Tight Inventory Controls, Lower Costs Buoy NJ Apparel Retailer

Burlington Coat Factory Warehouse Corp., a portfolio company of Bain Capital, is finding its footing, and Standard & Poor’s has taken notice.

On April 28, the ratings agency revised its outlook for the Burlington, N.J.-based specialty apparel retailer to stable from negative, and affirmed its ‘B-‘ corporate credit rating on the company’s debt. The move, which will end the company’s brief stay on S&P’s “weakest links” list, was attributed to expectations of an expanding cushion above the financial covenants of its senior term loan. S&P now believes Burlington Coat Factory’s cushion above the covenants will be “a minimum of 13 percent [of EBITDA] over the next year.”

“The cushion is higher than our previous forecast as BCF’s profitability improved in its fiscal third quarter as a result of cost-cutting initiatives,” said Diane Shand, a credit analyst with S&P, in a statement. The agency also expects the company to be successful with further expense reduction efforts in 2009.

Bain Capital took Burlington Coat Factory private in April 2006 in a deal worth $2.1 billion, or $45.50 per share. According to Thomson Reuters data, the Boston-based mega-buyout firm put roughly $454.2 million worth of equity to work in the deal, which is part of Bain Capital IX, an $8 billion pool that closed in March 2006.

The change in S&P’s outlook follows Burlington Coat Factory’s latest financial report on April 14. For the third quarter ended Feb. 28, adjusted EBITDA rose to $136.5 million from $120.9 million a year earlier. Sales saw a 3.4 percent increase to $1.02 billion in the latest quarter from $987.1 million a year ago. The sales boost was attributed to the opening of 31 new stores on a net basis in the preceding year. The company, which operates 427 stores in 44 states and Puerto Rico, cited strong inventory management, in addition to lower expenses, for the better EBITDA results, noting its average inventory per store fell 14 percent in the third quarter from the prior-year levels.

For the nine months ended February 28, Burlington Coat Factory reported adjusted EBITDA of $262.6 million, up 8.1 percent from $243 million in the year-ago equivalent period. Sales rose 4.5 percent in the latest nine-month period to $2.73 billion from $2.61 billion a year earlier. Looking ahead, the company said it expects to reduce its cost structure by a total of more than $60 million by the end of its fiscal year 2009, which concludes in May. The lower expenses achieved so far have mainly come from a decline in labor costs, S&P said, as the company moved to match staffing with store volumes and undertook an overall reduction in head count.

In its Form 10-Q filing for the third quarter, Burlington Coat Factory said the balance on its $900 million senior term loan stood at $872.8 million as of Feb. 28. The interest rate on the loan is LIBOR plus 2.3 percent due in quarterly payments of $2.25 million from May 30, 2009 to May 28, 2013. Total long-term debt for the company stood at $1.34 billion at the end of quarter, including the senior term loan, $300.7 million in 11.1 percent senior notes due in April 2014, and $99.3 million in 14.5 percent senior discount notes due in October 2014, as well as other liabilities. Also in the 10-Q, Burlington Coat Factory said its working capital stood at $229.1 million, cash and cash equivalents totaled $27.4 million, and the availability under its asset-backed line of credit was $427.9 million.

Burlington Coat Factory landed on the S&P’s “weakest links” list in the first quarter after the ratings agency cut its outlook on the company in late January to negative, citing a concern that the cushion over the financial covenants of its senior term loan would significantly narrow in the company’s current fiscal fourth quarter, which ends May 29. It specifically noted at that time that the leverage covenant on the loan was scheduled to become more restrictive in the fourth quarter, and said if debt levels and EBITDA performance were in line with those at the end of November 2008, the cushion over the covenants would narrow to about 5 percent of EBITDA by the end of fiscal 2009.