North America Retail 12 July 2017

Intentionally Blank NORTH AMERICA RETAIL 12 JULY 2017

TABLE OF CONTENTS

Foreword ...... 4

Bankruptcy Data ...... 5  Restructuring Stats ...... 7  Advisory Mandates ...... 10

Legal Analysis ...... 15  Retail Industry Primer ...... 17  Who Could Pull an NYDJ? ...... 29  J.Crew Update and Lessons to be Learned ...... 30

Financial Research ...... 33  Distressed Retail Watchlist ...... 35  Nordstrom ...... 38  Bon-Ton Stores ...... 42  GNC Holdings ...... 48  Neiman Marcus ...... 52  J. Crew ...... 58  99 Cents Only Stores ...... 64  Claire’s Stores ...... 69  Sears Holdings ...... 75  Tops Holdings ...... 80

3 NORTH AMERICA RETAIL 12 JULY 2017

nvesting in retail has emerged as an unfashionable trade Meanwhile, as investors debate the viability of bricks and mortar, I over the last year, as the brick-and-mortar concept has been Amazon itself sent shockwaves through the market when it tested by the surge in e-commerce competition. In short, retailers announced plans to go traditional with its proposed acquisition have struggled to stay relevant in the age of Amazon. of Whole Foods – begging the question of whether the Amazon juggernaut will once again rewrite the rules in retail. This year alone has produced a sharp uptick in bankruptcy filings, especially for apparel retailers. Payless ShoeSource, Gymboree and Read on for a selection of pieces previously published by Debtwire rue21, to name a few, have all filed for Chapter 11. No fewer and Xtract Research on topical issues and at-risk companies in than 17 retailers have sought bankruptcy protection so far this the sector. We’ve included a slew of data on Chapter 11 filings year, already equaling the 17 filings over all of 2016 – with half the and advisory mandates, our Distressed Watchlist and a sampling year still to come. of our credit research on actionable names. We also provide a primer on restructuring legal issues that investors in the space In an effort to avoid the courtroom fate, some highly levered should be aware of, and highlight several types of covenant loop- retailers have looked to unconventional balance sheet remedies. holes common in retailer credit agreements that could have far- For instance, J.Crew set off a revolt among its secured lenders reaching impacts on investor recoveries. when it transferred intellectual property to an unrestricted Regards, Cayman Islands subsidiary. Those assets served as a backbone for a proposed exchange with its more junior bondholders. Reshmi Basu Associate Editor, Debtwire Americas Brick-and-mortar retailers sit at a crossroads, in which they must embrace a digital transformation combined with a smaller footprint. It’s no easy task, given that many retailers can’t absorb much leverage to support a business makeover. Many will be looking for clues from Gymboree, since its prepetition secured lenders agreed to invest a hefty amount of new money to build out the retailer’s e-commerce platform as part of its exit from bankruptcy.

4 NORTH AMERICA RETAIL 12 JULY 2017

5 Intentionally Blank

BANKRUPTCY DATA 12 JULY 2017

Retail DIP Financings — 2016 / 2017 Roll-up / Prime / Pre-Petition DIP Amount Company Venue DIP Loan Type Repay Pre-petition Middle Market Debt (USDm) (USDm) Debt

Aeropostale Middle Market SDNY 223 160 TL and Revolver Y

Agent Provocateur Middle Market SDNY N/A 0.2 Term Loan N

American Apparel Prime Delaware 130 30 Revolver N

Backwoods Retail Middle Market ND Texas 1 3 Revolver N

BCBG Max Azria Prime SDNY 406.4 122.5 TL and Revolver Y

Central Grocers Middle Market ND Ill. 223 205 Revolver Y

Draw Another Circle Middle Market Delaware 70 90 Revolver Y

Eastern Outfitters Middle Market Delaware 83 85 Term Loan Y

Fairway Group Prime SDNY 275 85.6 TL and Revolver Y

Gander Mountain Prime Minnesota 439 452 Loan Y

Golfsmith International Middle Market Delaware 171 135 Revolver Y

Gracious Home Middle Market SDNY 0.5 3.0 Term Loan N

Gymboree Prime ED Virginia 1,069 378.5 TL and Revolver Y

Hancock Fabrics Middle Market Delaware 88 98.3 TL and Revolver Y hhgregg Middle Market SD Indiana 66.9 80 TL and Revolver Y

Marbles Middle Market ND Ill. 24 0.9 Promissory Note N

Pacific Sunwear Middle Market Delaware 112 100 Revolver Y

Payless ShoeSource Prime ED Missouri 838 385 TL and Revolver Y

Performance Sports Group Prime Delaware 450 561.3 TL and Revolver Y rue21 Prime WD Penn. 832 275 TL and Revolver Y

The Limited Stores Middle Market Delaware 13.4 6 Term Loan N

The Picture People Middle Market ND Texas 41 46.8 Term Loan Y

The Sports Authority Prime Delaware 1,090 595.3 TL and Revolver Y

Vestis Retail Group Middle Market Delaware 153 125 Revolver Y

BANKRUPTCY DATA 12 JULY 2017

Retail Restructurings — 2016 / 2017

Type of Filing Dispositions DIP Bankruptcy (Pre-packaged, (Reorganizations, Company Venue Financing Assets Sold Chapter 22 Filing Pre-arranged, Sale(s)*, (Y/N) Free Fall) Liquidations)

Aeropostale May 2016 SDNY Y Free Fall Sale* All Assets N

Pre-arranged Agent Provocateur April 2017 SDNY Y Sale* Stores N (stalking horse) Sale American Apparel November 2016 Delaware Y Free Fall IP Y Liquidation

Backwoods Retail November 2016 ND Texas Y Free Fall Sale* All Assets N

Free Fall BCBG Max Azria February 2017 SDNY Y Reorganization N/A N (PSA signed later)

Central Grocers May 2017 ND Illinois Y Free Fall Sale* Store Leases N

Pre-arranged DirectBuy Holdings November 2016 Delaware N Sale* All Assets N (stalking horse)

Draw Another Circle June 2016 Delaware Y Free Fall Liquidation Inventory N

Pre-arranged Y Eastern Outfitters February 2017 Delaware Y Sale* All Assets (stalking horse) (Vestis)

Fairway Group May 2016 SDNY Y Pre-arranged Reorganization N/A N

Gander Mountain March 2017 Minnesota Y Free Fall Sale* All Assets N

Leases General Wireless Sale March 2017 Delaware N Free Fall Inventory Y (RadioShack) Liquidation IP 1) Canadian assets Pre-arranged Golfsmith International September 2016 Delaware Y Sale* 2) US assets N (RSA / Sale) (IP, Inventory) Sale* Store Leases Gordmans Stores March 2017 Nebraska N Free Fall N Liquidation (going concern)

Gracious Home December 2016 SDNY Y Free Fall Sale* All Assets N

Gymboree June 2017 ED Virginia Y Pre-arranged Reorganization N/A N

Hampshire Group November 2016 Delaware N Free Fall Liquidation Inventory N

Sale Y Hancock Fabrics February 2016 Delaware Y Free Fall IP Liquidation (2007)

Note that we have excluded restaurant bankruptcies from our list of bankrupt retailers. We have also treated debtors walking into Chapter 11 with a stalking horse bid as “pre-arranged” bankruptcies, though we have noted those instances to differentiate from cases with RSAs/PSAs. We have also treated liquidations as “free-fall” bankruptcies. * Denotes a going-concern sale of significant assets to a third-party.

BANKRUPTCY DATA 12 JULY 2017

Retail Restructurings — 2016 / 2017 (cont’d)

Type of Filing Dispositions DIP Bankruptcy (Pre-packaged, (Reorganizations, Company Venue Financing Assets Sold Ch. 22 Filing Pre-arranged, Sale(s)*, (Y/N) Free Fall) Liquidations)

Sale IP hhgregg March 2017 SD Indiana Y Free Fall N Liquidation Class Actions

February Sale E-Commerce, Marbles ND Illinois Y Free Fall N 2017 Liquidation Wholesale Assets

Marsh Supermarkets May 2017 Delaware N Free Fall Sale* All Assets N

February MC Sports WD Michigan N Free Fall Liquidation N/A N 2017

November Sale Nasty Gal CD California N Free Fall IP N 2016 Liquidation

Reorganization Pacific Sunwear April 2016 Delaware Y Pre-arranged All Assets N (open to higher bids)

Payless ShoeSource April 2017 ED Missouri Y Pre-arranged Reorganization N/A N

Pre-arranged Performance Sports Group October 2016 Delaware Y Sale* All Assets N (stalking horse)

Rue21 May 2017 WD Penn. Y Pre-arranged Reorganization N/A N

Sale The Limited Stores January 2017 Delaware Y Free Fall IP N Liquidation

September Pre-arranged The Picture People ND Texas Y Sale* All Assets N 2016 (stalking horse)

Sale Inventory The Sports Authority March 2016 Delaware Y Free Fall N Liquidation IP

Pre-arranged Total Hockey July 2016 ED Missouri N Sale* All Assets N (stalking horse)

Vanity Shop of Grand Forks March 2017 North Dakota N Free Fall Liquidation N/A N

Pre-arranged Vestis Retail Group April 2016 Delaware Y Sale* All Assets N (stalking horse)

February Sale Wet Seal Delaware N Free Fall IP Y 2017 Liquidation

* Denotes a going-concern sale of significant assets to a third-party.

9 RETAIL ADVISORY MANDATES 12 JULY 2017

70 Prime 66 Middle Market Total 60

52 50

40 38 37

30 Total, 29 26 25 23 21 23 44 20 20 41 17 15 12 Middle Market, 25 24 10 Prime, 23 22 22 10 18 20 18 19 15 14 15 14 14 13 4 12 10 11 11 10 11 6 5 2 4 4 2 1 1 0 1 0 0 Jul-16 Jan-16 Jan-17 Jun-16 Oct-16 Apr-16 Apr-17 Feb-16 Sep-16 Feb-17 Dec-16 Aug-16 Nov-16 Mar-16 Mar-17 May-16 May-17

10 RETAIL MANDATES BY TYPE

Total Representations: 2016-2017

Financial Advisor / Restructuring Sector Lead Counsel Local/Special Counsel Claims Agent Grand Total Investment Banker Advisor

Company 47 39 62 29 30 207

Lenders / 49 16 21 0 0 86 Bondholders

Agent / Trustee 40 23 1 0 0 64

UCC 32 24 30 0 0 86

Other 7 4 1 0 0 12

Total 175 106 115 29 30 455

Prime/Middle Market Representations: 2016-2017

Financial Advisor / Restructuring Sector Lead Counsel Local/Special Counsel Claims Agent Grand Total Investment Banker Advisor

Company 13/34 13/26 21/41 9/20 8/22 64/143

Lenders / Bondholders 28/21 6/10 18/3 0/0 0/0 52/34

Agent / Trustee 15/25 7/16 0/1 0/0 0/0 22/42

UCC 7/25 5/19 9/21 0/0 0/0 21/65

Other 4/3 4/0 1/0 0/0 0/0 9/3

Total 67/108 35/71 49/66 9/20 8/22 168/287

* We have categorized companies as prime or middle market. Debtwire prime companies have at least USD 150m of funded debt commitments. Revolvers must total at least USD 150m to count towards the funded debt commitment. Debtwire middle market companies have less than USD 150m of funded debt.

11 FREQUENTLY APPOINTED RETAIL ADVISORS LEAD COUNSEL; LOCAL/SPECIAL COUNSEL

Prime / Official Advisor Engagements Company Bond / Loan Middle Market Committees

Lead Counsel: 2016-2017

Cooley 14 2/12 1 13 0

Kirkland & Ellis 14 9/5 9 0 5

Choate, Hall & Stewart 10 3/7 0 0 10

Morgan, Lewis & Bockius 10 2/8 3 1 6

Weil, Gotshal & Manges 10 6/4 5 0 5

Greenberg Traurig 6 0/6 0 0 6

Pachulski Stang Ziehl & Jones 6 3/3 0 6 0

Klee, Tuchin, Bogdanoff & Stern 5 0/5 4 0 1

Blank Rome 4 1/3 1 1 2

Jones Day 4 4/0 1 0 3

Milbank, Tweed, Hadley & McCloy 4 4/0 0 0 4

Otterbourg 4 2/2 0 0 4

King & Spalding 3 2/1 1 0 2

Riemer & Braunstein 3 2/1 0 0 3

Local /Special Counsel: 2016-2017

Richards, Layton & Finger 7 2/5 3 0 4

Young Conaway Stargatt & Taylor 7 4/3 5 0 2

Klehr Harrison Harvey Branzburg 6 3/3 1 2 3

Ashby & Geddes 4 2/2 0 0 4

Morris, Nichols, Arsht & Tunnell 4 2/2 0 0 4

ASK 3 0/3 2 1 0

Bayard 3 1/2 0 3 0

Fox Rothschild 3 2/1 0 1 2

Pachulski Stang Ziehl & Jones 3 1/2 1 1 1

Polsinelli 3 1/2 0 3 0

Reed Smith 3 1/2 1 0 2

Saul Ewing 3 0/3 1 2 0

12 FREQUENTLY APPOINTED RETAIL ADVISORS FINANCIAL/OPERATIONS ADVISORS

Prime / Official Advisor Engagements Company Bond / Loan Middle Market Committees

Financial Advisor / Investment Banker: 2016-2017

FTI Consulting 11 4/7 5 5 1

Houlihan Lokey 10 8/2 4 2 4

Province 10 2/8 0 10 0

Berkeley Research Group 6 2/4 5 1 0

Guggenheim 6 2/4 6 0 0

Lazard 5 5/0 4 0 1

Peter J. Solomon Company 4 0/4 4 0 0

PJT Partners 4 4/0 0 0 4

Ducera Partners 3 3/0 0 0 3

Jefferies 3 1/2 3 0 0

Rothschild 3 3/0 2 0 1

Restructuring Advisor: 2016-2017

AlixPartners 4 2/2 4 - -

Alvarez & Marsal 4 3/1 4 - -

Clear Thinking Group 4 0/4 4 - -

FTI Consulting 4 1/3 4 - -

Berkeley Research Group 3 2/1 3 - -

13 FREQUENTLY APPOINTED RETAIL ADVISORS BY TYPE 2016-2017

Prime / Prime / Prime / Local/ Lead Counsel Engagements Middle Engagements Middle FA / I-Banker Engagements Middle Special Counsel Market Market Market

Company Company Company

Kirkland & Ellis 9 7/2 Guggenheim 6 2/4 Young Conaway 5 3/2 Berkeley Research Group 5 1/4 Weil, Gotshal & Manges 5 2/3 Richards, Layton 3 0/3 & Finger Klee, Tuchin, Bogdanoff FTI Consulting 5 2/3 & Stern 4 0/4 ASK 2 0/2 Houlihan Lokey 4 2/2 Morgan, Lewis & Bockius 3 0/3

Committee Lazard 4 4/0 Skadden 2 0/2 Peter J. Solomon Company 4 0/4 Young Conaway 2 0/2 Bayard 3 1/2 Jefferies 3 1/2 Committee Polsinelli 3 1/2 Lincoln International 2 0/2

Cooley 13 2/11 Klehr Harrison 2 1/1 Harvey Branzburg Malfitano Advisors 2 0/2

Pachulski 6 3/3 Saul Ewing 2 0/2 Rothschild 2 2/0

Fox Rothschild 2 0/2 Stifel / Miller Buckfire 2 0/2 Lender

Kelley Drye & Warren 2 1/1 Committee Ashby & Geddes 4 2/2 Lowenstein Sandler 2 0/2 Province 10 2/8 Morris Nichols 4 2/2 Lender FTI Consulting 5 1/4 Richards, Layton 4 2/2 Choate, Hall & Stewart 10 3/7 & Finger BDO Consulting 2 1/1

Greenberg Traurig 6 0/6 Klehr Harrison 3 1/2 Harvey Branzburg CBIZ 2 0/2

Morgan, Lewis & Bockius 6 2/4 Bryan Cave 2 1/1 Houlihan Lokey 2 2/0

Kirkland & Ellis 5 2/3 Zolfo Cooper 2 1/1 Fox Rothschild 2 1/1

Weil, Gotshal & Manges 5 4/1 Lender Reed Smith 2 0/2 Milbank Tweed 4 4/0 Houlihan Lokey 4 4/0 Riemer & Braunstein 2 0/2 Otterbourg 4 2/2 PJT Partners 4 4/0

Thompson Coburn 2 1/1 Jones Day 3 3/0 Ducera Partners 3 3/0

Riemer & Braunstein 3 2/1 Young Conaway 2 1/1 Perella Weinberg Partners 2 1/1

14 NORTH AMERICA RETAIL 12 JULY 2017

15 Intentionally Blank LEGAL ANALYSIS INDUSTRY PRIMER—RETAIL | 28 JUNE 2017 DEBTWIRE’S UPDATED RETAIL BANKRUPTCY GUIDEBOOK HIGHLIGHTS NEED FOR EARLY CREDITOR SUPPORT TO AVOID LIQUIDATION INTRODUCTION As a result of that circumstance, the recent retail restructuring

landscape is littered with pre-arranged reorganizations, 363 sales, ince the publication of our original legal primer in June and liquidations, as opposed to relatively few free fall reorgani- 2016, the retail sector has become a hotbed for corporate S zations. See Annex A on Pages 14 and 15 for analysis on the filing restructuring—a trend that seems poised to continue for the strategies and case dispositions for all retail Chapter 11s in 2016 remainder of 2017, if not longer. and 2017. Many retailers—large and small—have been engaged in both In this updated Industry Primer, the Debtwire legal analyst team recent in-court and out-of-court restructurings. Recently, Gymboree refreshes subscribers with retail-specific restructuring issues, and rue21 sought bankruptcy court protection, joining Sports incorporating additional data from more recent filers. Authority, Payless ShoeSource, and Performance Sports Group in the annals of recent large and high-profile in-court bankruptcies. CLICK HERE for Debtwire Research’s distressed retail watchlist.

The recent wave of bankruptcy filings has also seen some repeat -CONTINUES- filers—i.e., Chapter 22s—as a number of attempted restructurings have fallen flat. American Apparel, Eastern Outfitters, Gen- Debtwire Industry Primers eral Wireless (f/k/a RadioShack), and Wet Seal have all seen Coal CLICK HERE the inside of the bankruptcy courtroom for the second time in E&P CLICK HERE late-2016 and 2017, showcasing just how hard it can be for tra- Midstream CLICK HERE ditional retailers to exist in an Amazon-dominated world. Offshore CLICK HERE On the out-of-court-side, Claire’s and J. Crew led the way, with Maritime CLICK HERE creative attempts to stave off in-court bankruptcies through ag- Healthcare CLICK HERE gressive liability management maneuvers that included transfers Unitranche CLICK HERE of intellectual property—the lifeblood and true value of these retailers—and debt exchanges. While Claire’s efforts went unop- Debtwire Radio Podcasts — Retail Focused Retail Restructuring Issues posed, J. Crew’s exchange is currently being challenged by a CLICK HERE (Lowenstein Sandler) group of its lenders that stand to be primed by the transaction. Retail Restructuring Market Trends One of the points we highlighted during the publication of this report and 2017 Outlook CLICK HERE in June 2016 was the difficulty retailers face in achieving successful (BRG, Gibson Dunn, Toys ‘r’ Us) restructurings the longer they sit in Chapter 11. While companies in 2017 Restructuring Survey CLICK HERE other sectors might benefit from a prolonged stay in bankruptcy in (AlixPartners) Retail UCC Restructuring Strategies order to carefully map their restructuring paths, retailers do not have CLICK HERE that luxury, for reasons we discuss herein. (Cooley, M-III Partners)

ABOUT THE AUTHOR AND CONTACT INFORMATION

Joshua Friedman Legal Analyst, North America Tel: 212.574.7867 | [email protected]

Joshua Friedman is a former practicing restructuring attorney. Prior to joining Debtwire as a Legal Analyst, Joshua practiced in the New York offices of Kramer Levin Naftalis & Frankel LLP.

He has represented various constituencies in several high-profile restructurings, including Hostess Brands, General Motors, Capmark Financial Group, and Lehman Brothers.

17 LEGAL ANALYSIS INDUSTRY PRIMER—RETAIL | 28 JUNE 2017

OVERVIEW retailers’ bottom lines. Monthly rent is a significant corporate expense to be managed. Securing future inventory supply chains is The impact of the 2005 Bankruptcy Code amendments (BAPCPA) also vital for survival. on retail companies seeking bankruptcy protection, amendments which included a substantial change to the treatment of commercial But these timing concerns intertwine with Bankruptcy Code provi- leases, has boded quite poorly for retailers, leading to many liqui- sions. Retailers must make important decisions regarding not only dations rather than reorganizations. In 2016 and 2017, there when they will file for bankruptcy—both in the business cycle and have only been six standalone retail reorganizations, contrasted on the calendar—to mitigate these industry-specific issues, but also to roughly 30 asset sale-based cases and liquidations. where they will file, as there are key venue differences regarding significant retail industry bankruptcy matters, including the treat- Retail companies simply no longer have the luxury of being able ment of stub rent and critical vendors. Thus, in addition to gaining to sit in the protective tent of Chapter 11 and use the various early plan support, decisions over timing and the bankruptcy fo- protections of the Bankruptcy Code, such as the automatic stay, rum could ultimately determine the success or failure of a retailer’s for a prolonged period of time in order to sort out their affairs. attempted reorganization. Instead, retailers are forced to make important business decisions early in the process, and thus must obtain pre-petition input and As the retail industry continues to churn out new bankruptcy filings, workouts from a wide variety of counterparties, from landlords at a seemingly increasing rate, it is worth keeping a close eye on and vendors, to lenders and noteholders, in order to have any distressed retailers, such as J. Crew, Claire’s Stores, Nine West, chance of a true corporate restructuring. Without that support, and others, that might need to take a tour through Chapter 11, as be it from new money plan sponsors or pre-existing creditors, a well as the legal issues they are bound to face. Chapter 11 retail debtor today seems more likely to be bound for liquidation. THE STORM BEFORE THE CALM? The largest retail bankruptcy of 2016—Sports Authority—is a Due to industry and Bankruptcy Code specific concerns, retailer case in point for the seeming inevitability of liquidation when a debtors are highly unlikely to utilize a freefall bankruptcy strat- company is unable to secure plan support before, or soon after, egy. Pre-petition planning is vital for a retail debtor since it has the Chapter 11 filing. Despite the company’s initial plans to re- limited time in Chapter 11 to make key determinations wheth- organize, competing pressures from its lenders and vendors, er (1) to retain or reject its commercial leases, (2) sell its assets, coupled with operational and landlord issues, ultimately led to and if so which and how many, and (3) reorganize as a going Sports Authority’s ongoing liquidation. concern or liquidate its inventory and assets.

