Category Archives: Retailing

Houston retailer settles with SEC over improper accounting practices

Conn’s Inc, has settled with the SEC and its former COO, Michael Poppe, that it deliberately understated the company’s allowance for bad debts and overstated income in its financial statements.

The company has its head office in The Woodlands and has a market cap of $584 million. It is a retailer of furniture and electronics and many of its customers are sub-prime borrowers.

Conn’s has agreed to pay a $1.1 million civil penalty. Mr Poppe will pay a $50,000 fine.

Mr Poppe joined the company in 2004 as its Controller. He was the CFO from February 2008 through April 2012 and its COO from April 2012 through May 2017.

The charges relate to the period from the quarter ending July 2012 to the quarter ending July 2014. The company made a fateful decision in 2012 to take more of the credit risk in-house.

Last month I wrote about some of the issues the company was facing when current CFO, Lee Wright, was promoted to COO.

Roll-rate model

The SEC states that Conn’s was using a ‘roll-rate’ model to measure potential credit portfolio losses by segmenting the portfolio into delinquency buckets and applying a roll-rate to each segments. A roll-rate is a measure of the percentage of receivables that will migrate into the next delinquency bucket the following month.

Historically, Conn’s used a roll rate that was based on the previous time period (month, quarter etc) or an average of several recent time periods. From July 2012, the roll rates used in the model were hard-coded plugs that reflected management’s unduly optimistic future expectations.

As a result, the bad debt expense was higher than projected/reserved charge-offs for 14 consecutive quarters. In the quarter ended July 2014, Conn’s finally began to build up its doubtful debt reserve. In the following quarter it removed the management plugs entirely. This caused a $20 million increase to the doubtful debt reserve. Conn’s share price dropped 30% on the day of the Q2 announcement and 41% on the day of the Q3 announcement.

Since October 2014, Conn’s has replaced all of its senior management team. Also, it no longer utilizes a roll rate model to calculate its allowance for doubtful accounts.

Poppe received restricted stock awards

It’s not clear whether Mr Poppe received a severance payment when he left. He had a base salary of $460,000. At the time the SEC filing announcing his departure did not refer to any severance payment. In addition, the annual proxy filed the following year did not list him as one of the top 5 officers.

Mr Poppe only received a cash bonus of $50,000 for the year ended 30 January 2017 and none the previous two years. For those three years, he did receive restricted stock units that were cumulatively valued at almost $3 million in the annual proxy filed for the year ended 31 January 2017. It’s not clear how many were forfeited on Mr Poppe’s departure.

SEC press release – Conn’s


Charming Charlie files for bankruptcy – to close all stores

Social Woodlands

Houston-based retailer, Charming Charlie, has filed for bankruptcy protection for the second time in 19 months. This time it intends to close all remaining 261 stores by the end of August.

In its Chapter 11 filing, the company listed assets of less than $50,000 and liabilities of between $50 million and $100 million.

The company has more than 3,300 employees. It has suspended online sales and the issuance of new gift cards. According to the Wall Street Journal, the company has $19.8 million in gift cards outstanding. It is seeking court approval to honor gift cards for 30 days.

Bankruptcy in 2017

The company was founded in 2004 by Charlie Chanaratsopon (then aged 26) and was backed by PE firms, TSG Consumer Partners and Hancock Park Associates.

It originally filed for Chapter 11 in December 2017 and exited in April 2018. During that process, the company closed 100 stores. Before the original bankruptcy filing, the company had $154 million of debt. It exited with $50 million in term loans and a $35 million credit facility.

Mr Chanaratsopon stepped down as CEO in October 2017 to be replaced by Lana Krauter. The current CFO is Al Bellon, who was appointed to the role in April 2019. He originally joined the company as Assistant Controller in December 2014.

Current creditors

After the conversion of debt to equity, the company’s major shareholder is THL Credit. They still hold about $25 million of the remaining term loans. They also have a commitment of $8.3 million in vendor financing.

Major unsecured creditors include the professional firms of Guggenheim Securities ($2.1 million), FTI Consulting ($850,000), Paul, Weiss, Rifkind, Wharton & Garrison ($637,000) and BDO ($325,000).

Law firms Paul Hastings LLP and Klehr Harrison Harvey Branzburg LLP are handling the chapter 11 proceedings. Clear Thinking Group LLC is the restructuring adviser.

Charming Charlie Chapter 11 filing


CFO resigns from struggling Houston retailer

Kelly Dilts has resigned from her position as CFO of Francesca’s Holdings to pursue another (as yet unnamed) opportunity. She had been the CFO since March 2016. The company promoted Cindy Thomasee to take her place.

