Gymboree debt hits the skids post-earnings; Walter Energy, Alpha Natural cut production targets

By Stephanie N. Rotondo

Phoenix, May 1 - Distressed debt investors were focused on Gymboree Corp. Thursday following the company's earnings report released late Wednesday.

The earnings showed a much wider loss and a hefty decline in same-store sales. The results were released shortly before the market closed Wednesday, which gave investors time to squash the bonds down as much as 7 points.

Come Thursday, the bonds "continued to melt down," one trader said, losing anywhere from 10 to 12½ points on the day.

In other earnings news, both Walter Energy Inc. and Alpha Natural Resources Inc. reported on Thursday. Additionally, both companies cut their production projections for the year, following in the footsteps of other coal producers as oversupply weighs on prices for metallurgical coal.

Walter's debt was drifting down on the back of its numbers, but Alpha Natural was holding its ground, traders reported.

Gymboree gets slammed

There was no relief for Gymboree debt on Thursday, as investors pushed the company's bonds down as much as 12½ points following a disappointing earnings release on Wednesday.

Early in the session, the 9 1/8% notes due 2018 were seen in a 67 to 69 context, which compared to Wednesday's closing levels in the mid-70s. But the pressure continued throughout the day and, after the close, another trader said the notes "continued to slide," deeming them off 12½ points at 63.

He added that over $30 million of the bonds changed hands.

Another trader said the paper was "down another 10 points" at 64 bid, 65 offered.

As for the company's bank debt, it was pegged around 85 early in the day. At the close, the term loan was seen at 80 ½ bid, 81 offered, down from 85½ bid, 86½ offered.

The earnings came out just before the close on Wednesday and by the bell, the bonds had dropped 6 to 7 points.

"They were down a bunch," he said.

For the fourth quarter ended Feb. 2, the San Francisco-based children's clothing retailer reported net sales of $351 million, which compared with sales of $397.6 million for the same quarter of fiscal 2012. However, the previous quarter was positively impacted by an additional week, which resulted in an added $19 million.

Same-store sales fell 9%, including online sales.

Gross profit came to $124.5 million, versus $144.8 million the year before. Net loss was $169.8 million and included a $157.2 million non-cash goodwill and intangible asset impairment charge.

Net loss for the same quarter of fiscal 2012 $5.4 million.

Adjusted EBITDA was $25 million, versus $47.7 million previously.

For the fiscal year, net sales were $1.24 billion, down from $1.28 billion in fiscal 2012. Same-store sales dropped 6%.

Gross profit was $476 million, down from $481.4 million. The company reported a wider net loss of $206.4 million, which compared to $10.4 million in fiscal 2012.

Adjusted EBITDA narrowed to $119.7 million from $161.8 million.

In other kid-related retailers, Toys 'R' Us Corp.'s bonds were also weaker on the day.

A trader called the 7 3/8% notes due 2018 off over 2 points at 713/4.

Another market source placed the issue at 73¼ bid, down almost a point.

Walter's loss widens

Walter Energy's net loss for the first quarter nearly doubled from the previous year, as the entire coal arena grapples with oversupply, low demand and subsequently, lower prices.

The company also lowered its production expectations for the year.

The news did not bode well with investors.

A trader said that the name wasn't overly active, but saw the 9 7/8% notes due 2020 falling 2½ points to 641/2.

A second trader said the debt "seemed a little weaker," quoting the notes at 64 bid, 65 offered.

For the quarter ended March 31, Walter reported a loss of $92.2 million, or $1.47 per share. For the same quarter of 2013, the loss was $49.4 million, or 79 cents per share.

Revenue dropped to $413.9 million, a 15.8% decline year over year.

Analysts had been expecting a loss of $1.22 per share on revenues of $447.21 million.

The company said it is expecting to produce 9 million to 10 million tons of metallurgical coal this year, down from previous estimates of 11 million to 12 million tons.

With just $676 million of available liquidity, Walter is hoping to raise as much as $250 million from asset sales. However, the company warned that such sales could be hampered if coal prices stay depressed.

Alpha beats expectations

Alpha Natural Resources also had earnings out on Thursday. Though the company posted a narrower quarterly loss, it also cut its production outlook for the year.

Right after the earnings came out, the company's debt was on the decline. But by the end of the day, the bonds had managed to inch back up.

One trader saw the 6¼% notes due 2021 ending around 75, which compared with previous levels around 741/4, he said.

"But there wasn't a lot of trades," he said.

Another market source called the issue up slightly at 74¾ bid.

Due to cost-cutting measures being undertaken, Alpha Natural narrowed its first-quarter loss to $55.7 million, or 25 cents per share, from $110.8 million, or 50 cents per share, the year before. Revenue dropped 16.6% to $1.11 billion.

Analysts polled by FactSet were anticipating a loss of 57 cents per share on revenues of $1.08 billion.

Like Walter and others in the space, the company said it expected to produce 15 million to 18 million tons of metallurgical coal in 2014, versus a previous estimate of 16 million to 20 million tons.

Sara Rosenberg contributed to this article

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