A number of the larger retail debtors of 2017—Gymboree, Pay- Moreover, distressed retailers are often acutely pressured by their less and rue21—hope to avoid the fate of Sports Authority by funding and liquidity needs in the early stages of a bankruptcy case. entering Chapter 11 with comprehensive restructuring agree- The very nature of the retail business lends itself to high admin- ments with significant creditor constituencies (and private equi- istrative expense claims and thus higher cash needs, due to, for ty sponsors)—following the paths taken by Fairway and Pacific example, certain rent obligations and Bankruptcy Code section Sunwear of California in 2016. 503(b)(9) claims for goods received within 20 days of the petition date. We discuss these potential expenses in more detail below. Yet, the retail restructuring “success” stories of the recent past should give pause to creditors (and future equity owners) of In addition, retail companies are often pressured by pre-petition distressed retailers. In June 2016, the market watched Radi- secured lenders benefitting from liens on company cash and inven- oShack and American Apparel emerge as reorganized compa- tory to liquidate or sell the secured inventory rather than pursue nies better-positioned to contend going forward, only to see a reorganization. The rise of liquidation firms and competitive cost them each back in Chapter 11 in about a year’s time to effec- structures has further turned the balance away from reorganiza- tively liquidating their assets. tion, since creditor recoveries—especially for secured creditors— Moreover, the retail space is disproportionately affected by cer- might not be negatively impacted by the costs of a liquidation in the tain operational and legal concerns that have a significant impact way liquidations for other Chapter 11 debtors might. in corporate retail restructurings—one common theme among -CONTINUES- them being timing. Holiday seasons are materially important to

18 LEGAL ANALYSIS INDUSTRY PRIMER—RETAIL | 28 JUNE 2017

THE STORM BEFORE THE CALM? (CONT’D) Therefore, working backwards, retailers really have closer to 120 In short, the trifecta of landlord, vendor and lender issues are days to pursue a restructuring path, so that liquidators can con- the primary concerns of a retailer as it approaches an in-court duct going out of business sales (a topic to be discussed later).[1] restructuring. It, therefore, behooves a retailer to have any reor- LEASE REJECTIONS. One of the first and most important steps in ganization attempt planned far in advance and allow sufficient restructuring a debtor’s business is identifying and closing store runway to negotiate a consensual resolution with these parties. that are putting a strain on the debtor’s operations. Bankruptcy If successful, the distressed retailer will be able to restore and Code section 365 enables a debtor to (1) get out of burdensome preserve the confidence of vendors and customers alike, while leases through rejecting the underlying agreements [2] and (2) negotiating concessions or deals with lenders and landlords so assume and possibly assign the leases to a third party when those that the company can restructure and maintain operations through- leases are deemed assets of the estate.[3] out the reorganization process. A retailer can also negotiate amendments to leases to make the terms more debtor-friendly. These provisions allow a debtor KEY CONSTITUENT # 1: LANDLORDS to achieve results with respect to its landlords that otherwise Real estate, including commercial leases, is often a distressed would have been out-of-reach outside of bankruptcy without retailer’s most significant asset. It is, therefore, incumbent on a landlord consent. retailer to properly plan for the treatment of its real estate portfolio, including its commercial leases. This could involve conducting Further, a debtor’s continued use of the leased premises after store-by-store business plan analyses to determine which stores the petition date generally gives rise to an administrative expense to keep open and which to close, in addition to determining which claim for the landlord—a claim paid first in the distribution water- of its leases are at above-market rates and subject to renegotia- fall. As a result, it behooves a distressed retailer to reject unwanted tion or rejection. leases and vacate the premises as early as possible in its Chapter 11 cases to minimize the amount of unnecessary admin expenses. A problem inherent to negotiations with this constituency is that a company’s landlord list could be quite sprawling. However, land- Retailers can, therefore, seek to reject those leases as early as the lords can form committees or ad hoc groups to conduct negoti- first day of the bankruptcy and have the court hear their requests ations with the company prior to a bankruptcy filing in order to on an expedited basis. But retailers can mitigate the risk of inflated jointly determine the best course of action for a company’s land- administrative expense claims through post-petition rent obligations. lord constituency. Specifically, the retailer can ask the court to reject those leases But this does not always occur, and the landlord base might not nunc pro tunc—think retroactively—to the petition date, which act in time or might lack the individual incentives to negotiate will allow the retailer to avoid unnecessary admin expenses for and make significant concessions to the distressed tenant. It is stores it does not plan to continue using. The majority of courts thus not uncommon for landlords to opt-out of negotiations grant nunc pro tunc rejection, though landlords will often object and prefer to have a store go-dark for a period of time rather on the grounds that (1) it is unfair to have property used post- than have a distressed tenant continue to occupy the space. petition without receiving rent and (2) landlords are unable to replace the debtor retailer until after the court enters its lease Moreover, landlord issues set the overall timeframe in which a rejection order, forcing further losses of income. retailer considers its Chapter 11 life. Retail debtors have 210 days from the petition date to decide whether to assume or reject their As will be a common refrain throughout, it is incredibly important store leases. That will serve as the outside date for reorganiza- for debtor retailers to minimize administrative expenses and credi- tion purposes—meaning, that a business plan will need to be tors should be prepared to negotiate with the debtor to best position determined well in advance of that deadline. Further, even if the themselves in the restructuring.[4] company plans to liquidate, the retailer will need to leave sufficient leeway for a liquidation to occur prior to that deadline since -CONTINUES- auction results will impact determinations over store lease rejection/assumption.

19 LEGAL ANALYSIS INDUSTRY PRIMER—RETAIL | 28 JUNE 2017

KEY CONSTITUENT # 1: LANDLORDS (CONT’D) The billing method preserves liquidity by, effectively, giving re- STUB RENT AND VENUE. The issue of timing for landlords extends tailers a cash-free month of rent if they file for bankruptcy after beyond the impact on lease rejections. A retail debtor needs to the rent’s due date since the entire month’s rent bill will be deemed take its cash needs into account in the Chapter 11 process and an unsecured claim and no portion of it will be treated as an the issue of stub rent can impact both the timing of a bankruptcy admin claim. filing and the venue in which it occurs. In fact, debtors in “billing method” jurisdictions often file for Specifically, stub rent is the amount of rent due to a landlord for bankruptcy soon after the rent comes due. Sports Authority did the period attributable to the period of the month encompassing just that, filing in Delaware on March 2, right after store rents came the petition date until the end of that month. So, if a company due. That timing meant that Sports Authority, in effect, was given pays rent on the first of the month, and the company files bank- a significant multi-million dollar unsecured, interest-free loan for ruptcy on the 15th of that month, the “stub rent” claim (in some the use of store premises during the first month of the company’s jurisdictions) will be the rent attributable to the period of the 15th chapter 11. through the end of the month. Other jurisdictions reject the idea Moreover, those rent payments are unlikely to be paid back in of stub rent, as discussed below. full, since the landlords’ rent claims will become part of the general unsecured claims pool that is likely to be impaired. There is a significant circuit split between the Second Circuit, housing the popular SDNY bankruptcy court, and the Third Circuit, A retailer with access to the SDNY and Delaware jurisdictions which includes Delaware, on the priority of claims for stub rent would, thus, be wise to consider the stub rent cash benefits that as either an administrative expense claim (which must be paid accrue from filing in Delaware as a result of the billing date ap- in full in a reorganization) or an unsecured claim (which could proach. The difference in cash savings could mean the difference be impaired). between a reorganization and liquidation. Moreover, landlords The basis for this disagreements stems from Bankruptcy Code should be prepared for the negative consequences resulting from how their rent claims will be treated in the various jurisdictions. [8] section 365(d)(3), which provides that the “trustee shall timely perform all the obligations of the debtor…arising from and after The issue of stub rent was a common refrain in many of the recent the order for relief under any unexpired lease of nonresidential retail bankruptcies, often rearing its head in connection with DIP real property, until such lease is assumed or rejected...”[5] This financing matters. In fact, in rue21, Payless and hhgregg DIP objec- provision requires tenants to timely pay rent post-petition prior tions lodged by landlords led to the payment of stub rent or their to rejecting the lease. Stub rent is one type of contested obliga- inclusion in the DIP budget. tion that arises from this provision. Interestingly, lenders, landlords and the company reached a set- The Second Circuit—which is the majority view—uses an accrual tlement in hhgregg’s Chapter 11 cases (in the Southern District method to determine the amount of stub rent owed by splitting of Indiana), that provided for stub rent to be paid in full prior to the monthly rent pro rata between the pre-petition and post- DIP lenders receiving full recoveries, but only if those landlords petition periods. In short, the pro rata amount of rent applied to agreed to the per diem/pro-ration method, instead of the billing the pre-petition period is deemed an unsecured claim, while the theory approach. “stub rent” claim is treated as an admin claim, which more signifi- Two other recent stub rent data points of note: cantly impacts a retailers’ liquidity and cash flow needs, since cash is needed to pay those claims in full.[6] (1) in Sports Authority, the UCC negotiated for stub rent claims to be paid 85% of their claims in cash as part of a settlement On the other hand, the Third Circuit, following its Montgomery reached that allowed for the orderly liquidation of the com- Ward decision, uses a billing method for establishing the amount pany; and of stub rent, which solely looks to the rent bill’s due date.[7] So, for example, if rent was due on the first of the month and the (2) in Eastern Outfitters, the buyer of the retailer’s assets agreed petition was filed on the second day of the month, the entire month to cover stub rent payments. of unpaid rent would be an unsecured claim since the rent bill came due prepetition—in other words, no pro rata allocation and -CONTINUES- no stub rent.

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KEY CONSTITUENT # 2: VENDORS CRITICAL VENDORS. Section 503(b)9) motions are often part of the A retailer will also need to provide significant reassurances to its first day relief sought by retail debtors and combine with another vendor-base in order to instill confidence that their relationship key first day motion—the critical vendor motion—to assist the re- will continue and the vendors’ goods will continue to be sold. tailer in achieving vendor cooperation in the early stages of and This can turn into a tricky situation because retailers are depend- throughout the Chapter 11 proceedings. In a critical vendor motion, ent on maintaining continued supply of relevant and saleable goods, a debtor will often seek to pay certain vendors’ pre-petition unse- and potential bankruptcy scenarios can spook vendors, leading to cured claims prior to plan confirmation to ensure that such vendors tightened terms and possibly refusals to continue supplying goods. will continue to supply the debtor, often under renegotiated terms. Those vendors, as the name suggests, are key suppliers whose continued relationships are vital for the debtor’s reorganization and As with landlords, pre-petition negotiations with vendors can mean whose replacement is often difficult if not impossible. the difference between reorganization and liquidation. Moreover, the 2005 Bankruptcy Code amendments also made a significant However, unlike section 503(b)(9) claims, critical vendor relief is impact on vendor claims against the debtors’ estates. replete with controversy, with common disputes regarding per- missibility, the basis for granting relief, and the actual qualifica- Bankruptcy Code section 503(b)(9) grants admin status to claims tions needed to be deemed “critical.”[12] Nonetheless, the appli- for goods delivered within 20 days of the petition date. [9] Retail cable critical vendor standard is the most important disagreement debtors with large moving inventory volumes might, therefore, for both vendors and retailers. The 2004 Kmart Seventh Circuit have a more difficult time reaching a confirmable plan of reorgan- decision rejecting the use of the court’s equitable powers or the ization since they will need to be able to pay these claims in cash, “doctrine of necessity” to approve a substantial critical vendor as per the absolute priority rule. While payment is generally not program that would have allowed for the payment of hundreds of required until the end of the case, the impact of these claims on millions of dollars to thousands of vendors was a game-changer.[13] the company’s liquidity will be known early in the case and can influence company strategy. The Seventh Circuit, now followed by others, applies a stricter standard and looks to whether (1) the vendor will continue doing This provision provides significant comfort for vendors and has business without payment of pre-petition claims, (2) there is no made it easier for vendors and retailers to maintain continuing alternative to payment of such claims, and (3) non-critical vendors relationships in bankruptcy. Yet, there are still limitations that are not prejudiced. Similarly, the Fifth Circuit—housing the now vendors should be aware of. -very popular Texas bankruptcy courts—has a strict three-part First, this section only covers goods and not services.[10] This ends test of its own. [14] up being complicated when the vendor provides both goods and Notwithstanding this seemingly strict standard, note that courts services. In those instances, some courts have taken a “predom-inant in the Second and Third Circuits routinely approve critical vendor purpose” approach. Under that method, a contract providing both motions, despite some general disfavor over the doctrine.[15] goods and services is treated only as a contract for the primary thing being provided—meaning that no claim is allowed for goods Moreover, the treatment of critical vendors and 503(b)(9) claims, received in the 20 day period if the provision of goods was the in addition to the similar category of reclamation claims, which secondary purpose of the contract. Other courts, however, reject allow sellers to recover goods from unpaid buyers within 45 that approach and effectively look to such contracts on a pro rata days of bankruptcy,[16] provide for a more fulsome picture of basis, allowing 503(b)(9) claims for goods provided under the contract the elements that can be a part of negotiations between ven- regardless of whether the purpose was primary or secondary.[11] dors and retailers. In short, under the various claim provisions it is possible for a vendor to have (1) pre-petition claims paid in full In addition, as the definition of 503(b)(9) claims are for the value by the end of the case (503(b)(9)); (2) pre-petition claims paid of goods received by the debtor, it is also important to under- even earlier (critical vendors); and (3) its goods returned so that stand how courts analyze such terms when projecting 503(b)(9) it can resell them. The parties can, then, mix-and-match these claims. For example, does the debtor have to actually take physical mechanisms to provide a more-tailored form of relief for both possession of the goods or is it sufficient for a customer to be in debtor and vendor under the specific circumstances. possession? Does value include non-good costs such as freight, shipping, labor or taxes? -CONTINUES-

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KEY CONSTITUENT # 2: VENDORS (CONT’D) While we have tried to boil down a long, complicated inter- CONSIGNMENT VENDORS. Vendor issues are of primary im- creditor fight into its core components, we would recommend portance during the early stages of a retailer’s chapter 11 cases taking a deeper dive into these issues, as the proposed and ulti- because the continued sale of goods is vital to maintaining suffi- mate resolutions of these issues and the prior and future nego- cient liquidity and important to any party seeking to support a tiation/litigation dynamics could be of great value in future retail reorganization of the business as a going-concern. This brings to bankruptcies when consignment goods form a significant part of the forefront additional issues related to the application of the the retailer’s inventory.[19] However, note that the sheer amount s consigned goods seems to have made it proceeds of such ordinary course sales of inventory. These issues of Sports Authority’ somewhat unique for this issue. can be further complicated when a retailer is dealing with the goods of consignment vendors, which can bring Uniform Com- The Sports Authority consignment vendor dispute centered on mercial Code (UCC) considerations into play. whether the company could sell approximately USD 90m of consignment goods received pre-petition and the relative priority A consignment vendor provides goods to a retailer for sale, but between the secured lenders and the consigning vendors to the is not paid immediately for those goods. Instead, unlike a non- proceeds derived therefrom. consignment vendor that is paid for goods upfront and gives up ownership of those goods immediately, a consignment vendor At the outset of the case, Sports Authority sought to continue is paid later upon the sale of goods by the retailer. selling its consignment goods in the ordinary course of business and proposed to grant consignment vendors replacement liens In short, while a consignment vendor’s goods sit in a retailer’s on the sale proceeds, subject to pre-existing liens on those assets. stores, the vendor receives nothing. Only when the goods are The proceeds would be placed into an escrow account and later sold does the consignment vendor receive proceeds—usually distributed to vendors with consent of secured lenders, who based upon a pre-determined allocation. Moreover, while the could benefit from a subsequent claw back of those proceeds. vendor might purport to keep ownership/title of those goods Numerous consignment vendors objected to this proposal and during that time period, under the Uniform Commercial Code the an interim order was ultimately entered that allowed for the vendor loses title to those goods upon delivery to the retailer. continued sale of consignment goods, with proceeds going into This difference is especially important in a bankruptcy scenario, escrowed accounts, and Sports Authority having the right to file where the commencement of Chapter 11 cases, for example, adversary proceedings against vendors lacking liens on or own- creates a debtor’s estate.[17] If the vendors retain title to the ership rights over the consigned goods. The adversary proceedings goods then those goods will not be property of the estate and would provide Judge Mary F. Walrath with the ability to properly the vendors will control the goods’ disposition. However, if a adjudicate the matter and break the gridlock that had been reached debtor has ownership over the goods, then it can decide what between lenders and vendors. to do with the goods, and the question will be who has the The company then attacked their consignment vendors, filing approx- rights to those proceeds and in which priority. imately 160 adversary complaints against its vendor-base, seek- Moreover, lenders, especially those of retailers, often have liens ing judicial determinations that (1) the debtors, not the vendors, on all inventory or even blanket liens over all assets, making own- own the consigned goods and have senior right to such goods ership over assets as of the petition date especially important. On and (2) the consigned vendors do not have valid/perfected secu- the flip side, vendors can protect their own interests by filing UCC-1 rity interests in the goods and lack title and right to both the goods financing statements and asserting their rights to other creditors and the proceeds. that could otherwise assert a lien on those assets. In short, Sports Authority argued that Article 9 of the Uniform The battles between pre-existing secured creditors with liens on Commercial Code was applicable to determining ownership of inventory and proceeds therefrom and the consignment ven- the consigned goods and governed respective priorities between dors asserting their own rights to the consigned goods and sale the consignment vendors and secured lenders based on, in part, proceeds can be brutal, significantly enhancing the risk of an the proper perfection of vendor security interests. eventual liquidation. For instance, consignment vendor issues

came to a head in the Sports Authority bankruptcy cases, which -CONTINUES- helped doom the company to its current-liquidation fate.[18]

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KEY CONSTITUENT # 2: VENDORS (CONT’D) liens and payments were being made as a carveout from lender collateral; (2) payment to vendors would be allocated solely as a Specifically, the company asserted that: percentage of proceeds, ranging from 25% to less than 50% (based  The shipment/delivery of goods converted the vendors’ on the individual vendor); and (3) settling vendors would receive security interests/rights in the consigned goods to a reser- a waiver of any estate preference claims and see the company’s vation of a security interest; adversary proceeding against it dropped. The vendor payment was  Almost all vendors failed to file a UCC-1 financing statement to perfect their security interests (120 of 160 vendors); also to be subject to reconciliation, which led to a further battle when many vendors didn't timely make those reconciliation payments.  Almost all vendors that filed UCC-1s filed them incorrectly or during the 90-day preference period (34 of 40 vendors ); and These dynamics and the ultimate legal resolution of these litiga-  No vendors provided timely notice to secured lenders. tions should be demonstrative for retailers and their creditors, Therefore: especially vendors and lenders that might face consignment related issues in the future.  The debtors’ lien rights/strong arm powers (i.e. hypothetical lien creditor) and the secured lenders’ perfected security In addition, retailers with significant consignment goods should interests trump the vendors’ rights; and take note over how the competing lender-vendor dynamic could  The consigned goods are property of the estate, which can have a detrimental effect on the early stages of an in-court restruc- be sold in the regular course of business free and clear of the turing and the company’s relationships with those key constituents. consigned vendors’ security interests.

If the debtors’ argument would have prevailed, the consignment KEY CONSTITUENT # 3: LENDERS AND LIQUIDATORS vendors would have seen their goods sold by Sports Authority Pre-petition lenders often have liens on a retail company’s inven- and the secured lenders will be first in line for the consignment tory and real-estate assets, leaving few valuable unencumbered good sale proceeds.[20] assets for unsecured creditor recoveries, or to entice third-party financiers for DIP financing packages.[21] Thus, with little likeli- The vendors, on the other hand, argued that they retained title hood of assets reserved for unsecured creditors, their only hope in the consigned goods and that the appropriate governing legal for recovery comes through the waterfall, thus making the balance framework was bailment law and not the UCC. In short, the consign- between secured, administrative, priority and unsecured claims ment vendors argued that the goods are theirs and their recovery especially pronounced in retail cases. is not dependent on whether they properly filed UCC-1s. Further, with all parties jockeying for priority, trade creditors are After further negotiation and continued litigation of the adver- more likely in retail cases to take an active role objecting to DIP sary proceeding, Sports Authority and certain consignment vendors motions—a likely addition to the administrative expense bucket— reached a settlement whereby vendors would receive (1) 60% of to ensure that there is sufficient liquidity to flow through the proceeds from the sale of goods received pre-petition, which waterfall in order to pay trade vendor claims, and that the DIP are governed by existing agreements and with proceeds not sub- Order and budget provide for the payment of any administrative ject to clawback, and (2) 100% of proceeds from goods received 503(b)(9) and reclamation claims. post-petition, in addition to a first priority, perfected security interest in those goods. Thus, prepetition secured lenders often push hard at the outset of a bankruptcy case to stem administrative expenses and keep junior Yet, that agreement was insufficient for the secured lenders who creditors at bay, all the while securing their position at the top of objected to, and ultimately blew up, that settlement. Nonethe- the waterfall and ensuring that, barring a reorganization, any liqui- less, the parties continued litigating the adversary proceedings, dation is conducted swiftly and efficiently in order to provide the the company moved forward with its liquidation, and negotia- greatest recovery on account of their claims. These lenders will also tions recommenced. often gain leverage by providing the company’s DIP, giving them A global resolution was ultimately reached with many consign- maximum control over the debtor’s restructuring. ment vendors that provided: (1) an acknowledgment from ven- -CONTINUES- dors that the goods/proceeds were subject to term loan lenders’

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KEY CONSTITUENT # 3: LENDERS AND LIQUIDATORS Instead, in both rue21 and Gymboree, certain lenders that pro- (CONT’D) vide new money DIP loans will have a portion of their pre-petition The majority of the recent bankrupt retailers have required DIP loans rolled-up, with those roll-up DIP loans recovering a significant financing in order to operate in the Chapter 11 space, and the portion of the equity through the plan. vast majority of those loans have come from pre-petition lenders. As a result, there will be a clear difference in recoveries between In many instances, the company’s entire secured lender base came pre-petition lenders that provide DIP loans versus those that do not. together to provide comprehensive DIP financing solutions for a This could be a trend worth watching out for, especially for those retailer through both revolver and term loan DIP facilities. In fact, investors that cannot, for whatever reason, provide new money to ten retail debtors entered Chapter 11 in 2016 and 2017 with both a debtor. Moreover, as neither of these debtors is at the plan con- term loan and revolver DIPs. firmation stage it is still possible for challenges to arise that create Interestingly, roll-ups are rampant in retail DIPs. It is actually quite different plan treatment or change recoveries. rare for a retail DIP to not include a roll-up component—whether a true roll-up of pre-petition debt into post-petition obligations, Ultimately, the company’s lenders often play an outsize role in the repayment of pre-petition debt with DIP proceeds, or a creeping the early stages of a retailer’s in-court reorganization, setting the roll-up through pay downs from inventory proceeds. Only a handful reorganization timetable and demanding a swift liquidation alter- of retail DIPs in the last year and a half came from third-party native in order to maximize ultimate recoveries. In the latter comes lenders and/or were comprised entirely of “new money.” (See the the liquidator, a common party to retail bankruptcies—and one Retail DIP Financings—2016/2017 table in the Bankruptcy Data that has changed the calculus for retail restructurings. section for recent retail DIP financings.) LIQUIDATORS. DIP lenders preparing for a fire sale use going-out- That should come as no surprise when pre-petition lenders are of-business (GOB) sales to monetize inventory if a reorganization the retail DIP lender of choice (or necessity). Retail lenders’ blan- cannot be timely achieved. The GOB sales are conducted by pro- ket liens make it increasingly difficult for third party lenders to fessional liquidating firms, such as Gordon Brothers, Tiger Capital, step in with new money, and the ease of liquidating inventory Great American and Hilco (or some combination thereof), whose (and pricing such a sale) makes it even more likely that a pre-petition rise may have contributed to—or came as a result of—the increased lender will make it difficult for a third party lender to come in and liquidation of retailers assist in a restructuring process that doesn't inure to the secured lender’s benefit. GOB sales, however, are not limited to full-scale liquidations and can be a part of a retailer’s reorganization strategy. For example, a debt- In light of the timing concerns mentioned herein, as well as the or may be looking to close certain under-performing stores and general fear of the “melting ice cube” and fear of inevitable liqui- streamline its operations prior to filing for Chapter 11 or even at the dation, these retail DIPs can often include tighter milestones and beginning of its bankruptcy cases by liquidating assets/inventory shorter maturities than those found in non-retail DIPs. Relatedly, and rejecting the related lease. DIP facilities will also often govern the actual strategic paths for a retail debtor—whether a standalone restructuring plan/sale or a While GOB sales can occur at any time in a Chapter 11 case, it is dual-track plan that allows a debtor to attempt to reorganize its becoming increasingly more prevalent for retailers to line up their operations while simultaneously preparing for a fire sale. preferred liquidation firm in advance of the Chapter 11 filing, especially if they or their lenders are eyeing quicker liquidation One other recent development in a couple of significant retail scenarios. As part of that process, a retailer can have a liquidator restructurings is the ultimate treatment of the DIP loans in the plan serve as a stalking horse bidder for the assets it will sell, subject of reorganization, including the impact on pre-petition lender recov- to higher and better offers from other liquidation firms or consor- eries. In both rue21 and Gymboree—two true retail reorganizations— tium of liquidators.[22] pre-petition lenders plan to take over the equity in the reorganized company. However, those lenders will not be receiving equity purely on account of their pre-petition claims—as is the case with lenders -CONTINUES- of Payless.