[UPDATE 08-12-19: Kelly Dilts is now Senior VP, Finance at Dollar General, based in Tennessee]

Ms Thomasee joined the company in 2017 and was currently serving as the Chief Accounting Officer. She will receive a base salary of $325,000. She also received a grant of stock units worth $200,000 (less the value of a grant given to Ms Thomasee in April 2019). The grant will vest over 3 years.

Francesca’s has its head office in Northwest Houston and has been struggling in recent years. Its share price at the close of business on 1 July was 44 cents (market cap $18 million). The company announced that it would perform a reverse stock split of 12-to-1 to get the stock price back over $1. The Nasdaq had notified the company back in February that it was in danger of being de-listed.

At the end of January CEO Steven Lawrence resigned and the Board appointed Michael Prendergast of Alvarez & Marsal as its interim CEO. The company is paying A&M a monthly retainer of $100,000 for Mr Prendergast’s services. A&M protected themselves from bankruptcy by also negotiating what effectively amounted to a $250,000 up-front deposit.

At the same time, the company announced it had retained Rothschild to assist in a potential sale of the company.

The company still has 722 stores and has experienced sales declines every quarter since Q2 2017.

Back in April, the company entered into a retention agreement with Ms Dilts that agreed to pay her $380,000 if she remained employed with the company through April 2020. Presumably she has another role lined up that will more than make up for the retention foregone.

Other Houston retailers to have changed CFO’s this year are Stage Stores and Conn’s

SEC filing

Houston retailer appoints new CFO

Conn’s Inc, a retailer of furniture and electronics, has announced a series of financial promotions, including a new CFO. The company has its head office in The Woodlands and has a market capitalization of $559 million.

CFO Lee Wright has been promoted to COO. Mr Wright joined the company in June 2016. Prior to that he was CEO of Professional Directional Enterprises, an energy services company. His annual salary will increase from $600,000 to $650,000.

George Bchara has been promoted from Chief Accounting Officer to CFO. He joined Conn’s in December 2016 from BankUnited, based in Florida. Prior to that he worked at PwC. Mr Bchara’s salary will increase from $325,000 to $400,000.

Ryan Nelson has been promoted from Controller to Chief Accounting Officer. He joined the company in May 2018. Prior to that he spent seven years with EnLink Midstream Partners. His salary will increase from $200,000 to $225,000.

Sub-prime borrowers

For the year ended January 31, 2019, 70% of Conn’s retail sales were made using in-house credit programs. A further 23% use third-party financing. Only 7% of sales are made with cash or credit card. Many of the customers are sub-prime borrowers. As a result, the profitability of the company is very dependent on its credit management program and the delinquency rate of its customers.

Increase in delinquency rate 2013-2015

At the end of 2013, the company had a market capitalization of $2.8 billion. It was hit hard by the subsequent downtown, especially in the Energy sector as many of its stores are in Texas and the surrounding states. The company compounded that problem by taking more of the credit risk in-house. The provision for bad debts as a percentage of the total credit portfolio rose from 7% in 2013 to 16.1% in 2015. When Mr Wright joined the company, the market capitalization had dropped to $250 million.

That decline took a toll on the senior executive team. A new CEO, Norm Miller, was appointed in September 2015. There were also 3 CFO’s in 4 years (including a former CAO who was interim CFO for 6 months) prior to Mr Wright arriving.

Credit management improvements

The company has improved its delinquency rates since Mr Wright arrived. The provision for bad debts has dropped to 12.9% for the year ended January 2019. This is due to a combination of improved credit management processes, increased use of third-party financing and an improving economy.  However, the company remains vulnerable if there is a sharp downturn in the economy.

SEC filing



Entertainment company delays quarterly filing due to SEC investigation

RCI Hospitality Holdings (market cap $184 million) which has its head office in NW Houston, has announced that it will delay filing its quarterly 10-Q. It also received a delisting notice from Nasdaq.

RCI operates 39 adult nightclubs (including Rick’s Cabaret) and 7 restaurant/bars under the Bombshells brand name.

According to the SEC filing;

In mid- and late 2018, a series of negative articles about the registrant was anonymously published in forums associated with the short-selling community. Subsequently in 2019, the SEC initiated an informal inquiry. In connection with these events, a special committee of the registrant’s Audit Committee engaged independent outside counsel to conduct an internal review. The registrant and its management are cooperating with both the internal review and the SEC inquiry. Because the internal review is still ongoing, the registrant will be delayed in filing its Form 10-Q.

