Gymboree, a children’s apparel company with 900 stores, filed for bankruptcy on January 17th, 2019.1 This is the company’s second bankruptcy in less than two years, but this time all Gymboree stores will be closed.2 Some said the company went under because it couldn’t sustain the debt it took on from a leveraged buyout by Bain Capital, while others fault Gymboree for failing to adapt to changing consumer tastes.3

Background 

Gymboree, founded in 1976,4 experienced rapid sales growth and went public in 1993.5 The company was a fixture in malls across the United States and gained a devoted following by selling matching outfits for toddlers.6 Some believed this to be a “recession-proof” business, since people need clothes for their children regardless of the economic conditions.7 Gymboree faced direct competition from The Children’s Place and Carter’s,8 but Bain Capital saw enough value to pay $1.8 billion for Gymboree in 2010.9

The takeover

In 2009, Gymboree had virtually no debt; it was a profitable company with positive cash flow.  When Bain Capital took over the company the following year, however, it did so as part of a leveraged buyout.  In short, two-thirds of the $1.8 billion Bain Capital paid for Gymboree came from debt.  Gymboree consequently found itself with $1.2 billion of debt.  Interest expense increased by a factor of 360, ballooning from $0.25 million to $91 million.

The LBO:  Gymboree’s death knell?

Some cite Bain Capital’s leveraged buyout as a significant factor in Gymboree’s demise.10 11 There is plenty of evidence to support this.  In fiscal year 2011, Gymboree’s interest expense exceeded its operating profit by $38 million.  Thus, any profits the company earned went to service its debt.  Before long Gymboree had no profits at all, posting operating losses in FY 2013 and FY 2014.

This made it difficult for Gymboree to invest in its business and remain competitive.

While The Children’s Place developed a mobile app and increase online sales,12 Gymboree couldn’t afford to build an online platform.13 Gymboree didn’t rank highly in Google searches14 and wouldn’t invest in an app until 2018.15 The cash flow to capex ratio declined several consecutive years, which meant Gymboree didn’t even generate enough cash flow to update the company’s stores.  Gymboree became so strapped for cash that it couldn’t get inventory for the holiday season, since suppliers were worried they wouldn’t get paid.16 And it turns out suppliers were right to be worried, as Gymboree filed for bankruptcy in 2017.17 The company reorganized and attempted a turnaround, but by 2019 it was over for Gymboree.18

This story is similar to that of another defunct retailer:  Toys R Us.

Acquired by Bain Capital for $6.6 billion,19 Toys R Us became bogged down with $400 million in annual interest payments.20 Any operating profits went to pay interest,21 which left little room for investment in Toys R Us stores.  This has led some to blame leveraged buyouts for destroying companies and suggest that LBOs be regulated.22

Was Gymboree doomed before the LBO?

Taking on a massive amount of debt definitely restricted Gymboree’s ability to invest in its business, but it’s possible the company was in trouble before Bain Capital arrived on the scene.  Sales per square foot, for example, was trending downward well before the takeover occurred.

In FY 2007, the average Gymboree store generated $1.146 million in sales.  By FY 2010, this figure had declined to $990,000.

This decline isn’t related to the LBO because Bain Capital didn’t take over Gymboree until 2010.  The fact is that Gymboree’s growth peaked and then began to decline prior to the takeover.  Gymboree had robust same-store sales growth of 7% in FY 2007, but showed no growth in 2008 and a 4% decline in same-store sales in FY 2009.

A major caveat:

A recession took place in the U.S. during 2008-2009, so Gymboree’s poor performance prior to the 2010 takeover could be attributed to general economic conditions.  However, a major selling point of Gymboree had been that the company was supposed to be somewhat insulated from overall economic conditions since it sold children’s clothing.  In any case, Gymboree was in trouble before it was acquired by Bain Capital.

Why was Gymboree in trouble? 