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KEY CONSTITUENT # 3: LENDERS AND LIQUIDATORS One of the most contested forms of customer programs are gift (CONT’D) cards. Despite customer perception that gift cards are insignificant, This could leave landlords and other creditors with little time to the outstanding pre-petition amount can in fact be quite staggering. negotiate with retailers who are eager to move forward with For example, in the Sharper Image bankruptcy, the company had the liquidation process (or their lenders are). In a number of recent close to USD 20m of gift cards outstanding, while Sports Authority cases liquidators served as stalking horse bidders (i.e., Draw filed with USD 93m of gift cards and Borders with over USD 200m. Another Circle), backup bidders in the event no going-concern buyer emerged (i.e., Hancock Fabrics), and as part of a going- Customers and the state/local governments’ representatives concern bid (i.e., Aeropostale, Gander Mountain). (i.e. Attorneys General and the Federal Trade Commission) that support them often end up at loggerheads with creditors’ com- GOB sales, by their nature, often implicate numerous legal issues, both bankruptcy and non-bankruptcy related. State and local mittees and secured lenders whose focus can be on cash recov- laws can limit conduct of GOB Sales, including with respect to eries, not consumer protection. timing, signage/advertising, and augmented inventory.[23] In addition, there are numerous other issues brought into play by The legal underpinning in favor of supporting gift card recogni- GOB sales, including contractual language in lease agreements tion stems from Bankruptcy Code section 507(a)(7), potentially prohibiting GOB sales. giving seventh priority to gift card claims.[25] There is limited caselaw regarding customer programs, including gift cards, as valid Nonetheless, courts will generally allow GOB sales to occur regard- consumer claims granted priority status above general unsecured less of the contractual language or the state/local laws, but will provide certain limitations on the sales—i.e., on the size and type claims. Nonetheless, Attorneys General and other gift cards ad- of advertising used.[24] vocates are often able to obtain positive relief for gift card holders, whether it be the allowance of gift cards on a limited basis There are, however, two issues that appear to loom larger over or some other mechanism.[26] GOB sales. The first is the use of sale proceeds and the proper allocation of GOB sale proceeds among the debtors, any lien holders, However, recent case law from the Delaware bankruptcy court and the liquidators. (seemingly the court of choice for retailers likely due to the stub A sub-issue of this category is pre-existing gift cards (and cus- rent issues described above) casts doubt on gift card holders’ ability tomer programs generally) and whether liquidators will respect to have their claims classified as priority status. In the City Sports their usage, since the sale of inventory for money contained on bankruptcy, Judge Kevin Gross ruled that claims for unredeemed a gift card does not bring any cash into the estate while depleting gift cards and gift certificates should be treated as general unse- inventory. The second major issue is that sometimes one of the cured claims and not afforded priority treatment under Bankruptcy retailer’s most significant assets is its collection of customer infor- Code section 507(a)(7). mation and customer privacy is often threated due to the potential sale of this information. The treatment of gift cards will have an impact on the amount of cash available for distribution and on the unsecured claims pool. KEY CONSTITUENT # 4: CUSTOMERS If gift cards are honored, there will be a dollar-for-dollar reduc- GIFT CARDS. Vendors aren’t the only constituency that requires tion of cash brought into the estate for each used gift cards, and assurance in order to preserve the value of the business. Customers if they are not honored but treated as priority claims, the gift are also a vital constituency, more so in going-concern reorgani- card claims will receive distributions prior to any general unse- zations, whose inherent issues often first crop up in the first day cured claims. On the flip side, the unsecured claims pool will be motions when a retailer seeks to have their various customer reduced by the amount of gift cards used or to the extent the claims programs approved and honored during the Chapter 11 cases. are treated as priority. In short, in an effort to maintain customer/brand loyalty and to show customers that the debtor’s operations are normal despite being in bankruptcy, companies will seek immediate court approval to honor pre-existing customer programs, which can range from -CONTINUES- rewards and incentive programs to coupons and warranty programs.

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KEY CONSTITUENT # 4: CUSTOMERS (CONT’D) State Attorneys General and the FTC are the ones often taking up the flag to protect customers and privacy concerns generally. In the GOB context, the debtors, liquidators and other interested parties are most likely to negotiate a financial settlement that The RadioShack Chapter 11, which took place in Delaware Bank- allows for the programs to continue, while liquidators/secured ruptcy Court, potentially provided a formula for the approval of creditors still benefit financially. the sale of customer data. In that case, the company, FTC and certain Attorneys General reached a global settlement over the One final note on gift cards: the claims and notice procedures sale of RadioShack’s substantial customer information, which should be monitored and followed closely, as a lack of diligence can lead to a reduced recovery on gift card claims. resulted in the buyer destroying a lot of the data and providing both opt-out rights and notice to consumers. The parties used The Borders Group bankruptcy cases, which dealt with over USD mediation, attended also by the consumer privacy ombudsman, 200m of gift cards, were illustrative of this fact. That court estab- to reach the settlement. lished a bar date and approved notice procedures that included publication notice and service of notice on known claim holders. In the end, the buyer purchased customer email-addresses and cer- No gift card claims were included on the company’s schedules of tain transaction data over a limited timeframe, but was required to liabilities and notice was not served on any gift card holder. In the destroy other contact information, credit card info, dates of birth and end, gift card holders did not file a single proof of claim and were social security numbers. Note that, in RadioShack, the business con- ultimately denied the right to have proper late-filed claims.[27] tinued as a going concern in a co-branded partnership with Sprint— That left them with the right to use the gift cards in the store, though the company’s going-concern status didn’t last for long. but made the cards worthless once the stores were closed. For additional data points concerning the sale of PII from the CUSTOMER INFORMATION. Another significant customer issue ongoing retail bankruptcy wave, see Performance Sports Group, relates to the personal information that retailers’ store collect about Golfsmith International, and Aeropostale, which all conducted each and every one of us. That information contains private, com- significant sales that included PII. mercially sensitive data, which in the digital age has become increasingly valuable. The question, though, is can a debtor sell that The settlement followed an earlier example—Toysmart—that sought information and if so what are the sale’s limitations? to sell customer information, despite language in its privacy policy that assured customers their information would not be sold. The FTC There is general consensus that customer information obtained by and many states objected to the sale, and despite the FTC reaching a the debtor is intangible property of the debtors’ estates, as defined resolution, a global settlement could not be achieved, leading to by Bankruptcy Code section 541(a).[28] However, as with many of the destruction of the customer data. the prior topics, the 2005 Bankruptcy Code amendments imposed limitations on the sale of personally identifiable information, which The keys to allowing the sale of customer information appears includes names, credit card info, social security numbers and con- to be (1) the inclusion of a customer opt-out provision and (2) tact info (i.e. address, email address, phone number). having a privacy policy in place that allows for the sale of the data. Retailers would be wise to ensure that their privacy policies in- Bankruptcy Code section 363(b)(1) allows a debtor to sell this type clude language providing for the allowance of such sales, including of information if the sale is allowed by the debtor’s privacy policy in bankruptcy-scenarios, especially because it could help ensure and a consumer privacy ombudsman is appointed, pursuant to an easier sale process. Bankruptcy Code section 332, whose role is to investigate the privacy policy, weigh the pros and cons for consumers and privacy if the sale occurs, and see what the available alternatives are.[29] RETAIL: NOT YOUR TYPICAL BANKRUPTCY Courts, however, have approved the sale of consumer information Retail chapter 11s are unique as there are a significant amount under certain conditions, including: of Bankruptcy Code provisions that appear to impact retailer bank-  If the sale is to a buyer operating a similar business who ruptcies disproportionately. In addition, the variety and amount agrees to abide by Debtor’s privacy policy; of affected creditors appears to be even greater.  Notice is provided to consumers whose personal information is held; and -CONTINUES-  Consumers have the ability to opt out of the transfer.

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RETAIL: NOT YOUR TYPICAL BANKRUPTCY (CONT’D) [6] See, e.g., In re Stone Barn Manhattan LLC, 398 B.R. 359 (Bankr. This trickles down to the ways in which creditors interact with S.D.N.Y. 2008). the retailers both pre- and post-petition. Vendor and landlord [7] See Centerpoint Props. v. Montgomery Ward Holding Corp. (In committees are commonplace; government entities get in- re Montgomery Ward Holding Corp.), 268 F.3d 205 (3d. Cir. 2001). volved; ombudsmen exist; and official committees of unsecured [8] There are numerous post-petition issues for landlords stem- creditors consist of a very different constituency, with trade ming from the later-rejection and or/assumption/assignment of creditors and landlords forming their base. leases, including specific Bankruptcy Code provisions regarding Perhaps most importantly, liquidations and administrative insol- shopping center leases. These matters are worthy of their own vency are the most common results of retail bankruptcies, likely article and outside the scope of this primer. For more, see Collier Guide to Chapter 11: Key Topics and Selected Industries, Chapter due to a truncated timeline fueled by mounting administrative 20: Chapter 11 Cases Involving Retail Businesses ¶20.06 (2015). expenses and Code-mandated deadlines. Without a clear plan early in the case backed with some level of creditor support, a [9] 11 U.S.C. § 503(b)(9). While requests for payment of section retail Chapter 11 may amount to no more than a battle over the 503(b)(9) claims are often filed early in the case, these claims ultimate allocation of liquidation proceeds. are generally paid on confirmation of a Chapter 11 plan. Creditors can argue for earlier payment, though that is a difficult argument The current bankruptcy wave is—for better or worse—highlighting to make. the fact that retail bankruptcies are generally the purview of [10] As the Bankruptcy Code does not define “goods,” courts have glorified liquidating plans, with limited opportunities for success- often looked to the Uniform Commercial Code for guidance. ful true turnarounds in Chapter 11. While rue21, Gymboree, and See, e.g., In re Goody's Family Clothing, Inc., 401 B.R. 131 (Bankr. D. Payless stand out as significant exceptions to this rule (all entering Del. 2009); In re Circuit City Stores, Inc., 416 B.R. 531, 534 (Bankr. with broad creditor support locked up via RSAs), the vast majority E.D. Va. 2009). of retailer bankruptcies in the last year and a half have culminated [11] See, e.g., In re Circuit City Stores, Inc., 416 B.R. 531, 538 in going-concern sales and liquidations (including combinations of (Bankr. E.D. Va. 2009) (applying predominant purpose test); In re the two). Moreover, the rise in retail Chapter 22s (i.e., American Pilgrim's Pride Corp., 421 B.R. 231, 237 (Bankr. N.D. Tex. 2009) (not Apparel, RadioShack, Wet Seal) clearly illustrate the risk of attempting applying predominant purpose test). See also, In re Plastech En- a reorganization. gineered Prods. Inc., 397 B.R. 828 (Bankr. E.D. Mich. 2009). [12] At its core, the disputes over the critical vendor doctrine arise ENDNOTES from the fact that the request seeks to upset the usual bankruptcy code priority scheme by elevating certain vendor unsecured claims [1] These going-out-of-business sales can take upwards of nine- and there is no explicit Bankruptcy Code section providing for such ty days, so we have assumed that the 210 day decision-making relief. As a result, courts have looked to their equitable powers, window is really closer to 120 days. including under Bankruptcy Code section 105, in addition to vari- [2] 11 U.S.C. § 365. This would create an unsecured claim for ous other bases under the Code—i.e., sections 362(d) (automatic prepetition rejection damages that would be limited by Bankruptcy stay), 363(b) (use of property), 364(b)(obtaining credit) and 1107 Code section 502(b)(6). 11 U.S.C. § 502(b)(6). (a) (protect/preserve the estate). [3] A debtor must cure all defaults and provide adequate assur- [13] In re Kmart Corp., 359 F.3d 866, 868 (7th Cir. 2004). ance of future performance in order to assume or assume/assign the lease. Note that contractual anti-assignment clauses are also [14] In re CoServ, LLC, 273 B.R. 487 (Bankr. N.D. Tex. 2002). The three generally ineffectual from preventing the assignment of a lease part test: (1) The debtor must deal with the claimant; (2) A failure to in bankruptcy, as they are considered to be invalid ipso facto deal with the claimant risks probable harm or eliminates an econom- clauses. See, e.g., 11 U.S.C. § 365(e)(1). ic advantage disproportionate to the amount of the claim; and (3) There is no practical or legal alternative to payment of the claim.” [4] The issue of administrative insolvency is, thus, an even greater reality for distressed retailers. While we have not delved into these [15] For example, Judge Gropper of SDNY has noted: “I have often said from this bench that I don’t believe that there is such a thing issues in this primer, CLICK HERE for the Debtwire legal team’s as a critical vendor.” See, In re Eastman Kodak Co., No. 12-10202, analysis of administrative insolvency in the Radioshack bankruptcy. Transcript of First Day Hearing (Bankr. SDNY Jan. 19, 2012). [5] 11 U.S.C. § 365(d)(3). -CONTINUES-

27 LEGAL ANALYSIS INDUSTRY PRIMER—RETAIL | 28 JUNE 2017

ENDNOTES (CONT’D) of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, [16] 11 USC § 546(c). The 2005 amendments extended the amount family, or household use of such individuals, that were not deliv- of time a vendor can reclaim goods from ten to 45 days. Note that ered or provided” are ranked seventh in priority. food retailers also have issues related to PACA, the Perishable Agricultural Commodities Act of 1930, which provides for the crea- One of the more heavily cited cases is In re WW Warehouse Inc., tion of a constructive statutory trust over delivered perishable 313 B.R. 588 (Bankr. D.Del. 2004)(finding gift certificates and other agricultural goods and related proceeds from their sale (i.e. goods items are priority payments under Bankruptcy Code section 507 and proceeds are not property of the estate), not discussed in (a)(7). this primer. [26] As one example, in Shaper Image the company was originally [17] 11 U.S.C. § 541. planning on not honoring gift cards but buckled to pressure and in [18] While there has been recent news that a fellow retailer might another in Fortunoff’s Chapter 22 case the purchaser of the compa- be acquiring over 100 stores, the bottom line is that Sports Author- ny’s assets agreed to provide a limited window for gift card use. ity will be no longer. [27] The Borders case went up to the U.S. District Court for the [19] For a recent dive into the UCC consignment issues, see ‘Sports Southern District of New York. Authority’ Tackles Issues of Title to Consigned Goods by David M. [28] 11 U.S.C. § 541(a). Bass and David W. Giattino, New York Law Journal. [29] 11 U.S.C. § 363(b)(1); 11 U.S.C. § 332. [20] However: (1) six vendors will argue that failure to timely provide notice should not force them to lose their place in the security interest line and (2) 34 will argue that a UCC-1 filed during

the preference period or incorrectly should similarly not hurt their position. [21] Other issues that seem to occur more frequently in the retail lending space are unitrache lending and “insider” issues when, for example, a PE sponsor provides pre-petition money to a distressed retailer, issues that reared their head in the Radioshack bankruptcy. CLICK HERE for all Debtwire intelligence on Radioshack. [22] There are generally two types of agreements utilized by liquidators, fee deals and equity deals. One of the key differences between the two is that under an equity deal the liquidator takes ownership of the goods. [23] Liquidators often want to have the inventory supplemented through additional goods from other locations or from non-debtors. While these used to be more controversial, parties can still seek to limit the amount/type of augmented goods. [24] Landlords have cited Bankruptcy Code section 365(d)(3) to argue that the restrictive lease provisions should be read strictly, but generally now seek to impact debtor/liquidator behavior rather than to completely fight the GOB sales from occurring. 11 U.S.C. § 365(d)(3). [25] 11 U.S.C. § 507(a)(7). The section provides that “allowed unsecured claims of individuals, to the extent of $2,775(*) for each such individual, arising from the deposit, before the commencement

Disclaimer Any opinions, analysis or information provided in this article are not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.

28 LEGAL ANALYSIS NYDJ | 30 JUNE 2017

WHO COULD PULL AN NYDJ? OVERVIEW (Unfortunately, most of the distressed retailers are private and do not have agreements filed with the SEC that we can analyze publicly.) The YDJ Apparel, a denim retailer and portfolio company of names we reviewed included: (1) 99 Cents Only Stores; (2) Neiman Crestview Partners, amended its credit agreement to re- Marcus; (3) J.Crew; (4) Lands’ End; and (5) Claire’s Stores. N finance consenting majority lenders into a new tranche of first-out term loans and push non-consenting minority lenders into a While each agreement would need to be closely analyzed based on third-out position. the specific facts and circumstances at the time, we found that minority lenders in Lands’ End, 99 Cents Only Stores and Claire’s are vulnerable Minority lenders were largely blindsided by the amendment, as most to NYDJ-style amendments. In these agreements, pro-rata protections market participants assume that this kind of amendment is not per- requiring the consent of all lenders are applicable only after a default. mitted without the consent of each affected lender. There are many Lands’ End also has a provision prohibiting the subordination of any agreements, however, that require only the consent of a majority of lender without its consent, although our reading is that this provision lenders to amend the pro rata sharing provisions. only applies to debt incurred outside the agreement and would not preclude subordination to other term loan lenders under the same agree- WHO ELSE CAN PULL AN NYDJ? ment, as occurred in NYDJ.

PRO RATA SHARING CHANGES “UNLESS OTHERWISE PROVIDED” The general rule governing amendments to credit agreements is that Even when the pro rata sharing is listed as a provision whose amend- lenders holding a majority of outstanding loans and unused commitment requires consent of each affected lender, there’s another po- ments have the right to make any amendments. As a result, a minority tential loophole to consider. The typical pro rata sharing provision lender will get dragged along for the ride unless there is a specific excep- usually includes a caveat that each lender is entitled to its pro rata share tion to this general rule. These exceptions typically address changes so “unless otherwise provided,” or “unless another amount is provided material that all affected lenders should have a consent right (e.g., for in this agreement.” Does this language mean that another part of reducing principal) or changes which benefit some lenders while disad- the agreement could be amended by the majority in a way that would vantaging others (e.g., the NYDJ amendment). override the pro rata sharing provisions? In our view, the language was Historically, amendments to the pro rata sharing clause required all intended to allow for the typical exceptions to pro rata sharing found lenders’ consent. The typical pro rata sharing clause states: in credit agreements, like open market purchases and Dutch auctions. Unfortunately, it allows for an alternate interpretation that could be “Except to the extent otherwise provided herein…each payment pursued by an aggressive majority group and that would result in other or prepayment of principal of Loans by the Borrower shall be made for account of the Lenders pro rata in accordance with sections of the credit agreement being amended that would override the respective unpaid principal amounts of the Loans held by the pro rata sharing provisions without those provisions themselves them; and each payment of interest on Loans by the Borrower being amended. shall be made for account of the Lenders pro rata in accordance with the amounts of interest on such Loans then due and pay- GOING FORWARD able to the respective Lenders.” We don’t expect the NYDJ amendment to usher in a new era of strong minority protections. We’ve been calling attention to this particular In other words, lenders agreed to be in it together, sink or swim. However, the game is changing, and we routinely review credit agreements that issue since 2014, when Sonifi (formerly LodgeNet) successfully pulled permit the pro rata sharing clause to be amended with a simple majority. off a post-bankruptcy debt restructuring which placed the minority non- consenting lenders in a last-out position. Still, we routinely find pro rata PRO RATA SHARING VULNERABILITY sharing missing from the list of sacred rights that can be amended We looked at the retail names on Debtwire’s Distressed Retail Watch- only by all lenders. Many lenders appear to be confident they will be list that had publicly available term loan documents to see if any had included on the side of the majority when the next pro rata sharing robust pro-rata sharing amendments that would block a move like NYDJ’s. amendment occurs

For any questions or further discussion about the topic discussed herein, please contact the Xtract Research Team or call 203-599-1000.

Disclaimer All Information contained herein is protected by copyright law and may not be copied, reproduced, transferred or resold in any manner or by any means whatsoever, by any person, without written consent from Xtract Research. This report should not be relied upon to make investment decisions. Furthermore, this report is not intended and should not be construed as legal advice. Xtract Research does not provide any legal advice and clients should consult with their own legal counsel for matters requiring legal advice. All information is sourced from either the public domain or is provided to us by our clients, and Xtract Research cannot and does not verify or guarantee the adequacy, accuracy or completeness of any source document. No representation is made that it is current, complete or accurate. The information herein is not intended to be used as a basis for investing and does not constitute an offer to buy or sell any securities or investment strategy. The information herein is for informational purposes only and Xtract Research accepts no liability whatsoever for any direct or consequential loss arising from any use of the information contained herein.

29 LEGAL ANALYSIS J. CREW | 5 APRIL 2017

SPECIAL REPORT: J.CREW UPDATE AND LESSONS TO BE LEARNED OVERVIEW THE TRANSFERS Crew Group, which owned its domestic trademarks through The Credit Agreement permits Subsidiaries to be designated as Unre-

a Restricted Subsidiary, transferred a 72.04% interest in those stricted Subsidiaries if there is no Default, the pro forma Total Lever- J trademarks to a Foreign Restricted Subsidiary, which in turn trans- age Ratio does not exceed 6.0x and the investment in that Subsidiary ferred it to an Unrestricted Subsidiary and subsequent transfers were is permitted by the Investment covenant. Section 6.14. Investment baskets made to other Unrestricted Subsidiaries. Sometime prior to March 2017 include the build up basket, which had a $65mm starter amount, a gen- J Crew Group proposed to holders of its parent company’s PIK toggle eral basket equal to the greater of $100mm and 3.25% of total assets, notes an exchange in which the noteholders would receive an aggregate and a basket for investments in non-guarantor Restricted Subsidiaries of $200mm of notes of an Unrestricted Subsidiary secured by that not to exceed the greater of $150mm and 4% of total assets. According Subsidiary’s 72.04% interest in the domestic trademarks and all of its to J Crew and its advisors, the value of the transferred domestic brands is equity securities, and guaranteed by Unrestricted Subsidiary parent $347mm. They therefore valued J Crew’s 72.04% interest at 72.04% of companies of that entity, plus 5% of the common equity of the parent that amount, or $250mm. That suggests that the starter amount was no company of the J Crew Group. The noteholders requested that $200mm longer available and that J Crew relied on the two baskets aggregating of preferred stock be added to the offer and there are now no open $250mm. Since the $150mm basket was only for investments in non- offers. The details of the offer and counteroffer are filed as exhibits to guarantor Restricted Subsidiaries, it could not have invested directly in an the J Crew 8K filed with the SEC on March 21, 2017. Unrestricted Subsidiary. So how did it get there?