Anonymous allegations

That got me searching for the negative articles. They weren’t too difficult to find. You can read them here.

The anonymous author alleges, among other allegations

  • RCI made loans to the CEO, Eric Langan, that were not disclosed in SEC filings
  • One of RCI’s independent Directors is the brother of a senior executive. This is a violation of the SEC requirements for being an independent director
  • Another of the independent Directors represents RCI in lawsuits
  • CEO’s relative defaulted on a loan received from RCI – also not disclosed in SEC filings

Interestingly in the 10-K filed at the end of December for the year ended September 30, 2018, the company states that Nourdean Anakar is an independent director. Yet, under related party transactions, the company discloses that it borrowed $500,000 at 12% interest from Ed Anakar, an employee of the company and the brother of Nourdean. Ed Anakar is the Director of Operations at RCI.

Since the company disclosed the delay in filing the 10-Q, the stock price has dropped 15%.

Material Weaknesses

Unrelated to the allegations, the 10-K also disclosed material weaknesses in controls over

  • Revenues – segregation of cash counts
  • Complex accounting and management estimates
  • Financial statement close and reporting
  • IT – lack of controls to prevent unauthorized access to certain systems
  • Segregation of duties.

That’s the most comprehensive list of internal control weaknesses I have seen disclosed for a publicly-traded company. RCI did go live with a new ERP system in October 2017


SEC filing

Two Miami women indicted on Hurricane Harvey fraud

Two Miami women have been charged with participating in a scheme to fraudulently obtain Hurricane Harvey disaster-relief funds.

Fredna Frederic and Courtney Gillis, both of Miami-Dade County, have been charged with one count of conspiracy to commit wire fraud and three counts of wire fraud. If convicted, they could face up to 20 years in prison.

After Hurricane Harvey hit Texas in August 2017, the Red Cross offered $400 to every household directly impacted by the storm. Payments were made via Zelle, MoneyGram, WalMart or PayPal.

In order to qualify for these relief funds, an individual had to enter the names, addresses, and dates of birth of individuals who resided in the affected area. Once this information was verified, the individual would receive a reference code that could be redeemed for a $400 payment at a national retailer.

Frederic and Gillis’s co-conspirators applied for Hurricane Harvey disaster relief funds by falsely and fraudulently using the names, addresses, and dates of birth of individuals who resided in the disaster-relief area to obtain reference codes. Gillis worked at WalMart in Miami and Frederic offered a kickback if she processed the reference codes. On approximately 15 occasions, Gillis entered the codes that Frederic gave her. Gillis then issued payments of $400 per code to Frederic and her co-conspirators.

Frederic and Gillis have pleaded not guilty.

Houston retailer appoints new CFO

Stage Stores has appointed Jason Curtis as its new CFO. He has been serving as the interim CFO since August 2018. Mr Curtis joined the company in 2011 and was serving as the Senior VP, Finance and Credit.

Previous CFO Oded Shein left to become the CFO at ‘The Fresh Market Inc’, a PE-backed grocer based in Greensboro, NC. Both Mr Shein and Mr Curtis used to work at Belk, a department store company, based in Charlotte, NC

Stage Stores has its head office in the Galleria area. It currently operates in 42 states through 728 department stores (under the names of Bealls, Goodys, Palais Royal, Peebles and Stage) and 68 off-price stores (Gordmans). It has a market capitalization of $27 million.

Last week, the company received a delisting notice from the New York Stock Exchange. The average share price has been under $1 for the last 30 days of trading. The company has until July 28 to regain compliance.

CEO in charge of disastrous acquisition leaves with huge payout

Doug Ewert, the CEO of Tailored Brands (formerly The Mens Wearhouse) will step down from the role effective September 30, 2018.  He will also step down from the board. Tailored Brands has its head office in west Houston and has a market capitalization of $1.1 billion.

The SEC filing states that Mr Ewert is retiring but then goes on to state that the Separation agreement provides Mr Ewert with severance payments and benefits ‘as if his employment were terminated by the company for no reason’.

Mr Ewert has been the CEO since June 2011 and presided over one of the worst acquisitions of the 21st century.

Back in September 2013, another retailer, Jos A Bank made an unsolicited offer to buy The Men’s Wearhouse for $2.3 billion (in cash at a 42% premium!).

After a few months of haggling, the company ended up buying Jos A Bank for $1.8 billion (in cash at a 56% premium) in June 2014, which included $1.4 billion of goodwill and intangibles. Immediately after the acquisition closed, the company stopped the steep discounting at Jos A Bank (Buy one suit, get 7 free!). Sales plunged.

