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Bon-Ton Stores Reveals a Long-Shot Plan to Survive

By Adam Levine-Weinberg - Jan 30, 2018 at 8:20AM

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Bon-Ton Stores wants bondholders to sign on to a restructuring plan that amounts to a Hail Mary pass. The company is telling them that they have nothing left to lose.

For the past few months, Bon-Ton Stores' (NASDAQ: BONT) management has been huddling with restructuring advisors in a desperate attempt to avoid bankruptcy. Meanwhile, revenue has continued to erode rapidly. Comp sales plunged by more than 7% in the first three quarters of fiscal 2017, and may fall by as much as 6% for the full year.

On Monday, Bon-Ton published the details of a turnaround plan that it has shared with creditors. However, while this proposal may work on paper, it doesn't give the company a realistic chance of staying competitive.

Bon-Ton lays out its comeback plan

As of now, Bon-Ton estimates that it will end fiscal 2017 with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $100 million. That would be down from $116 million a year earlier. It's also far below the company's original 2017 guidance, which called for adjusted EBITDA of $115 million-$125 million.

The exterior of a Bon-Ton department store

Bon-Ton has missed its financial targets consistently in recent years. Image source: Bon-Ton Stores.

Bon-Ton's turnaround plan calls for boosting adjusted EBITDA to $123 million in 2018, $164 million in 2019, and $184 million in 2020. The plan has a few key pillars.

First, the company will close more than 15% of its stores and one distribution center during 2018, but it will continue to open a few new stores each year in promising markets. It will also request rent reductions for other low-performing stores. The store closures and rent reductions should together increase annual EBITDA by at least $5 million, while new store openings could boost annual EBITDA by as much as $20 million by the end of 2020.

Second, Bon-Ton plans to revamp its marketing strategy. It will cut print advertising spending by about $15 million and reinvest a third of that total in search, social media, and radio -- channels where it expects to get more bang for the buck.

Third, the company is working on several initiatives to get comp sales growing again. These include investments in its e-commerce platform, improvements to its private-brand offerings, a new markdown strategy, and refining its inventory management.

Lastly, Bon-Ton plans to reduce corporate overhead costs, while improving staffing levels in its stores to drive sales growth. One particularly notable change is that it plans to shut down two of its seven brands, converting its remaining Bergner's and Boston Store locations to the Carson's banner.

The exterior of a Carson's department store

Bon-Ton plans to convert two of its smaller nameplates to the Carson's brand. Image source: Bon-Ton Stores.

Hitting the targets will be virtually impossible

Even if Bon-Ton were to achieve its business plan, its current shareholders wouldn't benefit. They stand to lose their entire investment under the restructuring scenarios that the company is considering. The real gains would go to holders of Bon-Ton's second-lien debt.

However, the company faces numerous potential land mines that could derail its turnaround. First, the value of print advertising is not fully quantifiable. Bon-Ton's planned double-digit reduction in print advertising could make its brands lose "top-of-mind" status with customers -- leading to a long-term loss of sales that isn't reflected in the company's projections.

Second, eliminating the local Bergner's and Boston Store nameplates in the Midwest could cause a short-term backlash among customers. Macy's (M 2.27%) has experienced this issue in some markets, such as when it retired the Marshall Field's brand in Chicago.

Third, Bon-Ton's projected sales turnaround implies that it will make substantial market share gains relative to other department stores. This is highly unlikely given the company's shoestring budget. Bon-Ton plans to increase capital spending to an average of almost $50 million over the next three years -- compared to $31 million in 2017 -- but Macy's spends $900 million-$1 billion annually on capex.

Not only does Macy's have more money to invest in each of its stores, but it also has a vastly larger technology budget than Bon-Ton will ever be able to afford. As a result, Bon-Ton is likely to remain an e-commerce laggard despite its best efforts.

This is just a Hail Mary pass

Even if Bon-Ton manages to avoid all of the pitfalls discussed above, its EBITDA would reach just $184 million by 2020. More than half of that sum would need to be spent on interest and capex, leaving very little for holders of Bon-Ton's second-lien debt -- who are being asked to convert their debt to stock.

The outlook would be considerably worse if any of Bon-Ton's profit improvement initiatives fail to bear fruit, or if the economy falls into a recession within the next few years, or if larger rivals become more adept at stealing Bon-Ton's customer base.

Indeed, this restructuring proposal seems like a Hail Mary pass rather than a realistic business plan. So why would any of Bon-Ton's creditors sign on? Simple: Bon-Ton claims that holders of its second-lien debt are likely to lose their entire investment if the company liquidates instead.

If forcing Bon-Ton into bankruptcy may lead to a total loss for these second-lien debt holders, perhaps they will agree to a long-shot plan that gives them a chance of getting some of their money back. But a restructuring isn't likely to keep Bon-Ton in business for very long. After all, the company's problems go well beyond having too much debt.

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