J Crew Group and material domestic Restricted Subsidiaries are par- The Investment Covenant – Section 7.02 – contains a trap door, as ties to a Credit Agreement dated as of March 5, 2014, which originally discussed in our Special Report dated February 17, 2017 – “J. Crew’s provided $1,567mm of term loans maturing March 5, 2021 and are also (and 59 Others’) ‘Trap Door’ for Investments in Unrestricted Subsidiar- parties to a separate ABL Facility. The loan parties are also grantors under ies.” Section 7.02(t) of the Credit Agreement permits “Investments … a Security Agreement dated as of March 7, 2011. In December 2016, by any Restricted Subsidiary that is not a Loan Party to the extent such the parties to that Security Agreement executed a partial release – of Investments are financed with the proceeds received by such Restricted the loan parties’ interest in 72.04% of the domestic trademarks and Subsidiary from an Investment in such Restricted Subsidiary made pur- the J Crew Group entered into a license agreement for those trade- suant to [the basket for investments in non-guarantor Restricted Sub- marks (which would finance the interest payments on the new notes). sidiaries and the general investment basket].” The purpose of this not uncommon provision is so that the funds invested in such entities may Following the partial release and the resignation by Bank of America be used without reducing other investment baskets. J Crew used this as agent bank and appointment of Wilmington Trust as successor, J basket for J Crew Cayman – the foreign Restricted Subsidiary and a non- Crew brought an action in the New York Supreme Court for a declara- Loan Party to which it contributed the domestic trademarks – to further tory judgment that its transfers complied with the Loan Documents transfer its domestic trademarks to an Unrestricted Subsidiary and and New York law. On March 27, 2017, Wilmington Trust filed its an- Unrestricted Subsidiaries are not subject to any of the covenants in the swer and a counterclaim seeking a finding that J Crew violated the Credit Agreement. Loan Documents, that an Event of Default has occurred and that the transfer violated fraudulent conveyance laws. Our discussion will be limited to the Loan Documents. -CONTINUES-

ABOUT THE AUTHOR AND CONTACT INFORMATION

Vincent J. Pisano Senior Analyst, Debtwire Covenant Research Tel: 203.438.6700 | [email protected] Vince practiced as a corporate finance lawyer for more than 35 years as a partner at Skadden Arps and Kirk- land & Ellis. There he represented Drexel Burnham, Merrill Lynch, DLJ, Morgan Stanley, Goldman Sachs, Credit Suisse and each of the other major investment banks, and numerous issuers, in public and private leveraged finance transactions. Vince is a graduate of Vassar College and St. John’s Law School and is ad- mitted to practice law in the State of New York.

30 LEGAL ANALYSIS J. CREW | 5 APRIL 2017

THE TRANSFERS (CONT’D) related to specified actions expected to be taken and must be “reasonably identifiable, quantifiable and factually supportable.” Not surprisingly, It is clear that J Crew had the ability to invest $250mm in the Cayman Term Lenders do not believe the adjustments were made in good faith Islands Restricted Subsidiary and that as a non-guarantor Restricted and they are alleged to be not identifiable, quantifiable or factually sup- Subsidiary that entity had the right to reinvest its assets. Designation portable. We suspect that enough time has gone by for J Crew to have of a Subsidiary as an Unrestricted Subsidiary, however, requires that identified cost savings initiatives that would support the $30mm add the pro forma Consolidated Leverage Ratio not exceed 6.0x and some- back. We also suspect, however, that J Crew first decided to transfer the how J Crew decided it did not. trademarks and then realized they needed to adjust EBITDA and worked The Consolidated Leverage Ratio is the ratio of EBITDA, as adjusted, to backwards from the adjustments needed to the projections. A New total debt, without netting cash from debt. EBITDA adjustments, about York Supreme Court judge could very well find that these adjustments which we have written at least half a dozen special reports, include were not made in good faith, in which J Crew could not have desig- projected cost savings from any action expected to be taken within 12 nated the transferee from J Crew Cayman or any other Subsidiary as months, limited to the greater of $30mm and 10% of EBITDA. At the an Unrestricted Subsidiary, making it subject to the covenants in the time the Credit Agreement was executed, we viewed that as conservative Credit Agreement. The prediction here is that those adjustments will not since cash could not be net from debt and add backs were capped, both be upheld. unusual features in today’s markets. INVESTMENT BASKETS J Crew announced on March 17, 2016 that its fourth quarter adjusted In a very compelling argument, Wilmington Trust argues that even if the EBITDA was $44mm. It announced on November 22, 2016 that its adjusted value of the Trademark Collateral was $347mm, it does not follow that EBITDA for the first nine months of 2016 was $137mm and that total the interest transferred equals $250mm. By giving control over a majori- debt, net of discount and deferred financing costs, was $1,513. Using J ty interest in the brand, which being held by an Unrestricted Subsidiary is Crew’s numbers, the Consolidated Leverage Ratio was 8.36x, but re- not subject to any of the covenants in the Credit Agreement, they are ported adjusted EBITDA is not the same as covenant EBITDA, which effectively transferring the value of the entire Trademark Collateral. The permits add backs for charges related to store closings and opening, ability of the Unrestricted Subsidiary to pledge its interest in the Trade- “costs incurred in connection with any strategic initiative,” and business mark Collateral to secure debt, gives its lenders the ability to seize and optimization expenses not to exceed $25mm in any four quarter period. control the pledged property if there is a default on that debt. It could be (borrowers frequently do not report covenant EBIDTA, in part because that J Crew has paused in its efforts to reach a deal with PIK noteholders some of the add backs are difficult to justify and they do not want to so that they can argue that no one now has that right, but in any case, create a template which they do not intend to always follow.) Adding the judge could easily find that no valid attempt has been made to value back just $25mm in business optimization expenses would make the the transferred interest and could find that it exceeds J Crew’s invest- ratio 7.34x, still above 6.0x. But wait – J Crew decided that they could ment baskets, which would invalidate the transfer to J Crew Cayman. add to EBITDA $30mm in projected cost savings. When that addition The prediction here is that the value will be found to exceed $250mm, is made, the Leverage Ratio comes down to 6.4x. Additional add backs but possibly still within the $277mm J Crew says it has available. permitted by the broad, detested EBITDA definition brought the ratio below 6.0x – all the way to 5.78x. TRANSACTIONS WITH AFFILIATES Interestingly, in its presentation to the PIK noteholders, J Crew indicat- Section 7.08 of the Credit Agreement requires that any transaction ed that adjusted EBITDA for fiscal 2016 was $188.5mm and that debt with an Affiliate, other than a Restricted Subsidiary, must be on terms as outstanding at the end of that year totaled $1,510mm, for a Leverage favorable to the Borrower and its Restricted Subsidiaries as would be Ratio of 8.0x. Funny how those projected cost savings and other EBITDA obtainable in an arms’ length transaction with a third party. Paragraph (l) add backs were not important enough to present in an exchange offer states that it does not apply to a transaction in which the Borrower or any document. In guidance offered for 2017, adjusted EBITDA, including Restricted Subsidiary provides an opinion from an independent financial $50mm of projected cost savings, is expected to be between $190mm advisor that the transaction is fair to the Borrower and its Restricted Sub- and $210mm, with 12 store opening and 20 store closures. Based on debt sidiaries and has terms as favorable as a transaction with a third party. outstanding on January 28, 2017, that would still make the Leverage Ratio The valuation letter from J Crew’s financial advisor provided that opinion. to 7.19x – 7.95x. Interestingly, while Section 7.08 states that its requirements do not apply to any permitted restricted payment or asset sale, it properly does not There is a reason we continually complain about artificial EBITDA add exempt investments. Wilmington Trust’s cogent argument is that looking backs, even when capped. Desperate borrowers can turn trash into dia- at the entire transaction, J Crew went from outright ownership of the monds, simply by making adjustments on a computer. Add backs here domestic trademarks with no required payments out of the company for enabled J Crew to reduce its Leverage Ratio by more than 2.0x! their use to a situation where they are required to pay for the right to WILMINGTON TRUST’S ARGUMENTS use them and failure to make a payment would result in their ability to use the marks. In return, they received nothing. This is a very compelling DESIGNATION OF UNRESTRICTED SUBSIDIARIES argument and delivery of an obviously incorrect opinion from an advisor WT argues that the calculation of the pro forma Total Leverage Ratio cannot free J Crew from its obligations under this covenant. is incorrect for several reasons. One such reason is that EBITDA adjustments for projected cost savings must be projected in good faith and -CONTINUES-

31 LEGAL ANALYSIS J. CREW | 5 APRIL 2017

WILMINGTON TRUST’S ARGUMENTS (CONT’D) Clearly that would require a major market change, but they should be made much more clear and specific – what is a business opti- THE SECURITY AGREEMENT mization expense? Isn’t it every expense? – and caps should be put Article IV of the Security Agreement, which is a Loan Document – contains in place. Certain adjustments should be permitted only for mainte- “Special Provisions Concerning IP Collateral.” Section 4.02(b) provides nance tests and not for incurrence tests. If you lose $20mm from that “no Grantor shall do or permit any act or knowingly omit to do any closing stores, those are real losses and why should a borrower act whereby any of it IP Collateral may lapse, be terminated or become be able to ignore them when calculating leverage ratios for RPs invalid or unenforceable…” Section 4.02(e) indicates that “each Grantor or Investments? shall take all reasonable steps to preserve and protect each item of its IP Collateral…” A breach of these covenants constitutes a Default under  Restrict, specifically, the pledge or transfer of valuable assets. The the Credit Agreement. most valuable assets of many retailers now consist of their trademarks. Limit the ability to move them out of the credit group and the By enabling an Unrestricted Subsidiary to incur unlimited debt secured ability to secure debt other than the loans. Tech companies frequently by the IP Collateral, and making it subject to the control of the Subsid- iary’s lenders, one would think that J Crew unarguably committed an act have these kinds of covenants. whereby its IP Collateral could be terminated. Additionally, in order to  Make the ability to designate Subsidiaries Unrestricted much more make its license agreement with the Unrestricted Subsidiary look like a difficult. As a concept, the notion of Unrestricted Subsidiaries has third party transaction and provide value for the Subsidiary’s lenders, Section 14.4 of that license agreement provides that if J Crew fails to make some justification, but as covenants have become distorted and lost any required payment, including the license fee, J Crew and its affiliates, their original intent, the concept now largely means that a portion other than the Unrestricted Subsidiary, “shall have no rights to use the of a borrower’s assets and business may be conducted solely for Licensed Marks . . . in any manner (notwithstanding Licensee’s ownership the benefit of shareholders without any value to creditors. We could interest…” Can they really argue that does not violate the covenant in the show you numerous instances where this is clearly the case. Get rid Security Agreement? As a Loan Document, that also is a Default under of those holes in credit agreements. Get the Unrestricted Subsidiary the Credit Agreement. concept back to where it started – a business that does not fit within the normal covenant coverage, for which the borrower has limited VIOLATION OF LIEN COVENANT risk, but whose success will benefit the borrower and not only the Section 7.01 of the Credit Agreement provides that J Crew and its Re- borrower’s shareholders. Cumulus Media’s Credit Agreement dated stricted Subsidiaries may not create a Lien upon its property or assets as of December 23, 2013 provides that no Unrestricted Subsidiary except a Permitted Lien. Lien is defined as any pledge, assignment, encum- may prepay junior debt if the borrower could not have done so. brance or preferential arrangement of any kind. By the express terms Gymboree’s ABL Facility has a similar provision. of its license agreement, J Crew agreed that its interest in the domestic trademarks cannot be used if it defaults under the license agreement and  Eliminate trap doors and other provisions permitting investments that sure looks like an encumbrance on that asset. It seems doubtful the outside of the enterprise. If lenders are willing to permit Unrestricted judge will even have to get this far. Subsidiaries, put an overall cap on investments in them. Some analysts forget that a basket that permits $100mm of investments in Unrestricted SUGGESTIONS Subsidiaries is not a cap on those investments but another hole in the wall through which funds can pass. Despite the belief that J Crew’s efforts to divert value from its business for the sole benefit of lenders to its parent company violates the Loan Overall, our advice is to take back some of the flexibility given to borrowers Documents, better covenants could have spared Term Lenders from much and make covenants meaningful again. Credit agreements are intended of this pain. Among these would be: to be read literally and interpreted in accordance with their clear meaning.  Tightening the definition of EBITDA so that it really does have Any argument as to the intention of a covenant or the spirit of a provision something to do with Earnings, the E in EBITDA. We have pointed out or an argument that someone is cheating has no force if the clear and that EBITDA adjustments originated as a means to value a company unambiguous terms of a covenant permit an action. based on its ordinary operations or to show the effects of a pending acquisition or disposition. Covenant EBITDA adjustments go so far beyond those kind of changes that they should be eliminated.

Disclaimer All Information contained herein is protected by copyright law and may not be copied, reproduced, transferred or resold in any manner or by any means whatsoever, by any person, without written consent from Xtract Research. This report should not be relied upon to make investment decisions. Furthermore, this report is not intended and should not be construed as legal advice. Xtract Research does not provide any legal advice and clients should consult with their own legal counsel for matters requiring legal advice. All information is sourced from either the public domain or is provided to us by our clients, and Xtract Research cannot and does not verify or guarantee the adequacy, accuracy or completeness of any source document. No representation is made that it is current, complete or accurate. The information herein is not intended to be used as a basis for investing and does not constitute an offer to buy or sell any securities or investment strategy. The information herein is for informational purposes only and Xtract Research accepts no liability whatsoever for any direct or consequential loss arising from any use of the information contained herein.

32 NORTH AMERICA RETAIL 12 JULY 2017

The following selection of research includes Debtwire’s retail Distressed Watchlist, followed by nine credit

reports on actionable issuers. The individual credit reports start off with Nordstrom, a take-private or

recapitalization candidate. Companies that our analysts believe face challenges, but have options to avoid

a wholesale restructuring in the near term, are Bon-Ton Stores, GNC Holdings, Neiman Marcus, J. Crew

and 99 Cents Only Stores. Finally, retailers that we believe may need to restructure in the next 12 months

include Claire’s Stores, Sears Holdings and Tops Holdings.

33 Intentionally Blank

33 DISTRESSED RETAIL WATCHLIST

OVERVIEW

Debtwire’s Retail Watchlist, a topical subset of the broader Debtwire Distressed Watchlist for each month, highlights bonds and loans of levered borrowers that are either engaged in balance sheet restructurings or face pressure RESEARCH — NORTH AMERICA

to reduce debt. For our Retail Watchlist, we include distressed companies exposed to swings in consumer spending and tastes. Yulia Latysheva Credit Analyst 646.378.3173 The list separately presents bonds and loans, and accompanying each security are recent trading levels and metrics [email protected] indicating credit quality. Links to Debtwire intelligence, indicated by the gold company name, are provided for in- sight into specific risk factors. “Available” in the Tearsheet column next to the company name indicates a link to a Tim Hynes Debtwire Research Tearsheet. To sort for companies included in the Retail Watchlist within the Excel version of the Head of Distressed Research 212.574.7878 report, filter for the number three in column C. [email protected]

This month’s edition of the Retail Watchlist features 30 borrowers as two new borrowers joined. Among the compa- Michael Coleman nies listed, eight borrowers have distressed bonds, 15 borrowers have distressed loans and eight borrowers have Credit Analyst 646.378.3186 both bonds and loans. [email protected]

Borrowers making the list are primarily culled from Debtwire’s distressed, restructuring and pre-restructuring uni- Tarun Panchamia verses. New additions are generally characterized by trading levels of 80 or below. Other criteria include a yield in [email protected] the mid-teens or higher, eroding free cash flow, thin covenant cushions and/or steep near-term maturity hurdles. 35 36 DISTRESSED RETAIL WATCHLIST BONDS | 12 JULY 2017

Distressed Bonds Watchlist Coupon Outstanding Current Current Previous Previous LTM EBITDA Net Debt Net LTM FCF Company Name Research Sector Ticker CUSIP Maturity Ranking Moody's S&P Price % Δ (%) (USDm) Price YTM Price YTM (USDm) (USDm) Leverage (USD m) 99 Cents Only Stores Available Consumer Discretionary NDN 65440KAB2 11.0 250 15-Dec-19 Sr Unsecured Caa3 CCC- 84.0 19.3 84.1 19.0 -0.1% 39 956 24.7 0 BI-LO Available Consumer Staples BILOLF 088609AA0 8.6 475 15-Sep-18 Sr Unsecured Caa2 CCC- 51.8 67.2 51.8 67.2 0.0% 268 1,490 5.6 - Bon-Ton Stores Available Consumer Discretionary BONT 09776NAF9 8.0 350 15-Jun-21 2nd lien Caa2 CCC- 41.6 36.4 41.6 36.4 0.0% 102 990 9.7 10 CLE 179584AP2 6.1 210 15-Mar-20 1st lien Caa3 CC 42.8 43.4 41.8 44.0 2.4% CLE 179584AM9 9.0 1125 15-Mar-19 1st lien Caa3 CC 47.5 61.6 47.0 60.6 1.1% Claire's Stores Available Consumer Discretionary 193 2,057 10.7 0 CLE 179584AQ0 7.8 217 1-Jun-20 Sr Unsecured C C 15.0 99.0 15.0 99.0 0.0% CLE 179584AL1 8.9 222 15-Mar-19 2nd lien C C 10.0 99.0 10.0 99.0 0.0% David's Bridal Available Consumer Discretionary DBPHLD 23306BAA6 7.8 270 15-Oct-20 Sr Unsecured Caa3 CCC- 62.0 24.9 67.3 21.6 -7.8% - - 10.0 - GNC Holdings Inc Available Consumer Discretionary GNC 36191GAB3 1.5 288 15-Aug-20 Sr Unsecured - - 67.8 14.5 70.0 13.0 -3.2% 320 1,548 4.8 68 GTRC 402040AJ8 9.6 325 15-Apr-20 Sr Unsecured Caa1 CCC- 59.3 32.5 55.3 35.2 7.2% Guitar Center Available Consumer Discretionary 158 1,097 6.9 - GTRC 402040AH2 6.5 615 15-Apr-19 1st lien B2 CCC+ 86.0 15.5 88.3 13.7 -2.5% Gymboree Available Consumer Discretionary GYMB 403777AB1 9.1 171 1-Dec-18 Sr Unsecured C D 7.0 - 4.3 - 64.7% (3) 1,041 - 0 J. Crew Available Consumer Discretionary JCG 16961UAA4 7.8 591 1-May-19 Sr Unsecured Ca C 51.8 51.1 50.5 51.3 2.5% 177 1,396 7.9 62 NMG 570254AB8 8.8 600 15-Oct-21 Sr Unsecured Caa3 CCC- 50.0 - 55.5 26.2 -9.9% Neiman Marcus Available Consumer Discretionary NMG 570254AA0 8.0 960 15-Oct-21 Sr Unsecured Caa3 CCC- 55.3 25.6 57.0 24.4 -3.1% 449 4,658 10.4 10 NMG 640204AB9 7.1 125 1-Jun-28 1st lien Caa1 CCC+ 76.0 10.9 76.0 10.9 0.0% JNY 65442LAA0 8.3 367 15-Mar-19 Sr Unsecured Ca C 25.0 115.9 27.4 96.5 -8.7% Nine West Available Consumer Discretionary JNY 48020UAA6 6.9 28 15-Mar-19 Sr Unsecured Ca C 26.5 99.0 26.5 99.0 0.0% 63 1,501 23.8 - JNY 480081AK4 6.1 250 15-Nov-34 Sr Unsecured Ca C 21.5 29.4 21.5 29.4 0.0% rue21 Available Consumer Discretionary RUE 781295AA8 9.0 250 15-Oct-21 Sr Unsecured WR D 3.5 244.4 13.0 89.9 -73.1% - - 12.0 - SHLD 812350AF3 8.0 625 15-Dec-19 Sr Unsecured Ca CCC- 78.0 19.4 83.5 15.6 -6.6% SHLD 812404AY7 6.9 43 15-Oct-17 Sr Unsecured Caa3 CCC+ 92.3 29.4 94.8 20.4 -2.6% SHLD 812350AE6 6.6 304 15-Oct-18 2nd lien Caa2 B- 94.4 10.9 94.4 10.9 0.0% Sears Holdings Available Consumer Discretionary (1,069) 4,413 - (186) SHLD 812404BE0 6.5 48 1-Dec-28 Sr Unsecured Caa3 CCC+ 45.1 17.9 45.1 17.9 0.0% SHLD 812404BK6 7.0 91 1-Jun-32 Sr Unsecured Caa3 CCC+ 43.3 18.1 43.3 18.1 0.0% SHLD 812404AX9 7.5 69 15-Oct-27 Sr Unsecured Caa3 CCC+ 42.8 21.4 42.8 21.4 0.0% TOMA 89078YAA3 8.0 560 15-Jun-22 Secured Caa1 CCC+ 82.5 12.8 87.3 11.4 -5.4% Tops Holding II Corporation Available Consumer Staples 121 848 7.0 6 TOMA 89078XAB3 8.8 90 15-Jun-18 Sr Unsecured Caa3 CCC- 80.0 29.1 80.0 29.1 0.0% Vitamin Shoppe Consumer Discretionary VSI 462044AF5 9.1 121 15-Dec-21 Sr Unsecured - B------109 122 1.1 32 DISTRESSED RETAIL WATCHLIST LOANS | 12 JULY 2017

Distressed Loans Watchlist

Initial Libor Outstanding Current Current Previous Previous LTM EBITDA Net Debt LTM FCF Company Name Research Sector Priority Facility Maturity Price % Δ Leverage Spread (bps) (USD m) Bid Offer Bid Offer (USDm) (USDm) (USD m)

First Lien TLB2 350 614 11-Jan-19 93 95 93 95 0.3% 99 Cents Only Stores Available Consumer Discretionary 39 956 24.7 0 First Lien RC 400 160 8-Apr-21 71 72 71 72 0.0% Academy Limited Available Consumer Discretionary First Lien TLB 400 1825 1-Jul-22 82 83 74 76 10.2% - - - - Bluestem Group Consumer Discretionary First Lien TL 750 559 6-Nov-20 66 70 65 71 -0.3% 60 303 5.1 112 First Lien TL 550 150 22-May-19 46 51 49 56 -6.8% Charlotte Russe Available Consumer Discretionary 42 210 5.0 - First Lien TL 500 80 22-May-19 46 51 49 56 -6.8% Charming Charlie Inc Consumer Discretionary First Lien TLB 800 150 24-Dec-19 50 52 50 52 0.0% - - 4.7 - Claire's Stores Available Consumer Discretionary First Lien RC - 115 20-Sep-17 59 65 59 65 0.0% 193 2,057 10.7 0 David's Bridal Available Consumer Discretionary First Lien TLB 375 520 11-Oct-19 79 80 83 84 -4.9% - - 10.0 - Eddie Bauer Consumer Discretionary First Lien TL 525 225 1-Jul-20 42 47 45 50 -7.0% - - 9.5 - First Lien TL 475 820 14-Oct-22 69 71 77 79 -10.2% FULLBEAUTY Brands Consumer Discretionary - - 9.1 - Second Lien TL 900 345 13-Oct-23 49 52 51 53 -2.2% First Lien TL 350 820 23-Feb-18 44 46 45 47 -1.6% Gymboree Available Consumer Discretionary (3) 1,041 - 0 First Lien RC 400 225 24-Sep-20 74 75 74 75 0.0% J. Crew Available Consumer Discretionary First Lien TL 300 1,567 5-Mar-21 69 70 67 68 2.9% 177 1,396 7.9 62 First Lien TLB 325 515 2-Apr-21 85 87 83 85 3.0% Lands' End Consumer Discretionary 40 354 8.9 (9) First Lien RC 175 - - 81 83 79 81 3.1% Neiman Marcus Available Consumer Discretionary First Lien TL 325 2943 25-Oct-20 78 79 80 81 -2.4% 449 4,658 10.4 10 First Lien TL 375 445 8-Oct-19 82 84 70 72 16.6% Nine West Available Consumer Discretionary 63 1,501 23.8 - Unsecured TL 525 300 8-Jan-20 31 34 26 29 18.0% First Lien TL 600 150 6-Jan-20 64 68 64 68 -0.5% NYDJ APPAREL LLC Consumer Discretionary - - 20.0 - First Lien RC 600 12.5 6-Jan-19 63 67 63 67 -0.5%

