Claire's Stores debt dives on weak numbers; Constar paper ends heavier

By Stephanie N. Rotondo

Portland, Ore., June 11 - Claire's Stores Inc. took a dive Wednesday after the company reported weak first-quarter results.

The disappointing figures included a 4% decline in net sales. The news sent the company's corporate debt down as much as 6 points during the session. The bank debt also fell on the figures, though not nearly as much as the bonds.

It was not clear what pushed Constar International Inc.'s bonds down, but down they went. Traders reported the bonds slipped at least 2 points, but they could only speculate on the cause.

Claire's debt dives on numbers

Claire's Store's took a dive after posting its quarterly numbers late Tuesday.

One trader saw the bonds off slightly, its 9 5/8% notes due 2015 around 52.5 after opening at 53.5 bid, 54.5 offered. The 10½% notes due 2017 were seen down 2 to 3 points at 47.5 bid, 48.5 offered versus opening levels of 52.5 bid, 53.5 offered.

Another trader said the Pembroke Pines, Fla.-based retailer's debt "really got beat up today," with the 9¼% notes due 2015 trading between 61 and 64, the 9 5/8% between 52.5 and 55.25 and the 10½% notes - called "the most active of the three" - between 46 and 48.

Yet another source called the bonds down generally 4 to 5 points, "depending on which flavor." He pegged the 9¼% notes around 61.5, down 5 to 6 points, and the 10½% notes at 47 bid, 48 offered.

At another desk, a trader called the 10½% notes 6 points softer at 46 bid, 48 offered.

Claire's term loan also slid lower during Wednesday's trading session, according to a trader. The term loan was quoted at 76¼ bid, 77 offered, down from previous levels of 78 bid, 79 offered, the trader said.

For the quarter, the company reported net sales of $327 million, down 4% from last year as same-store sales declined.

Consolidated same-store sales dropped 8.4% in the first quarter, consisting of a 3.7% increase in average transaction value that was offset by a 12.5% decrease in the average number of transactions.

Adjusted EBITDA in the quarter was $34.3 million compared to $60.6 million in the 2007 first quarter.

Cash used by operating activities was about $1.4 million during the quarter, compared with cash provided by operating activities of $20.3 million last year. This change in cash was primarily impacted by a decrease in operating income and an increase in interest paid on the debt incurred to fund the acquisition, offset by a decrease in working capital.

At May 3, the company's $200 million revolving credit facility was undrawn and fully available aside from an ongoing $5.9 million letter of credit. Cash and cash equivalents were $68 million.

"We are genuinely disappointed with our first-quarter results. The challenging retail environment continues to impact our sales with mall traffic declining, and consumers' discretionary spending being crimped by large price increases in food and gasoline," said Gene Kahn, chief executive officer, in a news release.

"We began 2008 with an expense structure that anticipated same-store sales growth. Given the current retail environment and economic conditions, we carefully reviewed our cost structure and estimate that we can save $40 million annually. We have begun to execute against a number of the identified opportunities and expect that we can save $15 million in this fiscal year, with the full annualized savings achieved in fiscal 2009.

"Our same-store sales, while still negative, have shown improvement in the second quarter. We are encouraged that the new merchandise organization, combined with our cost savings initiatives, will drive improved performance during the second half of this year," Kahn added in the release.

Elsewhere in the sector, Burlington Coat Factory Warehouse Corp.'s 11 1/8% notes due 2015 fell a point to 84.5 bid, 85.5 offered, while Linens n'Things Inc.'s floating-rate notes due 2014 slipped to 38.5 bid, 39 offered.

"Retailers were down a little in sympathy with what was going on in the broader market, as well as Claire's," a trader said.

Constar bonds fall

Constar International's bonds ended the day weaker, but a trader was not sure what prompted the move. He speculated that a seller might have entered the market.

The trader quoted the 11% notes due 2012 at 54.5. Last week, the bonds had been at 56 bid, 57 offered.

Another trader deemed the debt down a deuce at 54 bid, 55 offered.

In a research report released Wednesday, APS Financial analyst Scott Moxham placed a "speculative buy" on the 11% notes. In the report, Moxham stated that the company has had success in some of its higher margin custom products, offsetting declines in its domestic conventional products.

However, as a key contract is set to expire at the end of the year, Moxham noted that there is still some risk.

"However, management remains extremely confident that, based upon the status of current negotiations, the agreement will be renewed in the near future, possibly by the end of the second quarter," Moxham wrote. "Although investors should not ignore the risk associated with the expiration of the Pepsi contract, based upon various factors, particularly the longstanding relationship between the two companies and the geographical proximity of Constar plants to Pepsi plants, we believe the likelihood of a 100% loss of the business is low."

Philadelphia-based Constar International is a manufacturer of polyethylene terephthalate plastic containers for the food and beverage industry.

Broad market ends weaker

"Homebuilders remain active," a trader said, following ratings cuts earlier in the week from Moody's Investors Service and Fitch Ratings. The trader quoted KB Home's 6¼% notes due 2015 at 87 bid, 88 offered versus 88 bid, 88.5 offered previously.

The trader also saw Hovnanian Enterprises Inc.'s 7½% notes due 2016 offered at 72.

"That's off a touch, but nothing drastic," he said.

At another desk, a trader saw Hovnanian's 8 7/8% notes due 2012 at 75 bid, 76 offered and Beazer Homes USA Inc.'s 8 5/8% notes due 2011 at 87 bid, 88 offered, both down a point.

In gaming names, Trump Entertainment Resorts Inc.'s 8½% notes due 2015 ended a point lower at around 67.5, a trader said, after gaining in the previous session. Another trader placed the bonds at 67 bid, 68 offered, down 1.5 points. Las Vegas Sands' 6 3/8% notes due 2015 fell 2 points to 87.5 bid, 88.5 offered.

Away from that Charter Communications Inc.'s 11% notes due 2015 lost a point to end at 85.5.

Sara Rosenberg contributed to this article.

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