In 2015 the company took an impairment charge of $1.25 billion on the acquisition. In other words, they bought a business for $1.8 billion and less than 18 months later determined it was worth only $550 million!

Mr Ewert, who has a base salary of $1.25 million, is leaving with a cash payment of $5 million (2x base & 2x target bonus, to be paid over 2 years) and a pro-rata payment of his annual bonus to be paid in 2019. He also receives accelerated vesting of stock options and units worth, by my estimate, about $4 million.

Curiously, press release also announced that the COO of Tailored Brands, Bruce Thorn, had handed in his notice on August 22, effective August 31, to pursue another opportunity. Late this evening Big Lots, based in Columbus, Ohio, announced the hire of Mr Thorn as CEO.

As a result of Mr Thorn’s unexpected departure, the company is entering into a consultancy agreement with Mr Ewert until the end of the year which will pay him $104,167 a month for the 4th quarter.

Dinesh Lathi, currently the Non-Executive Chairman of the Board has been appointed as Executive Chairman with a base salary of $1 million. The company is seeking a new CEO.

SEC filing





Houston retail CFO resigns

Oded Shein, the CFO & Treasurer of Stage Stores has resigned his position to pursue another opportunity. No word yet on where that might be.

(Update 9 Aug: Mr Shein is joining ‘The Fresh Market Inc’ as its CFO. The company is a specialist grocer, based in Greensboro, NC. It used to be traded on the Nasdaq, until taken private by Apollo, a PE firm. Mr Shein used to work for Belk Inc, based in Charlotte, NC).

Stages Stores has its head office in the Galleria area and currently operates in 42 states through 764 department stores (under the names of Bealls, Goodys, Palais Royal, Peebles and Stage) and 59 off-price stores (Gordmans). It has a market capitalization of $62 million.

Mr Shein joined the company in January 2011 as its CFO.  For 2017 he had a base salary of $420,000. Mr Shein is also a non-executive director at Conn’s, another Houston-area publicly-traded retailer.

Jason Curtis, currently the Senior VP, Finance and Credit, has been appointed as the interim CFO and Treasurer. He joined the company in May 2011.

SEC filing

Houston retailer may file for bankruptcy

Source: Social Woodlands

Houston-based Mattress Firm may file for bankruptcy, according to this article in Reuters.

The company is seeking to get out of costly store leases and shut some of its 3,200 locations that are losing money. The company is working with AlixPartners, a restructuring firm.

Mattress Firm was publicly-traded until it was acquired by Steinhoff, a South African company for $3.8 billion in 2016. Back in December, the shares of the parent company plunged 80% as it disclosed accounting irregularities in its European operations.

According to the unaudited half-year results through March 2018 that were filed at the end of June,  the parent company wrote off nearly $13 billion in shareholders’ equity and admitted that €3 billion of cash reported the previous year either didn’t exist or shouldn’t have been consolidated.

Although Mattress Firm wasn’t part of this accounting shenanigans, the inflated purchase price that Steinhoff paid for the business added to the pressures. The same half-yearly results paint a grim picture for Mattress Firm. For the 6 months ended March 2018, the revenues of Mattress Firm were €1.26 billion (approx $1.5 billion), down 17% on the corresponding period. The EBITDA loss increased from €33 million to €94 million in the period to March 2018.

In early 2017 Mattress Firm had a spectacular and litigious fall out with Tempur Sealy, a supplier of many of the products in the stores, that clearly impacted revenues. This caused a €1.5 billion write-off of goodwill in 2017, one year after acquisition. Surprisingly, Steinhoff still carries €1 billion of goodwill on its books for Mattress Firm, despite the EBITDA losses.

Mattress Firm CEO  Ken Murphy, appointed in March 2016, stepped down in January, to be replaced by Steve Stagner, who was CEO between 2010 and 2016.

In November 2017 Mattress Firm sued two former real estate employees and a former broker with Colliers International claiming they defrauded the company of tens of millions of dollars by signing store leases at above-market prices. The defendants were responsible for the leases for about 1,500 of the new stores. The defendants have counter-sued, claiming Mr Stagner and Mr Murphy knew about the above-market rate deals.

Just before Mr Murphy resigned, in a bizarre move, he denied conspiracy theory allegations that surfaced on Reddit that Mattress Firm was a giant money laundering scheme! More revealing is this article that appeared in the lifestyle section of the Houston Chronicle in September 2016.

The aching loneliness of the Houston mattress salesman – Houston Chronicle

My December blog entry on the Steinhoff accounting irregularities