First Lien TL 400 520 11-Mar-21 50 52 50 52 -0.5% Payless ShoeSource Consumer Discretionary - - - - Second Lien TL 750 145 11-Mar-22 4 6 4 6 -1.9% First Lien RC - 250 - 50 53 50 53 0.0% First Lien TLB 462.5 539 9-Oct-20 9 12 9 12 0.0% rue21 Available Consumer Discretionary - - 12.0 - First Lien TL 462.5 100 31-Oct-17 9 12 9 12 0.0% First Lien TLB1 425 333 16-Jul-21 79 82 80 82 -0.8% Spencer Gifts Consumer Discretionary - - - - 5.2 - - Second Lien TL 825 135 29-Jun-22 80 82 80 82 0.0% Sports Authority - First Lien TLB 600 300 16-Nov-17 4 6 6 9 -37.9% 100 1,065 10.7 - Things Remembered Consumer Discretionary First Lien RC 800 20 28-Feb-19 27 47 27 47 0.0% - - - - TOMS Shoes Consumer Discretionary First Lien TL 550 307 30-Oct-20 54 58 66 69 -17.4% 43 299 6.9 - Totes Isotoner Corporation (aka Consumer Discretionary First Lien TL 425 245 1-May-21 61 69 61 68 1.0% - - 10.0 - Indra Holdings) First Lien TL 487.5 400 30-Jul-19 22 24 21 24 -0.3% True Religion Apparel Consumer Discretionary Second Lien TL 1000 85 30-Jan-20 43 50 43 50 0.0% - - 16.0 - First Lien RC 450 50 30-Jul-18 20 24 20 24 0.0% 37 38 NORDSTROM INC RETAIL, US TEARSHEET | 30 JUNE 2017

CAPITAL STRUCTURE (USD m) as of 29 April 2017 LIQUIDITY (USD m)- 29/4/2017 Est. Annual 2017E Face 2017E Mkt Cash 653 Instrument Coupon Maturity Face Price Market Yield Face Lev Mkt Lev Interest Lev Lev Availability under revolver 800 USD 800m Senior Unsecured Revolving Credit Facility Libor + 0.565%-1.3% 1-Apr-20 - -- - - 0.0x 0.0x 0.0x 0.0x Total Liquidity 1,453 Current maturities of long-term debt (11) Senior Notes 4.75% 1-May-20 500 104.7 500 3.0% 24 0.3x 0.3x 0.3x 0.3x (1) (184) Senior Notes 4% 15-Oct-21 500 102.9 500 3.2% 20 0.6x 0.6x 0.6x 0.6x Expected Dividend To tal Liquidity less current maturities 1,442 Senior Notes 4% 15-Mar-27 350 99.4 348 4.1% 14 0.8x 0.8x 0.8x 0.8x Source: SEC Filings, Debtwire Analytics Senior Debentures 6.95% 15-Mar-28 300 109.5 300 5.8% 21 0.9x 0.9x 1.0x 1.0x 1) Expected dividends for 2Q17, 3Q17 and 4Q17 Senior Notes 7% 15-Jan-38 149 113.4 149 5.9% 10 1.0x 1.0x 1.1x 1.1x based on 1Q17 runrate. Senior Notes 5% 15-Jan-44 966 97.3 940 5.2% 48 1.5x 1.5x 1.7x 1.7x

(1) Mortgage payable 7.68% Apr-20 23 - 23 - 2 1.7x 1.7x 1.7x 1.7x RECENT DEBTWIRE COVERAGE Other - - 35 - 35 - 0 1.6x 1.6x 1.8x 1.7x Total Debt 2,823 2,795 139 1.6x 1.6x 1.8x 1.7x Cash and Cash Equivalents 653 653 Distressed Credit | Debtwire North America Net Debt 2,170 2,142 1.2x 1.2x 1.3x 1.3x Market Capitalization 7,665 $47.5/Share 7,665 3.2% Vaibhav Jasani Analyst Enterprise Value 9,835 9,807 [email protected] LTM Adjusted EBITDA 1,785 EV/LTM Adjusted EBITDA 5.5x

(2) FY17 Projected EBITDA 1,612 EV/FY17 Projected EBITDA 6.1x Sagar Joshi Source: Company reports and MarketAxess for bond prices Manager NA Credit Research (Offshore) 1) Secured by an office building. [email protected] 2) Cap IQ consensus dated 9 June. Click here for the Excel model OVERVIEW Nordstrom Inc (JWN) is a Seattle, Washington-headquartered retailer of apparel, shoes, cosmetics and accessories. The company operates across two reportable segments: Retail (98% of 1Q17 revenues) and Credit (2%). Under the Retail segment, JWN sells branded and private-label apparel, shoes, cosmetics and accessories through full-line and online stores. The Credit segment offers payment solutions through credit and debit cards, in order to increase sales and generate customer loyalty. In FY15, the company sold USD 2.19bn of credit card receivables to TD Bank, to focus on the Retail segment. ‹ On 8 June, JWN announced that members of the Nordstrom family formed a group to explore the prospect of going private by acquiring all the outstanding shares. No proposal has yet been made by the group to the company. JWN could incur additional leverage, as its net leverage is 1.2x compared to the peer average of 3.3x. ‹ In fiscal 1Q17 ended 29 April 2017, JWN refinanced the USD 650m 6.25% Senior Unsecured Notes due January 2018 with the new 4% USD 350m Senior Unsecured Notes due March 2027 and 5% USD 300m Senior Unsecured Notes due January 2044, reducing its interest expense and extending debt maturities. ‹ JWN’s total sales improved 3% year-over-year to USD 3.35bn in 1Q17, led by an uptick in off-price net sales, which a decrease in full-price sales helped to partially offset. Comp sales declined 1% YoY for the quarter. For FY17, the company guided sales growth to 3%-4%, while comp sales are likely to remain flat. ‹ On a YoY basis, gross margin expanded marginally by 30bps to 35.7% in 1Q17, due to higher margins on full-price products, while operating expenses remained flat. Consequently, adjusted EBITDA for the quarter increased 17% YoY to USD 328m. ‹ The improved EBITDA, coupled with a 25% YoY reduction in capex, resulted in a significant improvement in levered free cash flow (pre-dividends) to USD 125m in 1Q17, compared to USD 59m at 1Q16-end. ‹ Even in a challenging industry environment, the company has been able to grow its top and bottom line consistently in recent quarters. Despite the downturn in the industry, JWN has been generating positive free cash flow, with USD 824m in LTM 1Q17, USD 758m in FY16 and USD 529bn in FY15. ‹ As at 1Q17-end, the company had total liquidity of USD 1.45bn, comprising USD 653m of cash and USD 800m available under the Senior Unsecured Revolving Credit Facility (RCF). Under the RCF, there is a requirement that JWN maintain a maximum adjusted debt to EBITDAR ratio of 4x. As of 29 April, the company was in compliance with its covenant. ‹ JWN operates at a net leverage of 1.2x, and currently trades at an EV/LTM adjusted EBITDA of 5.5x and EV/FY17 projected EBITDA of 6.1x, as compared to its peer average of 5x. ‹ With adequate liquidity, moderate leverage and consistent growing free cash flow, the company’s recently issued USD 350m 4% Senior Notes due 2027 last traded on 22 June at 99.4, yielding 4.1%, flat since issuance. JWN’s stock rose ~27% YoY to USD 47.5 as of 22 June. NORDSTROM INC RETAIL, US TEARSHEET | 30 JUNE 2017

FINANCIAL SUMMARY (USD m) Calendar Period 2014 2015 2016 LTM 1Q16 LTM 1Q17 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 31-Jan 30-Jan 28-Jan 1-Aug 31-Oct 30-Jan 30-Apr 30-Jul 29-Oct 28-Jan 29-Apr Total Revenues 13,506 14,437 14,757 14,471 14,862 3,701 3,328 4,193 3,249 3,651 3,542 4,315 3,354 YoY % inc/dec 8% 7% 2% 5% 3% 9% 6% 4% 1% -1% 6% 3% 3% Cost of sales (8,406) (9,168) (9,440) (9,269) (9,495) (2,327) (2,142) (2,700) (2,100) (2,359) (2,261) (2,720) (2,155) Gross Profit 5,100 5,269 5,317 5,202 5,367 1,374 1,186 1,493 1,149 1,292 1,281 1,595 1,199 Gross Margin 37.8% 36.5% 36.0% 35.9% 36.1% 37.1% 35.6% 35.6% 35.4% 35.4% 36.2% 37.0% 35.7% Operating expenses (3,777) (4,168) (4,512) (4,240) (4,517) (997) (1,031) (1,169) (1,043) (1,071) (1,226) (1,172) (1,048) Operating Income (Loss) 1,323 1,101 805 962 850 377 155 324 106 221 55 423 151 Depreciation and amortization expenses 508 576 645 594 651 140 147 152 155 164 161 165 161 Goodwill impairment 0 0 197 0 197 0 0 0 0 0 197 0 0 Stock-based compensation expense 68 70 91 71 87 22 16 13 20 27 21 23 16 Adjusted EBITDA 1,899 1,747 1,738 1,627 1,785 539 318 489 281 412 434 611 328 YoY % inc/dec 2% -8% -1% -15% 10% 13% -23% -21% -30% -24% 36% 25% 17% EBITDA Margin 14.1% 12.1% 11.8% 11.2% 12.0% 14.6% 9.6% 11.7% 8.6% 11.3% 12.3% 14.2% 9.8% Company given Adjusted EBITDAR 1,980 1,862 1,850 1,746 1,918 ------

Adjusted EBITDA 1,899 1,747 1,738 1,627 1,785 539 318 489 281 412 434 611 328 Interest Expense (152) (136) (134) (123) (167) (40) (16) (50) (17) (50) (16) (51) (50) CAPEX (861) (1,082) (846) (1,028) (794) (262) (336) (225) (205) (202) (218) (221) (153) Levered Free Cash Flow 886 529 758 476 824 237 (34) 214 59 160 200 339 125 Proceeds from Sale of Credit Card Receivables 0 2,187 0 2,187 0 0 2,187 0 0 0 0 0 0 Cash Dividends Paid (251) (1,185) (256) (1,177) (255) (71) (974) (69) (63) (65) (64) (64) (62) Adjusted Levered Free Cash Flow 635 1,531 502 1,486 569 166 1,179 145 (4) 95 136 275 63 Cash Flow Statement 2014 2015 2016 LTM 1Q16 LTM 1Q17 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Net Cash provided by Operating Activities 1,220 2,451 1,648 2,419 1,561 207 1,330 706 176 675 21 776 89 Net Cash used in Investing Activities (889) (144) (791) (79) (761) (342) 650 (213) (174) (200) (204) (213) (144) Net Cash used in Financing Activities (698) (2,539) (445) (2,639) (617) (211) (1,582) (719) (127) (53) (178) (87) (299) Cash and Cash Equivalents, Beginning of Period 1,194 827 595 769 470 769 423 821 595 470 892 531 1,007 Net increase (decrease) in cash and cash equivalents (367) (232) 412 (299) 183 (346) 398 (226) (125) 422 (361) 476 (354) Cash and Cash Equivalents, End of Period 827 595 1,007 470 653 423 821 595 470 892 531 1,007 653 Total Debt 4,299 4,280 4,457 4,314 2,823 4,444 4,200 4,280 4,314 4,369 4,403 4,457 2,823 Net Debt 3,472 3,685 3,450 3,844 2,170 4,021 3,379 3,685 3,844 3,477 3,872 3,450 2,170 Net Debt/Adj. EBITDA 1.8x 2.1x 2.0x 2.4x 1.2x ------39 40 NORDSTROM INC RETAIL, US TEARSHEET | 30 JUNE 2017

SEGMENT REVENUES (USD m) 2014 2015 2016 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Nordstrom full-line stores- US 7,682 7,633 7,186 2,097 1,634 2,203 1,582 1,978 1,568 2,058 1,482 Nordstrom.com 1,996 2,300 2,519 625 414 781 495 683 497 844 548 Full-price 9,678 9,933 9,705 2,722 2,048 2,984 2,077 2,661 2,065 2,902 2,030 Nordstrom Rack 3,215 3,533 3,809 857 885 960 894 926 958 1,031 957 Nordstromrack.com/hauteLook 360 532 700 117 129 169 166 157 159 218 198 Off-price 3,575 4,065 4,509 974 1,014 1,129 1,060 1,083 1,117 1,249 1,155 Other retail 116 378 554 79 107 128 121 127 135 171 126 Retail 13,369 14,376 14,768 3,775 3,169 4,241 3,258 3,871 3,317 4,322 3,311 YoY % inc/dec 10% 8% 3% 10% 6% 5% 2% 3% 5% 2% 2% Corporate/Other (259) (281) (270) (177) 70 (98) (66) (279) 155 (80) (29) Net Retail Sales 13,110 14,095 14,498 3,598 3,239 4,143 3,192 3,592 3,472 4,242 3,282

Credit Card revenues 396 342 259 103 89 50 57 59 70 73 75 YoY % inc/dec 6% -14% -24% 7% -11% -2% -43% -43% -21% 46% 32%

Total Revenue 13,506 14,437 14,757 3,701 3,328 4,193 3,249 3,651 3,542 4,315 3,357

COMPS, USD m LTM 2017E LTM 2017E Enterprise LTM 2017E LTM 2017E Total Net Company EBITDA EBITDA Revenue Revenue Total Debt Net Debt Value EBITDA EBITDA Revenue Revenue Leverage Leverage Multiple Multiple Multiple Multiple Macy's Inc 12,453 2,764 2,813 4.5x 4.4x 25,345 24,671 0.5x 0.5x 5,869 2.1x 5,524 2.0x JCPenney Company Inc 5,777 921 1,025 6.3x 5.6x 12,200 12,029 0.5x 0.5x 4,435 4.8x 4,252 4.6x Peer Average 5.4x 5.0x 0.5x 0.5x 3.5x 3.3x Nordstrom Inc 9,835 1,785 1,612 5.5x 6.1x 14,862 14,996 0.7x 0.7x 2,823 1.6x 2,170 1.2x Source: Peer companies, S&P Capital IQ NORDSTROM INC RETAIL, US TEARSHEET | 30 JUNE 2017

FINANCIAL SNAPSHOT (1Q17) COMPANY INFORMATION COMPANY TIMELINE LTM Revenue: USD 14.86bn Ticker: JWN (NYSE) Last earnings release: 31-May-17 LTM Adjusted EBITDA: USD 1.79bn Issuer rating: BBB+/Baa1 Administrative agent for Revoling Total Debt/LTM Adj. EBITDA: 1.6x Bank Of America, N.A. Next earnings release: 30-Aug-17 (est.) Credit Facility LTM Adj. EBITDA/LTM Interest Expense: 10.7x Share price as on 22 June 2017: USD 47.5/Share Next significant maturity: 1-Apr-20 EV/LTM Adj. EBITDA: 5.5x Market capitalization: USD 7.66bn Next coupon due: 15-Jul-17 EV/LTM Revenue: 0.7x Enterprise value: USD 9.83bn

NUMBER OF DEPARTMENT STORES AND SQUARE FOOTAGE 2014 2015 2016 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Store counts at end of year 292 323 349 304 323 323 329 329 348 349 353 Square footage at end of year (in thousands) 27,061 28,610 29,792 27,556 28,610 28,610 28,772 28,826 29,783 29,792 29,764 41 42 BON-TON STORES, INC RETAIL, US CREDIT REPORT | 28 JUNE 2017

CAPITAL STRUCTURE Face Market Est. Annual LTM Face Lev- LTM Market Capital Structure at 29 April 2017 Coupon Price Yield Maturity Amount Amount Interest erage Leverage

USD 880m First Lien Revolver (Tranche A USD 730m, A1 USD 150m) L + 1.75%, L+3.5% 552 100 552 5.5% 29 Apr 2022 33 4.8x 4.8x Capital Lease Obligations - 139 - 139 - 8 6.0x 6.0x First Lien Debt 691 691 41 Second Lien Notes 8.00% 350 40 141 38.6% 15 Jun 2021 28 9.0x 7.2x Consolidated Debt 1,041 832 69 Cash 7 7 Net Debt 1,034 825 8.9x 7.1x Market Capitalization USD Price Per Share : 0.48 10 10 Enterprise Value 1,044 835 LTM Adjusted EBITDA 100 EV Multiple 10.5x 2017 Low-End Guidance 115 Fwd EV Multiple 9.1x

(1) The capital structure reflects the impact of the ABL Term Loan that was announced on 15 August as if it had closed by quarter-end. As reported by the company, the term loan is a sublimit of the existing ABL loan with the ABL facility increased to USD 880m from USD 830m with the term loan addition. Bank of America is the agent on the ABL and pricing is tied to a grid.

OVERVIEW Issuer Summary (USD

 Bon-Ton’s fiscal first-quarter results reflected a significant deterioration in adjusted EBITDA. The company went to a negative USD 15.6m in 1Q17 from a positive USD 1.3m in Country US 1Q16. As a result, LTM adjusted EBITDA decreased to USD 100m from USD 116m at the end of fiscal 2016. Even with the poor first quarter and the decline in adjusted EBITDA, Sector Retail the company has reaffirmed its full-year 2017 guidance for adjusted EBITDA in the range of USD 115m-USD 125m. In its revised guidance, the company has reduced its expectation for SG&A for the year, so presumably it believes it will stay on its adjusted EBITDA plan—even after a poor first quarter—through diligence in managing expenses. Total Assets 1,469  Net merchandise revenue for the quarter decreased by 8.8% on a comparable sales basis and 9.3% overall to USD 536m. The company attributed the revenue reduction to Total Debt 1,034 weak mall traffic, a calendar shift that had Easter fall in the second quarter this year versus the first quarter last year, and the often used catch-all of “weather”. Not surprising Ticker BONT given the sales decline, gross profit margin also decreased, with a reduction to 32.1% from 33.8% a year ago. We expect margins to remain under pressure through the second quarter as the dollar level of inventory remained constant to a year ago, despite the revenue decline. This implies the need for additional markdowns to align inventory levels Market Cap 10 to the sales level, particularly as the competitive environment has been made even more challenging by the number of locations at competitors such as Macy’s, JCPenney and Fiscal Year-End 28-Jan Sears that have closed over the last several months. We think that may pose a challenge to Bon-Ton—not only to work through its own inventory levels, but to compete against competitors’ locations that may be offering deep discounts through GOB sales. USD m FY14 FY15 FY16 LTM  Subsequent to the end of 1Q17, the company announced that it has extended the USD 730m Tranche A facility to 29 April 2022 from 12 December 2018. With this extension, Adj. EBITDA 153 109 116 100 the company has no pressing maturities as well as ample liquidity. If the company can achieve the low end of its guidance for the remainder of fiscal 2017, it implies that over the next three quarters Bon-Ton will be free cash flow positive. But with USD 233m of liquidity at 29 April 2017, the company still has room to underperform against its plan. Interest 62 63 66 69 While there is no near-term liquidity risk, the company is leveraged at 9x total debt, so it will need to show improvements and demonstrate options to deleverage. Capex 91 85 55 52 PREVIOUS DEBTWIRE EDITORIAL COVERAGE FCF 0 (39) (5) (21) Bon-Ton embarks on supplier goodwill tour, aims to regain market confidence 7-Jun-17 Bon-Ton reports adjusted 1Q17 EBITDA of negative USD 15.6m, compared with USD 1.3m YoY 18-May-17 Bon-Ton completes closing of extension of USD 730m ABL Tranche A credit facility 1-May-17 DISTRESSED CREDIT | DEBTWIRE NORTH AMERICA Philip Emma BUSINESS DESCRIPTION Senior Analyst Bon-Ton operates a chain of regional department stores in the US. As of 30 April 2016, the company operated 267 stores, including nine furniture galleries and four clearance centers, in 26 646-.378.3132 states in the Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergner’s, Boston Store, Carson’s, Elder-Beerman, Herberger’s and Younkers trade names. [email protected]

Tim Hynes Head of North America Research [email protected]

Sources: SEC Filings, Press Releases, Debtwire Analytics. BON-TON STORES, INC RETAIL, US CREDIT REPORT | 28 JUNE 2017 | LIQUIDITY

LIQUIDITY (USD m) COMPS, USD m Cash 7 NTM NTM Enterprise LTM NTM EBITDA LTM NTM Revenue Revolver Availability 226 Company EBITDA Revenue Value EBITDA EBITDA Multiple Revenue Revenue Multiple Total Liquidity at 29 April 2017 233 Multiple Multiple

Dillard's Inc 2,109 553 531 3.8x 4.0x 6,332 6,044 0.3x 0.3x 1 LIQUIDITY FORECAST TO FYE 2017 (USD m) JCPenney Company Inc 5,700 921 910 6.2x 6.3x 12,442 12,153 0.5x 0.5x Est. Liquidity at 29 April 2017 233 Kohl’s 10,357 2,326 2,217 4.5x 4.7x 18,557 18,478 0.6x 0.6x Est Adjusted EBITDA FY 2017 less 1Q17 Actual 130 Macy's Inc 12,364 2,764 2,781 4.5x 4.4x 25,345 24,558 0.5x 0.5x 2017P Remaining Cash Interest (54) Peer Average 4.7x 4.8x 0.5x 0.5x 2017 Remaining Net Capex (20) Total Est. Liquidity at FYE 2017 289 Bon-Ton Stores 1,044 100 10.5x 2,618 0.4x

1) The Liquidity Forecast uses management’s low-end guidance for fiscal 2017, adjusted for 1Q17 actual. The forecast represents expected results for the remainder of fiscal 2017.

FY 2017 FORECAST COMPARISON FY 2017 FORECAST COMPARISON (USDm)

 After a poor 1Q17 that saw same store sales decrease by 8.8% and adjusted EBITDA 2017 Original Management 2017 Revised Management Guid- FY 2016 Actual come in at negative USD 15.6m against positive USD 1.3m a year ago, management Guidance (Post-4Q) ance (Post-1Q) revised modestly downward aspects of its FY 2017 guidance. The company still main- tains its full-year adjusted EBITDA guidance in the range of USD 115m-USD 125m. Comp Store Sales -3.8% -2 to -3% -3 to -4% Given the poor start, it effectively means that to meet its minimum adjusted EBITDA Gross Merchandise Margin 35.5% Up 10bps-20bps Flat to up 10bps to 35.6% target, adjusted EBITDA in the last three quarters of the year will need to be USD 130m. By comparison, in the last three quarters of fiscal 2016, adjusted EBITDA totaled USD SG&A $ 881 854-856 845-847 115m. Effectively, in order to achieve that USD 115m for all of fiscal 2017, the company SG&A excludes $10m for 53rd week. will need to generate a 13% increase in the last three quarters year-over-year.

