The Bon-Ton Stores Inc. has yet to hammer out an agreement with debt holders that could help it avoid a bankruptcy filing, but it does have a plan on how to turnaround operations over the next couple years if it can get its immediate finances in order.
The retailer failed to make a $14 million interest payment on Dec. 15, 2017, and elected to exercise a 30-day grace period. It also entered into forbearance agreements with its ABL credit agreement lenders and an ad hoc group of investors holding the company’s second lien secured notes due 2021 to give it more time to negotiate terms regarding its capital structure. The forbearance agreements expired on Friday.
While the debt holders can now choose to elect certain remedies, there is the possibility under certain conditions that Bon-Ton could have until Feb. 4 to continue negotiations. In a filing with the Securities and Exchange Commission on Monday, Bon-Ton said it hasn’t yet reached an agreement.
“There are no assurances that the company and such note holders will come to an agreement on the terms of a restructuring transaction,” the retailer said. “In accordance with the terms of the non-disclosure agreement that the company entered into with such note holders, the company agreement to publicly disclose the material terms of the potential restructuring transaction being negotiated with such note holders.”
The plan revealed in the filing details initiatives intended to enhance the retailer’s performance for 2018 and 2019 in four key areas: store portfolio; merchandising, planning and allocation; marketing, and capital investment. The turnaround plan also includes a look into a third year — 2020 — that was intended to be illustrative of a longer-term view incorporating the impact of the initiatives and the effects from increased capital investment. Bon-Ton said the plan still needs to be fine-tuned.
The plan is ambitious and the retailer still needs a capital structure that would allow it to invest in the planned initiatives. It is unclear how lenders view the plan.
The 2017 projection forecasts earnings before interest, taxes, depreciation and amortization of $100 million, on revenues of $2.56 billion, and a comparable-store sales decline of 4.9 percent.
Under the plan, which was created with the help of its financial adviser AlixPartners and given to note holders as a management presentation, Bon-Ton is forecasting EBITDA of $123 million for 2018, based on revenue of $2.39 billion and 2.3 percent comp growth.
The company said the 2018 forecast is based in part on merchandising and marketing initiatives that grow revenue and gross margin, new store openings and center core remodels to select flagship stores and cost savings from the closure of a distribution center.
Bon-Ton operates 260 locations across 24 states, primarily in the Northeast and Midwest. But the retailer has identified 100 of its worst-performing stores, determined that there are 42 potential closures and three potential stores sales, including one company-owned clearance center. It also determined that there are at least 20 additional stores that should be on its “watch list” for active monitoring for signs of further deterioration. The retailer said the stores might be closed account for $200 million of Bon-Ton’s total sales, but minimal contribution to EBITDA.
The merchandising component of the plan divides Bon-Ton’s inventory into three groups: core essentials that can be on the floor for at least six months; seasonal fashion that includes one or more deliveries and is shown for three to six months with a targeted markdown cadence, and a “wow” category for novelty fashion that is on the selling floor for one to three months and is intended to get the customer’s attention on the sales floor.
The biggest component of the three is seasonal fashion. The new plan calls for growing core essentials to 30 percent, shrinking seasonal fashion to 50 percent and growing “wow” to 20 percent.
One big area that Bon-Ton has lacked has been its e-commerce operation. The retailer seeks to correct that over the next three years, and projects that a 20 percent increase in its e-commerce penetration would result in a $200 million revenue increase and incremental EBITDA of $40 million. The regulatory filing noted that the “lack of online assortment breadth can be addressed quickly and with limited investment.”
While Bon-Ton told note holders it needs to eliminate unprofitable marketing spend, it also saw opportunity in select social media channels. One area for cuts is in direct marketing, where it could probably cut $13.1 million of unprofitable mailings. One area where it probably should increase its investment — $1 million — is Facebook because its core customers are “highly active” on this platform. Another was to increase its spend — $2.4 million — in search, such as on Google Shopping. Bon-Ton believes that it can affect positive changes to its revenues through more efficient spend and revised digital marketing tactics. While not concrete, the projection for 2018 results is due to the “opportunity to eliminate $10.7 million in marketing spend [that] potentially [would deliver] up to $22.2 million in incremental revenue.”