Unrelenting poor sales this year and last have pushed no small number of retailers into bankruptcy. And the latest sign that Gymboree could be next came this week when the company skipped an interest payment to bondholders.
On the other hand, Children's Place and Carter's seem immune to what's turning into a massive retail downturn. Each posted revenue growth last year, of 3.4% and 6.15% respectively.
Their magic? Low debt and business diversification.
"When you look at the stability of Carter's and Children's Place versus Gymboree you really see a tale of two cities," said James Gellert, CEO of Rapid Ratings, which analyzes companies' financial health.
Gellert's firm changed its rating on Gymboree from "very low risk" to "high risk" five years ago, following the acquisition by Bain Capital LP and the addition of more than $1 billion in debt.
"Operating profitability fell off the cliff," Gellert said, and "leverage went from strong to weak overnight."
Neither Gymboree nor Bain responded to request for comment on this story.
Although debt on its own isn't the problem, Gellert said---noting that Gymboree's lower priced brand Crazy 8 has largely cannibalized the company's business instead of adding to it---everything looks worse when a company is that leveraged going into a market downturn.
To be sure, a report in 2016 from IBISWorld says that expectations for higher disposable income and an increase in the number of children aged nine or younger will drive an annualized rate of growth in the industry of $10.2 billion, or .9%, over the next 5 years.
"However, to reap the potential benefits from increase in demand, industry operators will have to fend off increasing external competition from department stores, exclusively online establishments and big-box retailers," according to the report.
Gymboree, which filed its recent financial statement with a going concern warning, logged $324.9 million in net losses during the first period, on $356.8 million in total sales. It owes $4.3 million in debt principal payments by the end of July and is up against a $813.6 million maturity wall in August 2018. The company has more than $1.03 billion in debt in all.
That debt is a main differentiator between Gymboree, which operates 1,239 stores in the U.S. and internationally, and Children's Place.
Children's Place sells its branded clothing and shoes in 1,189 stores across the U.S. and internationally. For the first quarter of 2018, which ended April, the company posted $436.7 million in sales and $36.2 million in profit. Children's debt load is very low. Its only debt is $27.4 million in borrowings on its $250 million revolver, due in 2020.
Although Carter's has more debt than Children's, $581.6 million, its business is propelled by diversity. As brick and mortar retailers stumble, Carter's has eggs in many baskets, Gellert said.
Carters owns Oshkosh and acquired a brand called Skip Hop this year. It sells its products through 965 retail stores as well as through Wal-Mart Stores Inc., Target Corp., Costco Wholesale Corp. and others. During the first quarter of 2017, Carters rolled out a line exclusively for Amazon.com Inc. called Simple Joys.
Recently, analyst Steven Marotta of CL King Equity said that the Amazon line, targeted at Prime customers, will likely help Carter's as Amazon aggressively goes after this market. While Marotta remains neutral on Carter's valuation, his firm is "simultaneously impressed with Carter's mid-single-digit growth trajectory."
The company posted $732.8 million in net sales during the quarter ended April 1, resulting in $46.7 million in income.
"I think this is about resiliency," Gellert said of the children's apparel segment. When the "massive shock" came to retail, two of these retailers were well-positioned and one was not.
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