 The variance between the initial forecast for 2017 and its revision after 1Q17 is a At low end of range At low end of range slight reduction in expected same store sales, a lowering of margin expectations and, more importantly, a reduction in forecast SG&A. It appears that further diligence Merchandise Sales 2,600 2,522 2,496 on overhead reductions is the tool that management will use to stay on its adjusted Total Gross Profit 922 897 885 EBITDA plan, even while revising other aspects. Fiscal 2017 has a 53rd week, which may have some impact on the full-year comparison to 2016. It is unclear what that SG&A 881 854 845 extra week adds, but we believe the impact is about USD 45m of incremental revenue, CAPEX 55 30 30 which nets to incremental adjusted EBITDA of approximately USD 8m. From an expense level, management indicated the extra week adds USD 10m to SG&A. Adjusted EBITDA 116 115-125 115-125

Sources: SEC Filings, Press Releases, Debtwire Analytics. 43 44 BON-TON STORES, INC RETAIL, US CREDIT REPORT | 28 JUNE 2017 | HISTORICAL FINANCIALS - INCOME STATEMENT AND BALANCE SHEET

USD millions ANNUAL QUARTER Fiscal Period: FY14 FY15 FY16 LTM 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Period Ended: 1/31/15 1/30/16 1/28/17 4/29/17 5/3/14 8/2/14 11/1/14 1/31/15 5/3/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 10/29/16 1/28/17 4/29/17 Income Statement Net Merchandise Sales 2,756 2,718 2,600 2,545 607 563 643 943 611 555 623 928 591 542 590 877 536 Other Income 67 72 73 73 15 15 16 21 16 16 17 23 17 16 17 23 17 Net Revenue 2,823 2,790 2,673 2,618 622 578 659 963 627 571 641 951 608 558 607 900 553 Cost of Sales (1,773) (1,776) (1,678) (1,651) (393) (357) (409) (613) (404) (351) (415) (606) (391) (344) (383) (560) (364) Gross Profit (Merchandise) 983 942 922 894 214 206 233 329 206 205 208 323 200 198 207 317 172 Adjusted Gross Profit (GP + Other Income) 1,050 1,014 995 967 229 221 249 350 223 220 226 345 217 214 224 340 189 Selling, General and Administrative (907) (905) (881) (870) (222) (216) (221) (248) (219) (215) (220) (251) (216) (212) (214) (239) (205) + Other Adjustments 6 (3) 2 3 (1) (1) (1) 10 (1) (1) 0 (1) 1 1 1 0 1 Reported Adj. EBITDA 153 109 116 100 7 5 28 113 4 6 6 94 1 3 11 101 (15) LTM Adj. EBITDA 153 109 116 100 158 154 144 154 151 151 129 109 106 103 108 116 100 Interest Expense 62 63 66 69 15 15 16 15 15 15 16 17 15 15 18 18 18 LTM Interest Expense 62 63 66 69 65 63 62 62 62 61 62 63 63 63 65 66 69 Net Income (Loss) (7) (57) (64) (83) (32) (36) (11) 72 (34) (40) (34) 51 (38) (39) (32) 45 (57)

Current Assets Cash and Equivalents 9 7 7 7 8 8 7 9 9 21 22 7 8 8 7 7 7 Merchandise Inventories 735 712 724 714 712 723 971 735 738 738 994 712 712 694 946 724 714 Prepaid Expenses and Other Current Assets 93 97 99 83 73 72 79 93 78 80 83 97 72 75 79 99 83 Non-Current Assets PP&E, Net 642 635 585 571 629 633 637 642 642 642 644 635 623 614 606 585 571 Intangible Assets 90 82 73 72 101 94 92 90 89 87 85 82 81 79 78 73 72 Other Long-term Assets 23 17 17 22 44 43 44 23 40 36 38 17 17 16 18 17 22 Total Assets 1,592 1,550 1,505 1,469 1,567 1,573 1,830 1,592 1,596 1,604 1,865 1,550 1,513 1,486 1,734 1,505 1,469 Current Liabilities Accounts Payable 209 163 186 161 188 238 376 209 198 241 362 163 160 215 332 186 161 Accrued Liabilities 187 200 176 179 200 195 210 187 200 186 201 176 169 170 178 176 179 Gross Debt 907 907 989 1,034 903 910 1,029 907 955 978 1,139 988 996 949 1,112 989 1,034 Net Debt 898 900 982 1,027 895 902 1,022 898 947 957 1,117 981 988 941 1,105 982 1,027 Other Long-term Liabilities 202 189 177 174 180 170 166 202 189 183 181 189 189 190 181 177 174 Total Liabilities 1,505 1,459 1,528 1,547 1,471 1,513 1,781 1,505 1,542 1,588 1,883 1,516 1,514 1,524 1,803 1,528 1,547 Shareholders' Equity (Deficit) 88 89 (23) (78) 96 60 49 87 54 16 (18) 34 (1) (38) (69) (23) (78) Total Liability and Shareholders' Equity 1,593 1,547 1,505 1,469 1,567 1,573 1,830 1,592 1,596 1,604 1,865 1,550 1,513 1,486 1,734 1,505 1,469

Sources: SEC Filings, Press Releases, Debtwire Analytics BON-TON STORES, INC RETAIL, US CREDIT REPORT | 28 JUNE 2017 | CASH FLOW AND RATIO ANALYSIS

USD millions ANNUAL QUARTER Fiscal Period: FY14 FY15 FY16 LTM 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

Period Ended: 1/31/15 1/30/16 1/28/17 4/29/17 5/3/14 8/2/14 11/1/14 1/31/15 5/3/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 10/29/16 1/28/17 4/29/17

Cash Flow Statement Adjusted EBITDA 153 109 116 100 7 5 28 113 4 6 6 94 1 3 11 101 (15)

Capital Expenditures (91) (85) (55) (52) (15) (22) (26) (27) (24) (23) (23) (14) (13) (13) (18) (11) (10)

Interest Expense (62) (63) (66) (69) (15) (15) (16) (15) (15) (15) (16) (17) (15) (15) (18) (18) (18)

Free Cash Flow Levered 0 (39) (5) (21) (24) (33) (13) 71 (35) (32) (33) 63 (26) (26) (25) 72 (43)

Net Cash from Operating Activities 46 18 59 16 (16) 10 (102) 154 (18) 29 (152) 159 12 51 (145) 140 (31)

Net Cash from Investing Activities (85) 2 (55) (52) (10) (22) (26) (27) (24) 63 (22) (14) (13) (13) (18) (11) (10)

Net Cash from Financing Activities 41 (22) (5) 35 27 12 127 (126) 42 (79) 174 (159) 1 (39) 163 (130) 41

Net Change in Cash 2 (2) (0) (1) 1 (1) (0) 1 0 12 1 (15) 1 (1) (0) (0) 0

Cash at Beginning of the Period 7 9 7 8 7 8 9 9 10 10 21 23 7 8 7 7 7

Net Change in Cash 2 (2) (0) (1) 1 0 (0) 1 0 12 1 (15) 1 (1) (0) (0) 0

Cash at the End of the Period 9 7 7 7 8 9 9 10 10 21 23 7 8 7 7 7 7

Ratio Analysis Y/Y Total Revenue Growth -0.4% -1.2% -4.2% -2.1% -5.9% 1.3% -1.2% 3.1% 0.8% -1.2% -2.7% -1.3% -3.1% -2.3% -5.3% -5.3% -9.0%

Same Store Sales 0.2% -1.3% -3.8% -6.1% 1.6% -0.8% 4.3% -0.8% -1.3% -2.6% -1.9% -2.9% -2.0% -4.9% -4.7% -8.8%

Gross Margin Merchandise 35.7% 34.7% 35.5% 35.1% 35.2% 36.6% 36.3% 35.0% 33.8% 36.8% 33.4% 34.7% 33.8% 36.5% 35.1% 36.1% 32.1%

SG&A as % of Sales 32.9% 33.3% 33.9% 34.2% 36.6% 38.3% 34.4% 26.3% 35.8% 38.7% 35.3% 27.0% 36.5% 39.1% 36.3% 27.3% 38.2%

Adj. EBITDA Margin 5.4% 3.9% 4.3% 3.8% 1.1% 0.9% 4.3% 11.7% 0.7% 1.0% 0.9% 9.9% 0.2% 0.4% 1.8% 11.2% -2.7%

Net Income Margin -0.2% -2.0% -2.4% -3.2% -5.1% -6.3% -1.7% 7.4% -5.4% -6.9% -5.3% 5.3% -6.3% -7.0% -5.3% 5.0% -10.3%

Net Debt / LTM Adj. EBITDA 5.9x 8.3x 8.5x 10.3x 5.7x 5.8x 7.1x 5.8x 6.3x 6.3x 8.7x 9.0x 9.3x 9.1x 10.2x 8.5x 10.3x

Total Debt / LTM Adj. EBITDA 5.9x 8.3x 8.5x 10.4x 5.7x 5.9x 7.1x 5.9x 6.3x 6.5x 8.9x 9.1x 9.4x 9.2x 10.3x 8.5x 10.4x

Adj. EBITDA / LTM Interest Expense 2.5x 1.7x 1.8x 1.4x 2.4x 2.4x 2.3x 2.5x 2.4x 2.5x 2.1x 1.7x 1.7x 1.6x 1.7x 1.8x 1.4x

Sources: SEC Filings, Press Releases, Debtwire Analytics 45 46 BON-TON STORES, INC RETAIL, US CREDIT REPORT | 28 JUNE 2017 | ORGANIZATIONAL CHART AND WORKING CAPITAL

The Bon-Ton Stores, Inc.3

The Bon-Ton Department Stores, Inc. 1,2

The Bon-Ton Stores Non-guarantor subsidiaries 4 The Bon-Ton Gi co, LLC 3 Carson Pirie Sco II, Inc. 2,3 of Lancaster, Inc. 2 3 (No Longer active)

Bon-Ton Distribution, Inc. 2,3 McRIL, LLC 2 ,3

1 Issuer of 10.625% Second Lien Notes and 8% Second Lien Notes 2 Borrower under the First Lien Revolver 3 Guarantor of the Second Lien Notes 4 These entities are no longer active following the mortgage facility properties being rolled into the existing Issuer and Guar antor subs.. Source: on- on For S- le anuary

USD illions ANNUAL QUARTER Fiscal Period: FY14 FY15 FY16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Period Ended: 1/31/15 2/1/13 1/28/17 5/3/14 8/2/14 11/1/14 1/31/15 5/3/15 8/1/15 10/31/15 2/1/13 4/30/16 7/30/16 10/29/16 1/28/17 4/29/17 Net Merchandise Sales 2,756 2,718 2,600 607 563 643 943 611 555 623 928 591 542 590 877 536 Merchandise Inventories 735 712 724 712 723 971 735 738 738 994 712 712 694 946 724 714 Other Accounts Receivable 60 61 68 32 31 35 60 35 37 37 61 39 36 37 68 40 Prepaid and Other Current Assets 34 37 30 41 41 44 34 43 43 45 37 33 38 42 30 42 Accounts Payable 209 163 186 188 238 376 209 198 241 362 163 160 215 332 186 161 Accrued Liabilities 187 176 176 200 195 210 187 200 186 201 176 169 170 178 176 179 Ratio Analysis Inventory as % of Merchandise Sales 26.7% 26.2% 27.9% 117.3% 128.4% 151.0% 78.0% 120.8% 132.9% 159.5% 76.7% 120.5% 128.0% 160.3% 82.6% 133.2% Payable as % of Inventory 28.4% 22.9% 25.7% 26.4% 32.9% 38.7% 28.4% 26.8% 32.7% 36.4% 22.9% 22.4% 31.0% 35.1% 25.7% 22.5% Receivables as % of Sales 2.2% 2.2% 2.6% 5.3% 5.5% 5.5% 6.3% 5.8% 6.6% 6.0% 6.5% 6.6% 6.7% 6.3% 7.8% 7.5% Y/Y Change Merchandise Inventories 3.6% -3.2% -1.4% -2.7% 0.5% 6.1% 3.6% 3.7% 2.0% 2.5% -3.2% -3.5% -6.0% -4.9% 1.8% 0.2% Other Accounts Receivable 51.0% 1.3% 14.3% -16.6% 7.4% -22.4% 51.0% 9.9% 18.9% 6.0% 1.3% 11.3% -0.6% -0.1% 12.8% 3.1% Accounts Payable 4.2% -22.0% -11.0% 2.1% 1.2% 7.1% 4.2% 5.1% 1.3% -3.7% -22.0% -19.2% -10.9% -8.4% 14.2% 0.5% Total Merchandise Sales -0.5% -1.4% -5.7% -6.2% 1.1% -1.3% 3.0% 0.6% -1.4% -3.0% -1.5% -3.3% -2.4% -5.4% -5.5% -9.3% WC 432 470 461 397 362 464 432 418 391 514 470 456 384 515 461 457 WC Change 49 38 (9) 13 (34) 101 (31) (14) (28) 123 (44) (15) (72) 131 (54) (4) BON-TON STORES, INC RETAIL, US CREDIT REPORT | 28 JUNE 2017 | RECOVERY WATERFALL

The shading represents LTM Adjusted EBITDA at current peer group EV multiple.

EBITDA (USD m) Multiple $80 $95 $100 $115 $130 $145 4.0x 320 380 398 458 518 578 4.5x 360 428 448 515 583 650 5.0x 400 475 498 573 648 723 5.5x 440 523 547 630 712 795 6.0x 480 570 597 687 777 867 6.5x 520 618 647 744 842 939

First Lien Credit Facility $684 % Coverage for First Lien Lenders First Lien Credit Facilities 552 4.0x 47% 56% 58% 67% 76% 85% Capital Lease Obligations 139 4.5x 53% 63% 65% 75% 85% 95% Less: Cash (7) 5.0x 58% 69% 73% 84% 95% 106% 684 5.5x 64% 76% 80% 92% 104% 116% 6.0x 70% 83% 87% 100% 114% 127% 6.5x 76% 90% 95% 109% 123% 137%

Second Lien Debt $407 Residual Value for Second Lien Debt Holders Second Lien Notes 350 4.0x ------407 4.5x ------5.0x - - - - - 39 5.5x - - - - 28 111 6.0x - - - 3 93 183 6.5x - - - 60 158 255

% Coverage for Second Lien Debt Holders 4.0x ------4.5x ------5.0x - - - - - 9% 5.5x - - - - 7% 27% 6.0x - - - 1% 23% 45% 6.5x - - - 15% 39% 63%

Source: SEC reports, company documents and S&P CapIQ. 47 (2,3)

(3) 48 GNC HOLDINGS INC RETAIL, HEALTH FOOD ADDITIVES, US TEARSHEET | 13 JUNE 2017

PRO FORMA CAPITAL STRUCTURE (USD m) LIQUIDITY (USD m) - 4/10/2017 Face PF Face Est. Annual PF Lev PF Lev Instrument Coupon Maturity Adj. Price Market Yield Cash 28 31-Mar-17 10-Apr-17 Interest at Face at Market (1,3) Availability under First Lien Revolving USD 300m First Lien Revolving Credit Facility (USD 5.7m LCs) L + 2.25% 1-Sep-18 100 28 128 128 4 0.4x 0.4x 166 Credit Facility First Lien Term Loan Facility(2,3) L + 2.5% 4-Mar-19 1,171 (40) 1,131 90.9 1,028 10.0% 39 3.8x 3.5x Total Liquidity 195 Total Secured Debt 1,271 1,259 1,156 43 3.8x 3.5x Free Cash Flow for FY17 (1) 205 Covnertable Senior Secured Notes 1.5% 15-Aug-20 288 288 60.3 173 17.0% 4 4.7x 4.0x Current maturities of long-term debt (13) Total Debt 1,558 1,547 1,329 48 4.7x 4.0x Estimated total liquidity as of December (3) 387 Cash and Cash Equivalents 40 (12) 28 28 2017 Net Debt 1,519 1,519 1,301 4.6x 4.0x 1. Company-guided minimum FY17 free cash flow of 250m less 1Q17 actual free cash flow. Market Capitalization 506 506 $7.4/Share 506 USD Enterprise Value 2,025 2,025 1,807 RECENT DEBTWIRE COVERAGE

LTM Adjusted EBITDA 329 EV/LTM Adjusted EBITDA 6.1x 5.5x FY17 EBITDA(As per CapIQ consensus dated 25 May 2017) 266 EV/FY17 EBITDA 7.6x 6.8x Distressed Credit | Debtwire North America Source: Company reports and MarketAxess for bond prices Kaushal Mehta 1) Secured by a first priority lien on substantially all of the assets of centers. Analyst 2) Secured by a first priority lien on same assets securing the First Lien Revolving Facility. Libor is subject to a floor of 1%. [email protected] 3) On 10 April 2017, the company made the excess cash flow payment of USD 39.7m, in accordance with the consolidated net senior secured leverage ratio requirement. The company paid USD 28.2m from its First Lien Revolving Credit Facility and USD 11.5m from available cash. Sagar Joshi Manager NA Credit Research (Offshore) Click here for Excel model [email protected]

OVERVIEW GNC Holdings Inc (GNC), headquartered in Pittsburgh, is a specialty health, wellness, vitamin and body performance retailer. The company operates 8,983 stores globally. It has three business segments: US and Canada (86% of 1Q17 revenues), Manufacturing/Wholesale (8%) and International (6%).

u GNC’s stock fell 72% year-over-year to USD 7.4 as of 7 June, with the move towards online shopping, a non-competitive pricing model, an underperforming loyalty program and weak inventory management serving as the main drivers. Furthermore, the stock reacted negatively to the dietary supplement investigations at USP Labs, one of the company’s vendors. However, no action was taken against the company, and in December 2016, GNC entered into a non- prosecution agreement with US Department of Justice. As per the agreement, GNC will take steps to broaden industrywide knowledge of prohibited ingredients and improve the compliance of vendors of third-party products.

u To counter these challenges, the company fundamentally transformed its business model and launched “One New GNC” on 29 December 2016. Under this program, the company simplified competitive pricing, expanded the assortment of products available online and invested in online marketing campaigns. GNC also revamped its customer loyalty program with My GNC Rewards, which replaced its Gold Card program and has 5.4 million members (including 30% of old Gold Card members). The company also launched its PRO Access program in late-March, covering 100,000 members. With the implementation of these initiatives, customer traffic increased in 1Q17. During this same period, loyalty members visited company stores 1.5 times on average, while the number of transactions increased 9.3% YoY in the US, with the change in assortment to lower volume products serving as the driver.

u Despite the change in strategy and increase in customer traffic, GNC’s 1Q17 revenue slid 4% YoY to USD 645m, as the average amount per transaction in company-owned stores declined 12.1% in the US. Revenues under the US and Canada and the Manufacturing/Wholesale segments fell 4% YoY and 9% YoY, respectively. A 7% YoY increase in International segment sales (Refer to page 4 for segment details) partially offset the declines.

u The company’s gross margin declined roughly 220bps to 33% in 1Q17, mainly due to negative same store sales and lower retail product margin associated with One New GNC pricing impact. Higher Gold Card revenue (including deferred Gold Card revenue of USD 24.4m), as well as the favorable comparative effect of deep discounts on excess vitamin inventory nearing expiration partially offset the slip in gross margin. Consequently, adjusted EBITDA declined 33% YoY to USD 75m in 1Q17. Given the above challenges, EBITDA has consistently declined YoY for the past six quarters.

u Levered free cash flow fell 48% YoY to USD 45m in 1Q17, as a result of the decline in EBITDA and a 32% YoY increase in capex to USD 14m. For FY17, GNC expects a significantly lower capex of ~USD 34m versus USD 60m in FY16, on account of fewer new store openings and reduced IT spending. The company plans a disciplined approach to inventory and working capital management, as well as capital expenditures, with a goal to improve free cash flow. GNC has been generating positive free cash flow annually, albeit on a declining basis, with USD 204m in LTM 1Q17, USD 246m in FY16 and USD 387m in FY15.

u Looking ahead, GNC estimates a minimum free cash flow of USD 250m in FY17, which it will likely use for deleveraging. The company has also suspended quarterly dividend payments, as it intends to use those proceeds, along with free cash flow to repay USD 128m outstanding under the First Lien Revolving Credit Facility. The company anticipates a long-term adjusted leverage ratio of ~3x, as compared to the current net leverage of 4.6x.

u According to a Debtwire article dated 10 May, the First Lien Term Loan lenders rejected the amendment to extend the maturity by three years to 2022.

u Under the First Lien Revolving Facility, the company is required to maintain a maximum consolidated net senior secured leverage ratio of 4.25x. On 10 April, GNC made an excess cash flow payment (Refer to page 3 for excess cash flow details) of USD 39.7m, in accordance with the consolidated net senior secured leverage ratio requirement. The company paid USD 28.2m from its First Lien Revolving Credit Facility and USD 11.5m from available cash. Giving effect to the above transactions, GNC’s pro forma liquidity stood at USD 195m as of 10 April, comprising USD 28m cash and USD 166m available under the First Lien Revolving Credit Facility.

u GNC currently trades at an EV/1Q17 LTM-adjusted EBITDA of 6.1x and EV/FY17 expected EBITDA of 7.6x, as compared to its peer, Vitamin Shoppe, which trades at an EV/FY17 expected EBITDA of 3.8x. The company’s First Lien Term Loan last traded on 24 May at 90.9, yielding 10%, a fall of 9 points YoY. The Convertible Senior Secured Notes due 2020 last traded on 24 May at 60.3, yielding 17%, a decline of 23 points YoY. GNC HOLDINGS INC RETAIL, HEALTH FOOD ADDITIVES, US TEARSHEET | 13 JUNE 2017

FINANCIAL SNAPSHOT (1Q17) COMPANY INFORMATION COMPANY TIMELINE LTM Revenue: USD 2.52bn Ticker: GNC (NYSE) Last earnings release: 18-April-17 LTM Adjusted EBITDA: USD 329m Issuer rating: BB-/NR JPMorgan Chase PF Total Debt/LTM Adjusted EBITDA: 4.7x Administrative agent for Senior Credit Facility: Next earnings release: 28-July-17 (est.) Bank, N.A LTM Adjusted EBITDA/LTM Interest Expense: 5.3x Share price as on 7 June 2017: $7.4/Share Next significant maturity: 1-September-18 PF EV/LTM Adjusted EBITDA: 6.1x PF Market capitalization: USD 506m Next coupon due: 15-August-17 PF EV/LTM Revenue: 0.8x PF Enterprise value: USD 2.02bn

FINANCIAL SUMMARY (USD m) 2014 2015 2016 LTM 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Revenue 2,655 2,683 2,540 2,516 681 690 683 629 669 673 628 570 645 YoY % ∆ - 1.1% -5.3% -0.5% 0.6% 2.5% 1.8% -1.8% -2.4% -8.1% -9.4% -3.6% Cost of goods sold (1,675) (1,699) (1,680) (1,679) (432) (433) (433) (401) (433) (435) (413) (400) (432) Gross Profit 980 985 860 837 249 256 251 228 236 239 215 170 213 Gross Margin 36.9% 36.7% 33.9% 33.3% 36.6% 37.2% 36.7% 36.3% 35.3% 35.5% 34.3% 29.9% 33.0% Selling, general, and administrative (555) (567) (575) (593) (140) (140) (141) (146) (143) (139) (148) (145) (161) Gains on refranchising 10 8 19 18 0 1 1 5 1 17 0 1 0 Long-lived asset impairments 0 (28) (477) (477) 0 0 (28) 0 0 0 (3) (474) 0 Other income, net 4 (3) (0) 0 (0) 0 0 (3) 0 (0) 1 (1) 1 Operating Income (Loss) 440 393 (173) (213) 110 118 82 84 94 116 65 (448) 54 Depreciation and amortization expense 56 57 60 63 14 14 14 14 14 14 15 16 17 Amortization of debt costs 2 6 13 13 0 0 3 3 3 3 3 3 3 Stock-based compensation 6 6 9 9 1 2 2 2 1 2 4 2 1 Long-lived asset impairments 0 28 477 477 0 0 28 0 0 0 3 474 0 Gains on refranchising (10) (8) (19) (18) (0) (1) (1) (5) (1) (17) (0) (1) (0) Adjusted EBITDA 493 484 366 329 125 133 128 97 112 118 90 46 75 YoY % ∆ - -2.0% -24.3% -7.0% -2.8% 9.1% -6.8% 14.9% 5.9% -23.6% -49.1% 62.8% EBITDA Margin 18.6% 18.0% 14.4% 13.1% 18.4% 19.3% 18.8% 15.4% 16.7% 17.6% 14.4% 8.1% 11.6% Interest expense, net (47) (51) (60) (62) (12) (12) (14) (14) (14) (15) (15) (15) (16) CAPEX (70) (46) (60) (63) (8) (13) (10) (15) (11) (10) (15) (24) (14) Levered Free Cash Flow 376 387 246 204 106 109 104 68 87 93 60 6 45 Cash Flow Statement 2014 2015 2016 LTM 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Net Cash Provided by Operating Activities 304 355 208 112 117 67 91 80 142 (11) 39 38 46 Net Cash used in Investing Activities (75) (46) (22) (25) (7) (13) (11) (14) (10) (10) 13 (15) (13)

Net Cash used in Financing Activities (321) (384) (208) (108) (77) (121) (15) (172) (128) 9 (63) (25) (28)

Effect of Exchange Rate Changes on Cash and Cash Equivalents 0 (2) (0) (1) (0) (0) (1) (1) 1 (0) (0) (1) 0 Cash and Cash Equivalents, Beginning of Period 226 134 56 61 134 167 101 164 56 61 48 37 34 Net increase (decrease) in cash and cash equivalents (92) (77) (22) (21) 33 (66) 63 (108) 5 (13) (11) (3) 5 Cash and Cash Equivalents, End of Period 134 56 34 40 167 101 164 56 61 48 37 34 40 Total Debt 1,346 1,507 1,587 1,558 1,341 1,340 1,465 1,507 1,596 1,647 1,598 1,587 1,558 Net Debt 1,212 1,451 1,552 1,519 1,174 1,240 1,301 1,451 1,535 1,599 1,560 1,552 1,519 Net Debt/Adj. EBITDA 2.5x 3.0x 4.2x 4.6x ------49 50 GNC HOLDINGS INC RETAIL, HEALTH FOOD ADDITIVES, US TEARSHEET | 13 JUNE 2017

COMPS, USD m

2017E EBITDA LTM Revenue 2017E Revenue Company Enterprise Value LTM EBITDA 2017E EBITDA LTM EBITDA Multiple LTM Revenue 2017E Revenue Total Debt Total Leverage Net Debt Net Leverage Multiple Multiple Multiple

Vitamin Shoppe Inc 393 109 103 3.6x 3.8x 1,269 1,222 0.3x 0.3x 160 1.5x 120 1.1x

(1) GNC Holdings Inc 2,025 329 266 6.1x 7.6x 2,516 2,481 0.8x 0.8x 1,547 4.7x 1,519 4.6x

Source: Peer companies, S&P Capital IQ

1.Enterprise value, Total Debt and Net Debt are taken on a pro forma basis as of 10 April 2017.

