Another Apollo Retail Company Looks Wobbly

When Apollo Management agreed to acquire Claire’s Stores last year the economic landscape couldn’t have looked more different. Consumer confidence was high and thoughts of an impending financial crisis were all but unimaginable. It seemed like a good time to invest in retail.

Today, Claire’s, which sells costume jewelry and fashion accessory for the preteen, teen and young adult demographics, faces a rocky climb with a limited cushion. The $3.1 billion buyout of Claire’s, which closed on May 29, 2008, carried a total debt to EBITDA ratio of 8.1:1, with Apollo throwing in only $600 million of equity (19.4 percent of the total transaction value), according to Reuters Loan Pricing Corporation.

Ratings agency Moody’s Investors Services is obviously concerned. Late last month, the ratings agency said that the Pembroke Pines, Fla.-based company has a “higher-than-average probability of default,” given its “overleveraged and unsustainable capital structure.” With the announcement, Moody’s confirmed its Caa1 rating of $2.5 billion in debt securities held by Claire’s. A Caa1 rating falls in the middle of Moody’s speculative grade ratings range, which spans from Ba1 (the highest rating in the speculative range) to C (the lowest rating in the speculative range.)

With consumers shutting their pocketbooks, the average number of transactions per Claire’s outlet fell by 12 percent while the average transaction value rose by only 7.5 percent in the company’s second quarter of fiscal 2008, ended August 2, 2008. Same-store sales fell 5.8 percent. All told in the three months ended August 2, 2008 Claire’s reported net sales of about $360 million, just a slight dip from $365.5 million over the same period the year before.

Apollo Management has already taken a hit to its portfolio thanks in part to the slowing economy. Retail investment Linens ‘n Things filed for Chapter 11 bankruptcy protection this past May as its debt laden balance sheet crumbled under the pressure of the economic slowdown. Apollo Management acquired Linens ‘n Things in Feb. 2006 for $1.3 billion through its Apollo Management V LP fund. Claire’s, meanwhile, is a portfolio company of Apollo Management VI LP, a $6 billion fund that closed in 2005. The investment represents 10 percent of Fund VI’s total capital commitments.

As of August 2008, Claire’s operated 3,053 stores in the United States and Europe. The company also had 175 franchise locations in the Middle East, Turkey, Russia, South Africa, Poland and Guatemala, and another 205 stores in Japan through a 50/50 joint venture with Japanese retail giant AEON Co. Ltd

Last year, more than half (53.6 percent) of Claire’s sales came from jewelry, including earrings, necklaces, bracelets and rings, while the remainder came from accessories like hair goods, handbags and cosmetics.