers being watched closely by credit analysts for signs of potential bankruptcy or other forms of default. Among other such lists, the company is on Fitch’s "loans of concern" list for a $150 million outstanding loan.
Founded in 2004, the retailer made a name for itself by organizing accessories and jewelry assortments by color. Backed by private equity firms TSG Consumer Partners and Hancock Park Associates, the company has struggled of late to pay off its debt after a period of rapid expansion.
Last year, the retailer reportedly explored a debt restructuring after it "failed to establish sufficient scale to compete in a highly fragmented market that has been tested by the rise of internet shopping and rapidly changing consumer tastes," according to Reuters.
Debtwire writes that the retailer "has struggled in recent years with exposure to the highly fragmented market of fashion jewelry and accessories" but that "[t]his didn’t stop Charming Charlie from expanding by 79 stores between 2013 and 2015."
S&P’s Melvin wrote in October that his team expects fort the retailer’s "weak operating trends will persist" over the next 12 months, which would force the company to rely on credit for liquidity. "We believe the risks of a distressed debt transaction to address the capital structure are elevating as 2019 maturities approach, performance remains soft and the broader retail sector remains under pressure," the analysts wrote.
More broadly, Melvin and his team pointed out that Charming Charlie operates in a highly competitive sector and lacks the size and scope of its larger rivals. "The company is subject to fashion risk and is vulnerable to customers' shifting preference and spending, exacerbated by the company's rapid store growth over the past few years," the analysts wrote. "The company increased its store base by close to 35% to about 370 locations over the past four years."
The holidays, of course, are not only a crucial sales period, but also a time to reassure suppliers that a retailer is financially viable and has the cash to meet its obligations. The case of Toys R Us’ bankruptcy filing demonstrates how wary suppliers trying to protect themselves can compound liquidity problems for a retailer.
This story is part of our ongoing coverage of the 2017 holiday shopping season. You can browse our holiday page and sign up for our holiday newsletter for more stories.