NUMBER OF STORES 2014 2015 2016 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 U.S. and Canada Company-owned(1): Beginning of period balance 3,332 3,487 3,584 3,487 3,506 3,530 3,546 3,584 3,573 3,506 3,512 3,513 Store openings 183 115 69 21 26 17 51 8 22 16 23 19 Acquired franchise stores(2) 25 44 21 7 13 13 11 5 5 6 5 12 Franchise conversions(3) (25) (33) (102) (2) (5) (5) (21) (4) (86) (6) (6) (1) Store closings (28) (29) (59) (7) (10) (9) (3) (20) (8) (10) (21) (44) End of period balance 3,487 3,584 3,513 3,506 3,530 3,546 3,584 3,573 3,506 3,512 3,513 3,499 Domestic Franchise: Beginning of period balance 1,012 1,070 1,084 1,070 1,071 1,067 1,062 1,084 1,082 1,163 1,169 1,178 Store openings 70 32 33 8 5 5 14 4 9 8 12 6 Acquired franchise stores(2) (25) (44) (21) (7) (12) (14) (11) (5) (5) (6) (5) (12) Franchise conversions(3) 25 33 102 2 5 5 21 4 86 6 6 1 Store closings (12) (7) (20) (2) (2) (1) (2) (5) (9) (2) (4) (9) End of period balance 1,070 1,084 1,178 1,071 1,067 1,062 1,084 1,082 1,163 1,169 1,178 1,164 International(4): Beginning of period balance 2,034 2,150 2,095 2,150 2,132 2,103 2,115 2,095 2,069 2,075 1,991 1,973 Store openings 208 144 108 19 17 53 55 18 25 18 47 22 Store closings (92) (199) (230) (37) (46) (41) (75) (44) (19) (102) (65) (46) End of period balance 2,150 2,095 1,973 2,132 2,103 2,115 2,095 2,069 2,075 1,991 1,973 1,949 Store-within-a-store (Rite Aid): Beginning of period balance 2,215 2,269 2,327 2,269 2,277 2,304 2,319 2,327 2,340 2,343 2,347 2,358 Store openings 60 59 41 9 27 15 8 14 5 10 12 16 Store closings (6) (1) (10) (1) 0 0 0 (1) (2) (6) (1) (3) End of period balance 2,269 2,327 2,358 2,277 2,304 2,319 2,327 2,340 2,343 2,347 2,358 2,371 Total Stores 8,976 9,090 9,022 8,986 9,004 9,042 9,090 9,064 9,087 9,019 9,022 8,983 Source: SEC filings 1. Includes all stores in Canada. 2. Stores that were acquired from franchisees and subsequently converted into company-owned stores. 3. Company-owned store locations sold to franchisees. 4. Includes franchise locations in about 50 countries (including distribution centers where sales are made) and company-owned stores located in Ireland (The Health Store) and China.

EXCESS CASH FLOW REQUIREMENT Consolidated Net Senior Secured Leverage Ratio Excess Cash Flow Payments ≤ 2.75 to 1.00 0.0% ≤ 3.25 to 1.00 25.0% >3.25 50.0% GNC HOLDINGS INC RETAIL, HEALTH FOOD ADDITIVES, US TEARSHEET | 13 JUNE 2017

REVENUE AND OPERATING INCOME (USD m) 2014 2015 2016 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Revenue: U.S. and Canada 2,207 2,241 2,144 579 583 565 514 575 571 526 473 553 International 175 183 161 40 44 51 49 37 43 41 40 39 Manufacturing / Wholesale: Intersegment Revenues 291 267 219 66 73 68 61 63 57 53 46 61 Third-party 241 236 236 56 56 62 62 57 59 61 58 53 Subtotal Manufacturing / Wholesale 532 503 454 122 129 129 123 120 116 114 104 114

Total Reportable Segment Revenues 2,915 2,927 2,759 740 756 745 685 732 730 681 616 706 Other 32 24 0 7 7 6 4 0 0 0 0 0 Elimination of intersegment revenues (291) (267) (219) (66) (73) (68) (61) (63) (57) (53) (46) (61) Total Revenue 2,655 2,683 2,540 681 690 683 629 669 673 628 570 645 Operating (loss) Income: U.S. and Canada 382 378 (105) 101 106 94 78 86 105 65 (361) 50 International 60 64 55 16 16 16 16 13 14 15 14 15 Manufacturing / Wholesale 86 86 (20) 20 21 23 23 18 18 17 (74) 17 Total Reportable Segment Operating (Loss) Income 528 529 (70) 137 142 132 117 118 136 97 (421) 81 Unallocated Corporate and Other Costs (88) (136) (103) (27) (25) (50) (34) (24) (20) (32) (27) (28) Total Operating (Loss) Income 440 393 (173) 110 118 82 84 94 116 65 (448) 54 Source: SEC filings US COMPANY-OWNED SAME STORE SALES 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Total same store sales -4.1% -2.0% 0.5% 1.4% -2.3% -3.9% -8.6% -11.3% -3.9% Drivers of same store sales: Number of transactions -5.4% -2.5% -0.8% 0.0% -4.1% -5.5% -6.6% -6.5% 9.3% Average transaction amount 1.4% 0.5% 1.3% 1.4% 1.8% 1.7% -2.2% -5.2% -12.1% Contribution to same store sales Domestic Retail same store sales -3.4% -2.7% 0.1% 0.8% -1.9% -3.4% -6.5% -6.6% -3.6% GNC.com contribution to same store sales -0.7% 0.7% 0.4% 0.6% -0.4% -0.5% -2.1% -4.7% -0.3% Total Same Store Sales -4.1% -2.0% 0.5% 1.4% -2.3% -3.9% -8.6% -11.3% -3.9% Source: SEC filings 51 52 NEIMAN MARCUS GROUP RETAIL, US CREDIT REPORT | 22 JUNE 2017

CAPITAL STRUCTURE

Market LTM Face LTM Market Capital Structure at 29 April 2017 Coupon Face Amount Price Yield Maturity Amount Leverage Leverage USD 900m ABL Libor+ 1.25-1.75% 435 100 435 2.7% 25 Oct 2018 1.0x 1.0x Senior Secured Term Loan L+ 3.25-4.00% 2,847 78 2,221 12.9% 25 Oct 2020 7.3x 5.9x 2028 Debentures 7.125% 123 73 90 11.5% 01 Jun 2028 7.5x 6.1x Secured Debt 3,405 2,745 Cash Pay Notes 8% 960 53 509 27.0% 15 Oct 2021 11.0x 7.9x PIK Toggle Notes 8.75%/9.5% 600 48 288 28.7% 15 Oct 2021 11.0x 7.9x Consolidated Debt 4,965 3,542 11.0x 7.9x Cash 54 54 Net Debt 4,911 3,488 10.9x 7.7x Enterprise Value 4,911 3,488 LTM Adjusted EBITDA to 3Q17 451

OVERVIEW Issuer Summary (USD  When Neiman Marcus (NMG) reported its second-quarter results on 14 March, the reports of it exploring strategic alternatives, which at the time were said to include Canada’s Hudson Bay Company, overshadowed those poor results. With YTD adjusted EBITDA having now declined 25.6% and same store sales at seven consecutive negative Country US quarters, it is unlikely any suitor can be found that will allay the concerns of creditors. As reported by Debtwire editorial, the company hired several legal and financial advisors with a range of possible transactions to bring in cash, such as monetizing owned real estate and selling overseas intellectual-property assets. As further reported by Debtwire, Sector Retail Neiman Marcus lenders have enlisted their own advisors as they anticipate that the company will launch a distressed exchange and/or pull off an asset transfer to preserve Total Assets 8.198 equity value. Investors are concerned Neiman could utilize its permitted investment basket to orchestrate transactions, which Neiman’s designation of its MyTheresa entity and other owned properties to unrestricted subsidiaries could enable. Total Debt 4,965  The business story has been ugly, and the trajectory of the decline has been getting worse. In fiscal 2016, the year that ended last July, adjusted EBITDA decreased by 17.7% year- over-year. Thus far in fiscal 2017, it has declined by 25.6%. Same store sales decreased during fiscal 2016 by 4.1%, yet YTD, the comps have decreased by 6.6%. At the current LTM Book Equity 809 adjusted EBITDA level of USD 451m, the company-secured debt is covered at par at a multiple of 7.7x, which is the approximate EV at current pricing levels for the capital structure. Fiscal Year-End 30-Jul But as reflected in our Page 6 recovery waterfall, further erosion in adjusted EBITDA, which we see as highly likely, will soon start to make a par recovery less likely. We also note that a peer group including Macy’s, JCPenney, Nordstrom and Dillard’s has an average EV multiple of 5x EBITDA. We think the likelihood of transactions to raise cash and reduce debt is propping up the valuation, but even that prospect comes in the face of earnings, which have yet to show signs of anything but a decline for close to two years. We think it’s important USD m FY15 FY16 LTM to note that in 3Q17, sales decreased by 5% and the gross margin decreased 220 basis points, yet inventory at Neiman Marcus rose by 2.5% YoY. Until the company can start reducing inventory at a rate that is greater than its decline in sales, it will be difficult to see how sales rebound and margins improve. If the company can start to achieve working capital Adj. EBITDA 711 585 451 reductions, that may provide cash to allow it to reduce borrowings under the ABL. At 3Q17, ABL borrowings were USD 435m with availability of USD 373m. But the company reported that as of 13 June, ABL borrowings had decreased to USD 295m, with a rise in revolver availability to USD 513m. At both 29 April and 13 June, the borrowing base was USD 810m. Cash Interest 266 269 272 Given that, it’s unlikely the debt reduction came from a reduction in inventory, as that would have negatively impacted the borrowing base. In a credit story that has been mostly negative, we are interested to see if the debt reduction subsequent to quarter-end was for a reason that can be viewed as positive. Capex 270 301 230

Levered FCF 175 15 (51) PREVIOUS DEBTWIRE EDITORIAL COVERAGE Neiman Marcus tacks on another advisor as strategic options extend to potential JV formation, IP sale 7 June 2017 Neiman Marcus lenders retain financial advisor for restructuring talks 3 May 2017 Neiman Marcus lenders bring restructuring counsel on board 19 April 2017 DISTRESSED CREDIT | DEBTWIRE NORTH AMERICA BUSINESS DESCRIPTION Philip Emma Neiman Marcus Group LTD LLC is a luxury fashion retailer with store and online operations conducted under several tradenames. The most prominent part of the business is the 44 full- line Neiman Marcus stores. In New York City, Neiman Marcus operates its two stores under the Bergdorf Goodman brand. The company also operates 41 Last Call outlet stores and the Senior Analyst Mytheresa.com luxury online business out of Germany. In September 2013, private equity firms TPG and Warburg Pincus sold Neiman Marcus to Ares Management and the Canada 646.378.3132 Pension Plan Investment Board for USD 6bn. Based on EBITDA (unadjusted) through July 2013, the purchase price multiple was approximately 9.5x. [email protected]

Timothy Hynes Head of North American Research [email protected]

Sources: SEC Filings, Press Releases, Debtwire Analytics NEIMAN MARCUS GROUP RETAIL, US CREDIT REPORT | 22 JUNE 2017 | FORECAST

ADJUSTED EBITDA ESTIMATE AND LIQUIDITY FORECAST Month Quarter Ends October January April July FY LIQUIDITY (USD m) FY 2014 193 192 194 119 698 Cash 54 Revolver Availability 513 FY 2015 194 206 203 108 711 Total Pro Forma Liquidity at 13 June 2017 567 FY 2016 164 183 173 65 585

FY 2017 123 127 137 LIQUIDITY 12-MONTH FORECAST Total Liquidity 567 $ Change '16/15 (30) (23) (30) (43) (126) Estimated FY17 Adjusted EBITDA 426 % Change '16/15 -15.5% -11.2% -14.8% -39.8% -17.7% LTM Capex (230) LTM Cash Interest (272) Amortization of Term Loan $ Change '17/'16 (41) (56) (36) (29) Total Estimated 12-Month Liquidity Forecast 462 % Change '17/16 -25.0% -30.6% -20.9% 2017E Adjusted EBITDA Scenarios LIQUIDITY: FY 2017 Scenario 1 -Actual through 3Q17, 4Q17 at Prior Year Decline At the end of 3Q17, Neiman Marcus had usage under its ABL consisting of USD 435m of borrowings, USD 2m of letters of credit and unused availability of Forecast Adjusted EBITDA 123 127 137 39 426 USD 373m. However, when the company reported 3Q17 results, it stated that LTM Adjusted EBITDA Roll-Forward 544 488 451 426 as of 13 June 2017 borrowings under the ABL had decreased to USD 295m and unused availability had increased to USD 513m. Based on that update, we YoY % Change per quarter -25.0% -30.6% -20.9% -39.8% -27.2% have created a revised 12-month liquidity forecast using a combination of our FYE17 adjusted EBITDA forecast and the run-rate LTM level of interest and Original DW Midpoint Forecast 119 137 160 capex. There are numerous variables that could alter the company’s liquidity in the coming months, so this is in reality a forecast that assumes no change, Actual Result Variance to DW Forecast 4 (10) (23) either good or bad, in the operating status quo. Leverage Ratio Impact Total Debt at 3Q17 4,965 Actual Leverage at 3Q17 11.0x Pro Forma Leverage at 3Q Debt 11.7x Real Estate Summary Locations Gross Sq Footage Owned - Collateral Term Loan 16 2,048,000 We have updated our forecast through the end of FY2017 following the release of 3Q17 results. If the company’s level of Owned - Mortgaged TL and 2028s 8 1,170,000 adjusted EBITDA decline matches last year’s fourth quarter, then we expect the company to finish fiscal 2017 with adjusted EBITDA of USD 426m. That level would represent a 27.2% YoY decline. YTD, adjusted EBITDA has decreased by USD 133m- Total Owned Stores 24 3,218,000 USD 387m, or by 25.6% from the prior-year level of USD 520m. There are several possibilities for how far the adjusted DCs, Support and Office Space 1,480,000 EBITDA level will fall in the fourth quarter, and we’d put the erosion at a level of 20.0%-39.8%. On a dollar basis, we see Total Owned Real Estate 4,698,000 4Q17 decreasing to somewhere between USD 39m and USD 52m when compared to last year’s USD 65m. Even if by some unlikely event the company reaches a plateau and stabilizes the level at USD 65m, its fiscal fourth quarter is always the smallest contributor to annual results, so we’d still be skeptical that it can begin to rebuild its adjusted EBITDA until we see Leased - Department Stores 20 2,721,000 sustained improvement in revenue trends, improvement in gross margin rates and percentage changes in its level of Leased - Last Call Stores and other 42 1,082,000 inventory that do not exceed the change in revenue. In our original forecasts from prior to holiday 2016, we used two Leased DC Support and Office Space 1,532,000 scenarios, effectively a “bad” one and a “worse” one. In the bad scenario, we had adjusted EBITDA YTD through 3Q17 at Total Leased Space 86 5,335,000 USD 449m, while in the worse scenario, we had USD 382m for the nine months. The fact that the actual level is only USD 5m above our worst-case scenario is telling in terms of how bad the year has been thus far. We don’t think the conditions are favorable for stemming the erosion, and at best, we hope to begin seeing signs that the business can stop eroding. Total Operated Real Estate 10,033,000

Sources: SEC Filings, Press Releases, Debtwire Analytics 53 54 NEIMAN MARCUS GROUP RETAIL, US CREDIT REPORT | 22 JUNE 2017 | HISTORICAL FINANCIALS - INCOME STATEMENT AND BALANCE SHEET

USD millions ANNUAL QUARTERLY Fiscal Period: FY14 FY15 FY16 LTM 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Period Ended: 8/2/14 8/1/15 7/30/16 4/29/17 11/1/14 1/31/15 5/2/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 10/29/16 1/28/17 4/29/17 Income Statement Net Revenue 4,839 5,095 4,949 4,714 1,186 1,522 1,220 1,167 1,165 1,487 1,169 1,128 1,079 1,396 1,111 Cost of Sales (3,248) (3,306) (3,323) (3,231) (728) (1,019) (755) (804) (736) (1,026) (743) (818) (700) (982) (731) Gross Profit 1,591 1,789 1,626 1,483 458 503 465 363 429 461 426 310 379 414 380 Selling, General and Administrative (1,101) (1,162) (1,118) (1,105) (286) (323) (286) (267) (285) (302) (275) (256) (276) (308) (265) Income from Credit Card Program 56 53 61 63 14 15 12 12 13 16 15 17 14 17 15 Depreciation and Amortization (309) (323) (338) (334) (93) (73) (78) (79) (85) (82) (87) (84) (85) (84) (81) Other Expenses (196) (39) (27) (26) (20) (3) (5) (11) (17) (8) 1 (3) (7) (5) (11) Impairment Charges 0 0 (466) (620) 0 0 0 0 0 0 0 (466) 0 (154) - Operating Earnings 41 318 (262) (539) 73 119 108 18 55 85 80 (482) 25 (120) 38 Reported Adj. EBITDA 698 711 585 451 194 206 203 108 164 183 173 65 123 127 136 LTM Adj. EBITDA 698 711 585 451 699 713 722 711 681 658 628 585 544 488 451 Interest Expense 270 290 285 288 73 72 73 72 72 71 73 69 72 74 73 LTM Interest Expense 270 290 285 288 306 300 291 290 289 288 288 285 285 288 288 Net Income (Loss) (147) 15 (406) (574) 0 28 20 (33) (10) 8 4 (408) (24) (117) (25)

Current Assets Restated Restated Cash and Equivalents 196 73 62 54 81 127 82 73 59 57 77 62 42 48 54 Merchandise Inventories 1,070 1,155 1,125 1,231 1,281 1,112 1,173 1,155 1,350 1,166 1,201 1,125 1,325 1,213 1,231 Prepaid Expenses and Other Current Assets 144 126 147 205 144 152 143 126 169 168 204 147 162 167 205 Non-Current Assets 1,410 1,354 1,334 1,490 1,506 1,391 1,398 1,354 1,578 1,391 1,482 1,334 1,529 1,428 1,490 PP&E, Net 1,390 1,478 1,588 1,601 1,409 1,425 1,440 1,478 1,504 1,533 1,548 1,588 1,607 1,601 1,601 Favorable Leases 1,095 1,040 985 944 1,082 1,068 1,054 1,040 1,027 1,013 999 985 972 957 944 Intangible Assets 4,707 4,831 4,332 4,136 4,908 4,880 4,839 4,831 4,815 4,797 4,792 4,332 4,321 4,147 4,136 Other Long-term Assets 160 17 17 27 155 147 140 17 135 132 124 17 36 23 27 Total Assets 8,762 8,720 8,256 8,198 9,060 8,911 8,871 8,720 9,059 8,866 8,945 8,256 8,465 8,156 8,198 Current Liabilities Accounts Payable 375 343 318 214 373 307 280 343 323 288 265 318 347 384 214 Accrued Liabilities 452 493 493 441 475 490 457 493 469 526 487 493 485 510 441 CPLTD 29 29 29 29 29 29 29 29 29 29 29 29 29 29 29 Non-Current Liabilities 856 865 840 684 877 826 766 865 821 843 781 840 861 923 684 Gross Debt 4,609 4,585 4,613 4,878 4,832 4,720 4,738 4,585 4,913 4,731 4,823 4,613 4,802 4,615 4,878 Net Debt 4,413 4,512 4,551 4,824 4,751 4,593 4,656 4,512 4,854 4,674 4,746 4,551 4,760 4,567 4,824 Other Long-term Liabilities 1,893 1,885 1,889 1,878 1,950 1,944 1,941 1,885 1,951 1,913 1,952 1,889 1,908 1,838 1,878 Total Liabilities 7,329 7,306 7,313 7,411 7,630 7,461 7,416 7,306 7,656 7,458 7,527 7,313 7,542 7,347 7,411 Shareholders' Equity 1,433 1,414 943 787 1,430 1,450 1,455 1,414 1,403 1,408 1,418 943 923 809 787 Total Liability and Shareholders' Equity 8,762 8,720 8,256 8,198 9,060 8,911 8,871 8,720 9,059 8,866 8,945 8,256 8,465 8,156 8,198 Sources: SEC Filings, Press Releases, Debtwire Analytics NEIMAN MARCUS GROUP RETAIL, US CREDIT REPORT | 22 JUNE 2017 | CASH FLOW AND RATIO ANALYSIS

USD millions ANNUAL QUARTERLY Fiscal Period: FY14 FY15 FY16 LTM 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Period Ended: 8/2/14 8/1/15 7/30/16 4/29/17 11/1/14 1/31/15 5/2/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 10/29/16 1/28/17 4/29/17

Cash Flow Statement Adjusted EBITDA 698 711 585 451 194 206 203 108 164 183 173 65 123 127 136

Capital Expenditures (174) (270) (301) (230) (56) (63) (64) (87) (75) (79) (78) (69) (65) (49) (47)

