Dive Brief:

• J.P. Morgan is ceding its role as administrative agent for rue21’s term loan to Wilmington Savings Fund Society as the struggling apparel retailer seeks to restructure its debt, Debtwire reports. The apparel retailer has missed interest and amortization payments and is seeking new lenders, although many lenders think the company can’t take on any more debt, Debtwire Associate Editor Reshmi Basu told Retail Dive.

• Factor firms are getting nervous and not approving shipments, Basu said, though Debtwire’s report noted that management has said it continues to have factor support. “Whenever you have issues with your supply chain it’s not a good thing,” she told Retail Dive.

• The debt loan and ongoing sales slumps make it likely that rue21 will follow apparel retailers The Limited, Wet Seal and BCBG in filing for Chapter 11 bankruptcy protection this year, Basu said. “Way too much leverage and declining mall traffic trends are just the death knell,” she said, adding that rue21 is a “poster child” for mall-based apparel retail.

Dive Insight:

Rue21 has been taking steps to turn things around, with plans to revamp its girls' in-store experience, in alignment with the girls' merchandising transformation led by Chief Merchandising Officer Nina Barjesteh, who joined rue21 from Target after the abrupt departure of Kim Reynolds in October. 

That was just one executive change amid a shake-up instituted last year by the retailer’s private equity owner, Apax Partners, shortly after credit ratings firm Fitch Ratings warned rue21 could slip down the slope to bankruptcy. The company replaced Reynolds as well as CEO Bob Fisch, who together had run the company for some 15 years. Keith McDonough, who had been CFO for 13 years, has since served as interim CEO while the board of directors continues its search for a permanent chief executive. Dirk Armstrong, who has been with rue21 for five years, was promoted to chief operating officer in January.

The executive shakeup may have come too little too late, though Debtwire reports that the company has signaled that same-store sales in already revamped stores have risen 6%, with wider gross margins and lower inventory levels.

Fitch’s blunt report last fall singled out rue21 as one of seven retailers with tenuous futures. “The lack of proprietary products in many categories leaves retailers vulnerable to permanent traffic decline resulting from the rise of competitors (for example, discounters and online-only players),” Fitch said, pointing out that mall-based apparel brands in particular can quickly become irrelevant as consumer sentiment changes. “The outcome in either case is that the bankrupt retailer has lost its place in the market and thus has limited value as a going concern.” In January, rue21 appeared in another Fitch report citing retailers most likely to default on their loans. 

Most of the retailers listed in that report are owned by private equity firms, and some of rue21’s troubles may stem from its private equity ownership. Often, private equity ownership means big debt loads without enough time and resources spent on retail fundamentals. Apax Partners took rue21 private after buying it for $1.1 billion in 2013. 

In recent years, rue21 expanded its number of stores, despite having negative same-store sales, Basu said. “That can be pretty lethal,” she said. But one area where struggling mall-based retailers have some hope is in renegotiating leases, she said, because landlords are under the gun as retailers shutter underperforming stores (or all stores).