Gymboree faced direct competition from The Children’s Place and Carter’s, as well as big-box stores such as Walmart and Target.23 Like all retailers, Gymboree lost sales to online retailers with the rise of e-commerce.  But perhaps most importantly, Gymboree was a victim of changes in consumer preferences.  Some consumers decided to mix and match children’s clothing rather than purchase an entire outfit,24 and Gymboree faced a backlash from its core consumers when it later attempted to change with the times.25

So what role did Bain Capital play? 

Bain Capital accelerated the fall of a declining company.  If Gymboree was a patient on life support, Bain Capital is the one who pulled the plug.

While Gymboree was in trouble when Bain Capital took over, the high debt load significantly increased the strain on Gymboree’s resources.  This is best illustrated by Gymboree’s working capital, which was on an upward trend until the takeover in 2010.

The situation is even bleaker when you look at Gymboree’s cash balance.

Gymboree had $250 million in 2009, but struggled to maintain cash after Bain Capital took over.

The 2017 bankruptcy seemingly gave Gymboree a second chance, as the company was able to unload $900 million of debt in exchange for letting creditors take over the firm.26 But by then it was too late.  A last-minute price increase and a shift to targeting older children were not able to save the company.27 Gymboree went bankrupt a second and final time, owing $200 million to its creditors and $12 million to its suppliers.28

References:

  1. Gray, A. (2019, January 17). Gymboree bankruptcy puts 10,000 retail jobs at risk. Financial Times. https://www.ft.com/content/43a1b644-1a75-11e9-9e64-d150b3105d21
  2. Yerak, B. (2019, January 17). Gymboree files for chapter 11 bankruptcy protection again. The Wall Street Journal. https://www.wsj.com/articles/gymboree-files-for-chapter-11-bankruptcy-protection-again-11547704441
  3. Wahba, P. (2018, July 16). Gymboree pins post bankruptcy comeback hopes on better merchandise. Fortune. http://fortune.com/2018/07/16/gymboree-turnaround/
  4. Kapner, S. (2018, July 19). Gymboree has a new look, and some parents aren’t pleased. The Wall Street Journal.  https://www.wsj.com/articles/gymboree-has-a-new-look-moms-arent-pleased-1531999801
  5. Gilpin, K. N. (1993, April 1). Gymboree’s stock offering finds an excited audience. The New York Times.  https://www.nytimes.com/1993/04/01/business/gymboree-s-stock-offering-finds-an-excited-audience.html
  6. Kapner, S. (2018, July 19). Gymboree has a new look, and some parents aren’t pleased. The Wall Street Journal.  https://www.wsj.com/articles/gymboree-has-a-new-look-moms-arent-pleased-1531999801
  7. Kapner, S. (2018, July 19). Gymboree has a new look, and some parents aren’t pleased. The Wall Street Journal.  https://www.wsj.com/articles/gymboree-has-a-new-look-moms-arent-pleased-1531999801
  8. Porter, K., Coleman-Lochner, L., & Klein, J. X. (2017, May 31). Bain doubles down on risky Gymboree bet even as bankruptcy looms. https://www.bloomberg.com/news/articles/2017-05-31/bain-doubles-down-on-risky-gymboree-bet-even-as-bankruptcy-looms
  9. Gray, A. (2019, January 17). Gymboree bankruptcy puts 10,000 retail jobs at risk. Financial Times. https://www.ft.com/content/43a1b644-1a75-11e9-9e64-d150b3105d21
  10. Unglesbee, B. (2018, March 5). Gymboree: A tale of two specialty retailers. Retail Dive. https://www.retaildive.com/news/the-childrens-place-and-gymboree-a-tale-of-two-specialty-retailers/518107/
  11. Gray, A. & Fontanella-Khan, J. (2019, January 10). Gymboree within days of filing for bankruptcy again. Financial Times. https://www.ft.com/content/7d7c8e60-147c-11e9-a581-4ff78404524e
  12. Unglesbee, B. (2018, March 5). Gymboree: A tale of two specialty retailers. Retail Dive. https://www.retaildive.com/news/the-childrens-place-and-gymboree-a-tale-of-two-specialty-retailers/518107/
  13. Wahba, P. (2018, July 16). Gymboree pins post bankruptcy comeback hopes on better merchandise. Fortune. http://fortune.com/2018/07/16/gymboree-turnaround/
  14. Unglesbee, B. (2018, March 5). Gymboree: A tale of two specialty retailers. Retail Dive. https://www.retaildive.com/news/the-childrens-place-and-gymboree-a-tale-of-two-specialty-retailers/518107/
  15. Wahba, P. (2018, July 16). Gymboree pins post bankruptcy comeback hopes on better merchandise. Fortune. http://fortune.com/2018/07/16/gymboree-turnaround/
  16. Unglesbee, B. (2017, June 15). Gymboree said vendor issues hastened financial woes. Retail Dive. https://www.retaildive.com/news/gymboree-said-vendor-issues-hastened-financial-woes/445094/
  17. Yerak, B. (2019, January 17). Gymboree files for chapter 11 bankruptcy protection again. The Wall Street Journal. https://www.wsj.com/articles/gymboree-files-for-chapter-11-bankruptcy-protection-again-11547704441
  18. Wahba, P. (2018, July 16). Gymboree pins post bankruptcy comeback hopes on better merchandise. Fortune. http://fortune.com/2018/07/16/gymboree-turnaround/
  19. Gray, A. & Fontanella-Khan, J. (2019, January 10). Gymboree within days of filing for bankruptcy again. Financial Times. https://www.ft.com/content/7d7c8e60-147c-11e9-a581-4ff78404524e
  20. Ronalds-Hannon, E. Townsend, M., & Coleman-Lochner L. (2018, March 16). Behind the breakneck unraveling of Toys ‘R’ Us. https://www.bloomberg.com/news/articles/2018-03-16/who-killed-geoffrey-the-giraffe-the-last-days-of-toys-r-us
  21. Lachapelle, T. (2018, March 9). Lessons learned from the downfall of Toys ‘R’ Us. Bloomberg Businessweek. https://www.bloomberg.com/news/articles/2018-03-09/toys-r-us-downfall-is-ominous-reminder-about-debt-laden-deals
  22. Morss, E. R. (2018, November 10). Should leveraged buyouts be regulated? Seeking Alpha. https://seekingalpha.com/article/4220722-leveraged-buyouts-regulated
  23. Unglesbee, B. (2018, March 5). Gymboree: A tale of two specialty retailers. Retail Dive. https://www.retaildive.com/news/the-childrens-place-and-gymboree-a-tale-of-two-specialty-retailers/518107/
  24. Wahba, P. (2018, July 16). Gymboree pins post bankruptcy comeback hopes on better merchandise. Fortune. http://fortune.com/2018/07/16/gymboree-turnaround/
  25. Kapner, S. (2018, July 19). Gymboree has a new look, and some parents aren’t pleased. The Wall Street Journal.  https://www.wsj.com/articles/gymboree-has-a-new-look-moms-arent-pleased-1531999801
  26. Gray, A. (2019, January 17). Gymboree bankruptcy puts 10,000 retail jobs at risk. Financial Times. https://www.ft.com/content/43a1b644-1a75-11e9-9e64-d150b3105d21
  27. Kapner, S. (2018, July 19). Gymboree has a new look, and some parents aren’t pleased. The Wall Street Journal.  https://www.wsj.com/articles/gymboree-has-a-new-look-moms-arent-pleased-1531999801
  28. Yerak, B. (2019, January 17). Gymboree files for chapter 11 bankruptcy protection again. The Wall Street Journal. https://www.wsj.com/articles/gymboree-files-for-chapter-11-bankruptcy-protection-again-11547704441

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