Specialty Retail Shops Holding Corp. (Shopko Stores) – Files Chapter 11, Lines up $480mn in DIP Financing, Closes 38 More Stores

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January 16, 2019 – Specialty Retail Shops Holding Corp. (“Shopko” or “the Company”) and 13 affiliated Debtors filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Nebraska, lead case number 19-80064. The Company, the parent of Shopko, a leading operator of general merchandise stores throughout the Central, Western and Pacific Northwest, is represented by James J. Neimeier of McGrath North Mullin & Kratz. Further board-authorized engagements include (i) Kirkland & Ellis LLP as legal counsel, (i) BRG as restructuring advisor, (iii) Houlihan Lokey as financial advisor, (iv) Willkie Far & Gallagher LLP as counsel to a special committee of the Board (the “Special Committee”), (v) Ducera Partners LLC as financial advisor to the Special Committee, (vi) Prime Clerk as claims agent and (vii) Hilco Real Estate, LLC as real estate consultant.

The Company’s petition notes between 1 and 50 creditors; estimated assets between $0 and $50k; and estimated liabilities between $500mn and $1bn. Documents filed with the Court list the Company’s three largest unsecured creditors as (i) McKesson Drug Company ($69.8mn vendor claim), (ii) Provider Pay ($5.7mn vendor claim) and (iii)U.S. Bank Global Corporate Trust Services ($5.7mn bond claim).

In a press release announcing the filing, Shopko noted, “The Company is seeking to facilitate the restructuring as a result of excess debt and ongoing competitive pressures. Shopko has obtained up to $480M debtor-in-possession (DIP) financing from certain of its prepetition secured lenders, led by Wells Fargo, N.A. as administrative agent, to help fund and protect its operations during the Chapter 11 process. This incremental liquidity will ensure that suppliers and other business partners and vendors will be paid in a timely manner for authorized goods and services provided during the Chapter 11 process, in accordance with customary terms.”

Russ Steinhorst, the Company’s Chief Executive Officer, commented, “This decision is a difficult, but necessary one, In a challenging retail environment, we have had to make some very tough choices, but we are confident that by operating a smaller and more focused store footprint, we will be able to build a stronger Shopko that will better serve our customers, vendors, employees and other stakeholders through this process.”

Store Closings and Ongoing Operations

Shopko announced that it will be closing an additional 38 stores, relocating over 20 Optical centers to freestanding locations, and conducting an auction process for its pharmacy business. Throughout this process, all Shopko Optical centers and pharmacies remain open. All other stores remain open as the Company continues to optimize its store footprint.

Events leading to the Chapter 11 filing

 
In a declaration in support of the Company’s filing (the “Steinhorst Declaration”), Steinhorst, stated, “Unfortunately, the Debtors, like many other retail companies, have recently fallen victim to adverse macro-trends, including the general shift away from brick-and-mortar stores to online retail channels. More specifically, retail companies like Shopko, with a substantial physical footprint, bear higher expenses than web-based retailers and are heavily dependent on store traffic, which has decreased significantly as consumers increasingly shop online rather than in malls or shopping centers. In addition to competing against online retailers, the Debtors have struggled against other established brick-and-mortar retailers, such as Walmart and Target, who have less leveraged capital structures and greater economies of scale. These factors allow the Debtors’ competitors to offer lower prices than the Debtors and still bear the high operating expenses associated with brick-and-mortar retail. Further, consolidation in the pharmacy industry has led to a lack of pricing power for retail pharmacies of Shopko’s size.
 
These market developments, compounded with an underdeveloped online presence and wholesale platform and certain above-market lease obligations, have adversely impacted the Debtors’ sales and operations, with EBITDA declining by 21% over the last year, from approximately $45.2 million in 2017 to approximately $35.6 million in 2018. These declines have directly—and negatively—impacted liquidity and left the Debtors overleveraged. Moreover, the Debtors’ pharmacy business has not performed as well as the Debtors anticipated, due in part to high inventory costs from the Debtors’ primary pharmaceutical provider, McKesson Corporation (‘McKesson’).”
 
Anticipated timetable (as required in proposed DIP facility and/or set out bidding procedures motion)
 
  • Bid Deadline for Pharmacy Assets: January 21, 2019, with objections due by January 21, 2019  
  • Auction: Scheduled for January 23, 2019
  • Sale Hearing: Scheduled for January 28, 2019
  • Consummation of Pharmacy Assets Sale: On or before March 2, 2019
  • Securing of Plan Sponsor (or otherwise demonstrate ability to consummate the Plan): On or before March 14, 2019
  • Approval of Disclosure Statement: On or before March 22, 2019
  • Plan confirmation: On or before April 12, 2019
  • Emergence: On or before April 15, 2019

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