Rue21 emerges from bankruptcy with 420 fewer stores

Dive Brief:

Teen retailer rue21 has emerged from bankruptcy. On Friday, a federal bankruptcy court in Pennsylvania deemed the company's reorganization plan effective after having confirmed it earlier in September. Rue21 filed for Chapter 11 in May.
Out of Chapter 11, the retailer's capital structure will include an asset-backed loan facility of $125 million (with about $39 million outstanding on exit) and an exit term loan facility of $50 million. That capital, as well as cash from operations, will be used to pay outstanding claims, according to court documents. The retailer's secured and unsecured lenders now own most of the company, with their debt holdings converting to equity through the bankruptcy process.
Rue 21 closed about 420 stores in bankruptcy. As of Sept. 11, it operated 758 stores in 45 states, mainly in malls and outlet or strip centers, according to a press release. "We are very pleased to have moved through the restructuring process in a relatively short period," CEO Melanie Cox said in a statement at the time of the plan's court confirmation. She added that the company has "performed consistently well ahead of its liquidity plan, and exceeded its second quarter target for Adjusted EBITDA by over 200%."

Dive Insight:

Rue21 is the second in its cohort to emerge from a carefully planned bankruptcy filed this year. The company follows Payless, which emerged in August.

Like Payless, the teen retailer used the court process to jettison debt and unprofitable stores to adapt to a retail landscape that has changed quickly in just a few years (next up will likely be Gymboree, which also filed early in the summer and expects to emerge this month).

Rue21, in court documents, pointed to that landscape as one of the major forces that prompted the filing. Among the conditions driving rue21 to bankruptcy were a "general downturn in the retail industry, decreased sales and increased operating costs, the shift away from brick-and-mortar retail sales to online channels, and the tightening of trade credit in the months prior" to the filing.

But the retailer also owned up to self-inflicted problems with its merchandising strategy and e-commerce fulfillment. It has since worked to tackle both these issues, the company told the court. Rue21 said it parted with its previous fulfillment partner, TradeGlobal, and in July contracted with Radial to provide e-commerce fulfillment out of its Kentucky warehouse. The retailer said in court documents it expects the switch to Radial to "significantly improve" its e-commerce fulfillment services.

And last October, rue21 brought in Nina Barjesteh as a new merchandising officer to "transform and reinvigorate the girls' segment by streamlining [rue21's] supply chain and elevating the style and quality of the Debtors' female-focused brands," the company said in court documents.

Adding to the retailer's problems ahead of bankruptcy was a debt load of nearly $1 billion leftover from a leveraged buyout by private equity firm Apax Partners in 2013. Debt from private equity buyouts is a theme we've seen with Gymboree, Payless, Toys R Us and several other retailers to file this year. "Like so many retailers, rue21 is a story of too much leverage," Reshmi Basu, associate editor at Debtwire told Retail Dive in May. "The company's capital structure can't absorb the current meltdown taking place in retail ... The company couldn't grow into its capital structure as it racked up a slew of earnings misses."

Retailers and other observers will be following closely the performance of the 2017 Chapter 11 graduates. As with Payless, Gymboree and others, the market will continue testing the strength of rue21's brand outside of bankruptcy. Removing debt and poorly performing leases is an important first step to turning around. The next step is adapting to customer's habits and tastes, which aren't nearly as orderly as the Chapter 11 process.