Southeastern Files Chapter 11

Saddled with more than $1 billion in debt and beset by aftereffects of deflation, SNAP benefit reductions and an inability to keep up investment pace with competitors, Southeastern Grocers filed for voluntary Chapter 11 bankruptcy protection Tuesday.

As expected, Southeastern filed a prepackaged plan created in negotiations with its lenders in recent months, which would refinance approximately half of its debt and turn the other half to new equity. The Jacksonville, Fla.-based retailer said it anticipates closing approximately 100 stores and intends to emerge in 90 days operating 580 stores; it also plans to sell 20 of the remaining 580 to its new equity holders in a sale-leaseback deal.

Southeastern, which operated 704 stores as of Tuesday under the Winn-Dixie, Bi-Lo, Harveys, and Fresco Y Mas brands, reported sales of nearly $9.9 billion in the fiscal year ended Dec. 27, 2017, and a $139 million net loss.

In a disclosure statement filed in U.S. Bankruptcy Court in Delaware, the company said an inability to keep up investment during a “pivotal time” for the food retailing industry exacerbated financial problems brought on by its high debts.

“In this challenging environment, food retailers must invest in operations to stay up to speed with the latest industry developments to survive,” the company said in the statement. “Now is a pivotal time in the industry, with market participants investing in new store facilities as well as improving existing stores to enhance the consumer experience. Moreover, companies are also implementing cost-saving technologies and practices that allow them to further lower their prices, including in the areas of labor scheduling, ordering, receiving, payment processing, and data analytics. Capital improvements are thus imperative for food retailers to keep pace with their competition.

Related:Southeastern Grocers Restructures in Chapter 11; 94 Stores to Close

“Additionally, because more companies are beginning to provide what used to be considered difficult-to-find organic, natural, and other specialty products, it has become increasingly important for industry participants to invest in marketing efforts in order to differentiate their offerings in front of consumers,” the statement continued. “In sum, the current market values the ability to spend cash on capital improvements and marketing at a premium.”

Food price deflation and a rollback in federal food assistance programs during 2016 also hurt sales and profitability, the company said. At the same time, expansion of food discounters and an associated reaction of rivals competing on lower prices challenged Southeastern’s same-store sales.

Food deflation of approximately 1.3% in 2016—well off from historical rates of approximately 2.2% annual price inflation—triggered a 20% decline in the company’s EBITDA that year.

“Recently, some of the company’s competitors have attempted to increase market share through expanding their footprint and discount pricing, creating a more difficult environment in which to consistently increase year-over-year sales,” the disclosure said. “Notwithstanding the implementation of such measures, the company experienced reduced profitability and liquidity as a direct result of falling produce and retail food prices, and competitors’ increased willingness to engage in price-based competition.”

Southeastern projected fiscal 2019 sales of approximately $8.4 billion and slim profits, indicating the “right-sizing” of the company would cost it some $1.5 billion in sales.

Southeastern said its largest unsecured creditor ware bondholders, with $522 million in notes that will be converted to new equity under the plan. Wells Fargo is the trustee Primary grocery supplier C&S Wholesale Grocers has a $109 million claim, and pharmacy supplier Cardinal Health is owed approximately $50 million. Its next largest trade creditors are Coca-Cola of Florida ($5.5 million), Pepsi Cola ($5.2 million), Mondelez ($5.1 million), United Natural Foods ($4.6 million) and Frito-Lay ($4.2 million).

Southeastern said it anticipates its trade creditors would be paid in full. It also intends to execute a new supply agreement with C&S secured in part by a junior lien. That deal will provide Southeastern with incremental payment credit terms equivalent to approximately $100 million throughout the Chapter 11 process, which Southeastern said would substantially enhance liquidity and eliminate the need for debtor in possession financing. C&S will also provide payment credit terms equivalent to $75 million in the first year following emergence and $50 million the following year, subject to the payment of certain negotiated amounts. Southeastern has asked the court permission to file its C&S agreement under seal.

This story has been clarified from an earlier version that incorrectly indicated Wells Fargo was a creditor in the case. Wells Fargo is the trustee for the $522 million bond issuance.