Total Interest Expense (270) (290) (285) (288) (73) (72) (73) (72) (72) (71) (73) (69) (72) (74) (73)

Add-Back for Non-Cash Interest (Est) 28 24 16 16 6 6 6 6 4 4 4 4 4 4 4

Free Cash Flow Levered 282 175 15 (51) 71 77 72 (45) 21 37 26 (69) (10) 8 20

Net Cash from Operating Activities 295 229 310 90 (99) 221 1 106 (142) 260 32 160 (132) 248 (186)

Net Cash from Investing Activities (3,527) (452) (302) (231) (238) (63) (63) (88) (75) (80) (78) (69) (65) (48) (49)

Net Cash from Financing Activities 3,292 100 (19) 120 222 (112) 18 (27) 203 (182) 66 (106) 177 (192) 241

Net Change in Cash 60 (123) (11) (21) (115) 46 (44) (9) (14) (2) 20 (15) (20) 6 6

Cash at Beginning of the Period 136 196 73 77 196 81 127 83 73 60 57 77 62 42 48

Net Change in Cash 60 (123) (11) (21) (115) 46 (44) (9) (14) (2) 20 (15) (20) 6 6

Cash at the End of the Period 196 73 62 54 81 127 83 73 60 57 77 62 42 48 54

Ratio Analysis Y/Y Total Revenue Growth 4.1% 5.3% -2.9% -4.7% 5.0% 6.2% 4.7% 4.9% -1.8% -2.3% -4.2% -3.3% -7.4% -6.1% -5.0%

Gross Margin Merchandise 32.9% 35.1% 32.9% 31.5% 38.6% 33.0% 38.1% 31.1% 36.8% 31.0% 36.4% 27.5% 35.1% 29.7% 34.2%

SG&A as % of Sales 22.8% 22.8% 22.6% 23.4% 24.1% 21.2% 23.4% 22.9% 24.5% 20.3% 23.5% 22.7% 25.6% 22.1% 23.9%

Adj. EBITDA Margin 14.4% 14.0% 11.8% 9.6% 16.4% 13.5% 16.6% 9.3% 14.1% 12.3% 14.8% 5.8% 11.4% 9.1% 12.2%

Net Income Margin -3.0% 0.3% -8.2% -12.2% 0.0% 1.8% 1.6% -2.8% -0.9% 0.5% 0.3% -36.2% -2.2% -8.4% -2.3%

Total Debt / LTM Adj. EBITDA 6.6x 6.4x 7.9x 10.8x 6.9x 6.6x 6.6x 6.4x 7.2x 7.2x 7.7x 7.9x 8.8x 9.5x 10.8x

Net Debt / LTM Adj. EBITDA 6.3x 6.3x 7.8x 10.7x 6.8x 6.4x 6.4x 6.3x 7.1x 7.1x 7.6x 7.8x 8.8x 9.4x 10.7x

Adj. EBITDA / LTM Interest Expense 2.6x 2.5x 2.1x 1.6x 2.3x 2.4x 2.5x 2.5x 2.4x 2.3x 2.2x 2.1x 1.9x 1.7x 1.6x

Sources: SEC Filings, Press Releases, Debtwire Analytics 55 56 NEIMAN MARCUS GROUP RETAIL, US CREDIT REPORT | 22 JUNE 2017 | WORKING CAPITAL AND PEER COMPS

WORKING CAPITAL AND PERFORMANCE METRICS USD millions Fiscal Period: FY14 FY15 FY16 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Period Ended: 8/2/14 8/1/15 7/30/16 11/1/14 1/31/15 5/2/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 10/29/16 1/28/17 4/29/17 Total Revenue 4,839 5,095 4,949 1,186 1,522 1,220 1,167 1,165 1,487 1,169 1,128 1,079 1,396 1,111 Merchandise Inventories 1,070 1,155 1,125 1,281 1,112 1,173 1,155 1,350 1,166 1,201 1,125 1,325 1,213 1,231 Prepaid and Other Current Assets 144 126 147 144 152 143 126 169 168 204 147 162 167 205 Accounts Payable 375 343 318 373 307 280 343 323 288 265 318 347 384 214 Accrued Liabilities 452 493 493 475 490 457 493 469 526 487 493 485 510 441 Ratio Analysis Inventory as % of Merchandise Sales 22.1% 22.7% 22.7% 108.0% 73.1% 96.1% 99.0% 115.9% 78.4% 102.7% 99.7% 122.8% 86.9% 110.8% Payable as % of Inventory 35.0% 29.7% 28.3% 29.1% 27.6% 23.9% 29.7% 23.9% 24.7% 22.1% 28.3% 26.2% 31.7% 17.4% Y/Y Change Merchandise Inventories 5.1% 7.9% -2.6% -0.5% 7.0% 11.4% 7.9% 5.4% 4.9% 2.4% -2.6% -1.9% 4.0% 2.5% Accounts Payable -2.8% -8.5% -7.3% 5.4% 5.1% 6.9% -8.5% -13.4% -6.2% -5.4% -7.3% 7.4% 33.3% -19.2% Availability ABL Usage 0 130 165 230 125 150 130 340 165 265 165 355 170 435 Borrowing Availability 720 645 645 580 685 660 680 470 645 545 645 455 638 373 ABL as % of Inventory 0.0% 11.3% 14.7% 18.0% 11.2% 12.8% 11.3% 25.2% 14.2% 22.1% 14.7% 26.8% 14.0% 35.3% WC Change 14 58 16 190 (110) 112 (134) 282 (207) 133 (192) 194 (169) 295 Performance Metrics Total Merchandise Sales % Change 4.1% 5.3% -2.9% 5.0% 6.2% 4.7% 4.9% -1.8% -2.3% -4.2% -3.3% -7.4% -6.1% -5.0% Same Store Sales % Change 5.4% 3.9% -4.1% 5.5% 5.6% 2.2% 1.9% -5.6% -2.4% -5.0% -4.1% -8.0% -6.8% -4.9%

Gross Profit Margin 32.9% 35.1% 32.9% 38.6% 33.0% 38.1% 31.1% 36.8% 31.0% 36.4% 27.5% 35.1% 29.7% 34.2% YoY Change In GPM 2.2% -2.3% -1.8% -2.0% -1.7% -3.6% -1.7% -1.3% -2.2% SG&A $/Gross Profit $ 69.2% 65.0% 68.8% 62.4% 64.2% 61.5% 73.6% 66.4% 65.5% 64.6% 82.6% 72.8% 74.4% 69.7%

Store Count Neiman Marcus/Bergdorf Full-line Stores 43 43 44 43 43 43 43 43 43 44 44 44 44 44 Last Call 38 43 42 41 42 42 43 43 42 42 42 42 41 41

PEER COMPS COMPS, USD m Enterprise NTM EBITDA NTM Revenue Company LTM EBITDA NTM EBITDA EBITDA Multiple LTM Revenue NTM Revenue Revenue Multiple Value Multiple Multiple Macy's Inc 12,099 2,764 2,781 4.4x 4.4x 25,345 24,558 0.5x 0.5x Nordstrom 9,741 1,698 1,638 5.7x 5.9x 14,862 15,096 0.7x 0.6x JCPenney Company Inc 5,594 921 970 6.1x 5.8x 12,442 12,153 0.4x 0.5x Dillard's Inc 2,000 553 531 3.6x 3.8x 6,332 6,044 0.3x 0.3x Peer Average 5.0x 5.0x 0.5x 0.5x Neiman Marcus Group 3,488 451 7.7x 4,714 0.7x Sources: SEC Filings, Press Releases, Debtwire Analytics NEIMAN MARCUS GROUP RETAIL, US CREDIT REPORT | 22 JUNE 2017 | VALUATION WATERFALL

EBITDA (USD m) Multiple $401 $426 $451 $476 $501 $526 5.5x 2,206 2,343 2,481 2,618 2,756 2,893 6.0x 2,406 2,556 2,706 2,856 3,006 3,156 6.5x 2,607 2,769 2,932 3,094 3,257 3,419 7.0x 2,807 2,982 3,157 3,332 3,507 3,682 7.5x 3,008 3,195 3,383 3,570 3,758 3,945 8.0x 3,208 3,408 3,608 3,808 4,008 4,208

Secured Debt $3,351 % Coverage for Secured Debt ABL 435 5.5x 66% 70% 74% 78% 82% 86% Term Loan 2,847 6.0x 72% 76% 81% 85% 90% 94% 2028 Debentures 123 6.5x 78% 83% 87% 92% 97% 102% Less: Cash (54) 7.0x 84% 89% 94% 99% 105% 110% 3,351 7.5x 90% 95% 101% 107% 112% 118% 8.0x 96% 102% 108% 114% 120% 126%

Unsecured Debt $1,560 Residual Value for Unsecured Debt Holders Cash Pay Notes 960 5.5x ------PIK Toggle 600 6.0x ------1,560 6.5x - - - - - 68 Total Net Debt 4,911 7.0x - - - - 156 331 7.5x - - 32 219 407 594 8.0x - 57 257 457 657 857

% Coverage for Unsecured Debt Holders 5.5x ------6.0x ------6.5x - - - - - 4% 7.0x - - - - 10% 21% 7.5x - - 2% 14% 26% 38% 8.0x - 4% 16% 29% 42% 55%

Sources: SEC Filings, Press Releases, Debtwire Analytics 57 58 J. CREW GROUP, INC RETAIL, US CREDIT REPORT | 30 JUNE 2017

CAPITAL STRUCTURE Face Pre Exchange Post Exchange Pro Forma at 29 April 2017 (USD m) Coupon Adj. Adj. Amount Price Yield Maturity Amount Leverage Leverage USD 350m ABL Facility Libor+ 1.50%/2.50% - - - - 17 Nov 2021 - - Term Loan Facility L+ 300bps 1,528 (120) 1,408 61 19.8% 05 Mar 2021 9.0x 8.3x New 13% Senior Secured Notes (1) 13% - 347 347 100 13.0% 15 Sep 2021 - 10.9x Cash 105 105 Net Debt 1,423 1,650 8.4x 9.7x Chinos Intermediate Holding A (PIK Toggle) 8.5% PIK 567 (567) - 51 52.3% 01 May 2019 Net Debt Including Chinos Note 1,990 1,650 11.7x 9.7x New Series A Non Convertible Preferred Stock 7% (5% cash 2% PIK) - 190 190 100 7.0% TEV 1,840 11.7x 10.8x LTM Adj. EBITDA to 1Q17 170

1) For pro forma presentation purposes for the new 13% Senior Secured Notes, we have included both the USD 250m resulting from the Chinos note exchange and the USD 97m portion that will result from a private placement with an ad hoc group of term loan holders in one line item.

OVERVIEW Issuer Summary (USD m) The month of June has been an active one for J. Crew, and once it completes the second quarter of its fiscal 2017 in late-July, it should be positioned with a revamped capital Country US structure. Longtime CEO Mickey Drexler announced his resignation from the company, and is to be replaced by industry veteran James Brett in July. The company announced its long-anticipated recapitalization plan on 12 June, which will reduce net debt, including the soon-to-be-eliminated Chinos PIK notes, by USD 340m. However, that plan was not Sector Retail without controversy, as certain holders of the Term Loan facility filed suit on 22 June over the transfer of the “J. Crew” trademark, outside of what it deemed as part of the Term Loan collateral, with a request for a temporary injunction thus far denied. Adding to the J. Crew-dominated news cycle was the release of first-quarter results, which was for the Total Assets 1,282 period that ended 29 April 2017. With the recapitalization plan and management changes, the company has taken steps to provide the time and possibly a fresh perspective, Net Debt 1,650 which it needs to stem several years of erosion in operations. Fiscal Year-End 28-Jan  Outwardly, J. Crew’s numbers continue to be bad and the obvious signs of the problem, with same store sales, gross margin rates and the adjusted EBITDA level all falling from a year ago. Comp store sales at the J. Crew brand declined 11% (although rising 10% at Madewell), the total gross profit margin rate decreased by 80 basis points and adjusted EBITDA dropped by 40%. If there is a positive to build on, it is that inventory decreased by 16.9% year-over-year, against a total sales decrease of 6.2%. With the reduction in USD m FY14 FY15 FY16 LTM inventory outpacing the level of decline in revenue, the company may have some opportunity to push up margins and stop the cycle of needing to take increased markdowns to clear inventory. In our forecast for 2017, we assume that at best, adjusted EBITDA plateaus at USD 170m. But even after the problematic performance of 1Q17, management Adj. EBITDA 256 204 188 170 reaffirmed its guidance of adjusted EBITDA for the year in the range of USD 190m-USD 210m. With a new CEO and the likely elimination of the 2019 bond maturity with the Interest 75 69 80 82 Chinos exchange transaction, there may be a lot of changes before year-end in operations that either validate the ability to regain lost ground on performance, or ratchet down future expectations with a new CEO not tied to missteps of the past. Even with its problems, J. Crew has liquidity of USD 300m available in an undrawn revolver and a Capex 128 104 80 69 free cash flow level that should remain positive, unless the 40% adjusted EBITDA drop turns out not to be an anomaly when future results are released. Levered FCF 53 31 28 19 PREVIOUS DEBTWIRE EDITORIAL COVERAGE COURT: J. Crew judge denies Eaton Vance motion for preliminary injunction blocking IP transfer 28-June-2017 DISTRESSED CREDIT | DEBTWIRE NORTH AMERICA J. Crew announces early tender results, extends deadline to 10 July 26-June-2017 Philip Emma J. Crew obtains consent for TL amendment 16-June-2017 Senior Analyst J. Crew crossholders buy more TLs, as bondholders and lenders draw battle lines 15-June-2017 646.378.3132 LEGAL ANALYSIS: J. Crew Group’s new exchange offer and proposed term loan amendments 15-June-2017 [email protected]

Timothy Hynes BUSINESS DESCRIPTION Head of North American Research J. Crew Group, Inc is a multi-channel retailer of women’s, men’s and children’s apparel, as well as shoes and accessories. As of 29 April 2017, the company operated 287 J. Crew [email protected] retail stores, 106 Madewell stores and 164 factory outlet stores. TPG Capital and Leonard Green & Partners acquired J. Crew in November of 2010 at a multiple estimated at 8.1x.

Sources: SEC Filings, Press Releases, Debtwire Analytics. J. CREW GROUP, INC RETAIL, US CREDIT REPORT | 30 JUNE 2017 | LIQUIDITY AND FORECAST

Liquidity and Adjusted EBITDA Estimate LIQUIDITY (USD m)  Despite a poor first quarter, which saw adjusted EBITDA decline by 40% to USD 27m from USD 45m, the company reaffirmed its full-year guidance for adjusted EBITDA in the range of USD 190m-USD 210m, which is expected to result from an anticipated Cash on Hand 105 USD 50m reduction in product costs and other supply chain initiatives. Revolver Excess Availability 300  While we are optimistic that the company has started to show progress by reducing inventory YoY by 16.9%, we are taking a wait-and-see approach to its ability to reach, at a minimum, a plateau where earnings stabilize. The company has ample liquidity, so even if it generates adjusted EBITDA FY17 that is well below its USD 190m minimum guidance, Total Liquidity at 29 April 2017 405 liquidity should still be more than sufficient to support the business.

LIQUIDITY FORECAST TO FYE 2017 (USD m) Store Count as of: FY11 FY12 FY13 FY14 FY15 FY16 1Q17 Liquidity at 29 April 2017 405 J. Crew 234 247 265 280 287 281 287 FY 17 DW Estimated Adjusted EBITDA 170

Less 1Q17 Actual Adjusted EBITDA (27) J. Crew Factory 96 106 121 139 161 181 164 Cash Interest Expense Estimate Next Three Quarters (83) Madewell 32 48 65 85 103 113 106 CAPEX Estimate Next 3 Quarters (24) Total Company Locations 362 401 451 504 551 575 557 Total Est. Liquidity to FYE 2017 at 3 January 2018 441

ADJUSTED EBITDA SCENARIOS USD m FYE Date 1Q 2Q 3Q 4Q FY FY 2014 31-Jan-15 66 67 81 42 256 FY 2015 30-Jan-16 44 42 74 44 204 FY 2016 28-Jan-17 45 38 53 52 188 FY 2017 3-Feb-18 27

$ Change '15/14 (22) (25) (7) 2 (52) $ Change '16/'15 1 (4) (21) 8 (16) $ Change '17/'16 (18)

% Change '16/15 2.3% -9.0% -28.4% 17.1% -7.9% Assumed $ Change FY 2017 (1Q Actual) (18) (5) (5) 10 (18) Assumed % Change FY 2017 YoY -40.0% -13.1% -9.4% 19.2% -9.6% 2017E DW Adjusted EBITDA Forecast (1Q Actual) FY 2017 Base Scenario - Modest Improvement after 1Q17 Forecast Adjusted EBITDA by Quarter 27 33 48 62 170 LTM Adjusted EBITDA Roll-Forward 170 165 160 170

Sources: SEC Filings, Press Releases, Debtwire Analytics. (* LP/PP = last period/prior period to reflect the working capital change from quarter to quarter.) 59 60 J. CREW GROUP, INC RETAIL, US CREDIT REPORT | 30 JUNE 2017 | WORKING CAPITAL SUMMARY AND EXCHANGE TERMS

WORKING CAPITAL SUMMARY USD millions ANNUAL QUARTER Fiscal Period: FY13 FY14 FY15 FY16 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Period Ended: 2/1/14 1/31/15 1/30/16 1/28/17 5/2/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 10/29/16 1/29/17 4/29/17 Sales 2,428 2,580 2,505 2,018 582 593 620 710 567 570 593 696 532 Merchandise inventories 354 368 372 315 410 413 483 372 391 392 446 315 325 Prepaid expenses and other current assets 71 80 66 59 89 89 96 66 69 67 77 59 77 Accounts Payable 237 244 248 194 256 276 299 248 236 251 255 194 214 Accrued Liabilities 173 164 170 190 160 158 179 170 172 154 189 190 203

Ratio Analysis Inventory as % of Sales 14.6% 14.3% 14.9% 15.6% 70.4% 69.6% 77.9% 52.4% 69.0% 68.8% 75.2% 45.3% 61.1% Payable as % of Inventory 66.9% 66.3% 66.7% 61.6% 62.4% 66.8% 61.9% 66.7% 60.4% 64.0% 57.2% 61.6% 65.8% Gross Profit Margin 41.4% 37.6% 35.7% 36.1% 37.2% 34.2% 38.5% 33.2% 36.2% 35.6% 38.1% 34.8% 35.3%

Working Capital Changes Merchandise inventories - Sequential 33.6% 4.0% 1.1% -15.3% 11.4% 0.7% 16.9% -23.0% 5.1% 0.3% 13.8% -29.4% 3.2% Accounts Payable - Sequential 68.1% 3.0% 1.6% -21.8% 4.9% 7.8% 8.3% -17.1% -4.8% 6.4% 1.6% -23.9% 10.3% Sales Change - Sequential 9.0% 6.3% -2.9% -19.4% -17.6% 1.9% 4.6% 14.5% -20.1% 0.5% 4.0% 17.4% -23.6% Sales Change - Y/Y 9.0% 6.3% -2.9% -3.2% -1.7% -5.4% -5.3% 0.6% -2.6% -3.9% -4.4% -2.0% -6.2% Merchandise Inventory - Y/Y 33.6% 4.0% 1.1% -15.3% 3.5% 4.6% 7.3% 1.1% -4.6% -5.1% -7.7% -15.3% -16.9% Working Capital, Net 15 40 20 (10) 83 68 101 20 52 54 79 (10) (14) WC Change LP/PP Increase/(Decrease) (14) 25 (20) (30) 43 (15) 33 (81) 32 2 25 (89) (4)

SUMMARY TERMS OF EXCHANGE OFFER AND NOTE PURCHASE AGREEMENT: The J. Crew Exchange Offer is intended to exchange any and all of the outstanding USD 566.5m aggregate principal amount of 7.75%/8.50% Senior PIK Toggle Notes due 1 May 2019 issued by Chinos Intermediate. In addition, the Company will enter into a transaction with an Ad Hoc group of term loan holders, whereby it will issue in a private placement USD 97m of 13% Senior Secured Notes to that group. For presentation purposes, on a pro forma basis we reflect both the USD 250m exchange component and the USD 97m private placement component as one USD 347m 13% note in our pro forma capital structure. The Chinos PIK Notes will be exchanged into: i. 13% Senior Secured Notes due 15 September 2021 in an aggregate principal amount of up to USD 250m; ii. shares of Parent's 7% non-convertible perpetual preferred stock, series A, no par value per share, with an aggregate initial liquidation preference of up to USD 190m and iii. shares of Parent's class A common stock, USD 0.00001 par value per share, representing up to approximately 15% of the common equity of Parent. Note Purchase Agreement and Concurrent Private Placement

J. Crew has entered into a Note Purchase Agreement dated 12 June 2017, with an Ad Hoc creditors group, whereby subject to certain conditions, the Ad Hoc group will purchase USD 97m of an additional series of 13% Senior Se- cured Notes due 15 September 2021 at a 3% discount. The Private Placement Notes and the guarantees thereof will be secured by (a) first-priority liens on (i) the Additional Transferred IP, (ii) IPCo's rights under the Additional IP License Agreement, (iii) the IP Group Pledge and (iv) the Other IP Group Assets; and (b) second-priority liens on (i) the Initial Transferred IP and (ii) IPCo's rights under the A&R IP License Agreement.

Sources: SEC Filings, Press Releases, Debtwire Analytics. J. CREW GROUP, INC RETAIL, US CREDIT REPORT | 30 JUNE 2017 | HISTORICAL FINANCIALS

USD millions Fiscal Period: FY13 FY14 FY15 FY16 LTM 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Period Ended: 2/1/14 1/31/15 1/30/16 1/28/17 4/29/17 5/2/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 10/29/16 1/29/17 4/29/17 Income Statement J Crew 2,213 2,295 2,146 2,018 1,965 509 506 527 604 481 477 488 572 428 Madewell 181 246 301 342 355 62 68 79 92 72 78 88 104 85 Other 34 39 58 66 71 11 19 14 14 14 15 17 20 19 Net Revenue 2,428 2,580 2,505 2,426 2,391 582 593 620 710 567 570 593 696 532 Cost of Sales 1,422 1,610 1,611 1,550 1,532 366 390 381 474 362 367 367 454 344 Gross Profit 1,006 970 895 876 859 217 203 239 236 205 203 226 242 188 Operating Expenses (756) (1,556) (2,215) (827) (970) (737) (200) (1,048) (230) (198) (196) (204) (229) (341) Operating Income (loss) 250 (586) (1,321) 49 (111) (521) 3 (809) 6 7 7 22 13 (153) Reported EBITDA 345 (475) (1,201) 169 7 (492) 32 (778) 37 36 36 50 47 (126) + Stock compensation, lease amortization 13 9 8 1 5 0 1 4 3 1 0 0 0 5 + Sponsor fees 10 12 11 10 9 3 3 2 3 3 2 2 3 2 + Impairment charges 2 710 1,386 8 147 533 6 846 1 5 0 1 0 146 Adj. EBITDA 370 256 204 188 170 44 42 74 44 45 38 53 52 27 LTM Adjusted EBITDA 370 256 204 188 170 234 209 202 204 205 202 181 188 170 Interest Expense 104 75 69 80 82 17 17 18 17 18 21 21 20 20 Net Income (Loss) 88 (658) (1,243) (23) (138) (462) (14) (760) (7) (8) (9) (8) 2 (123)

Ratio Analysis FY13 FY14 FY15 FY16 LTM 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 J Crew Y/Y Revenue Growth NA 3.7% -6.5% -6.0% -2.6% -5.2% -9.8% -8.5% -2.7% -5.5% -5.7% -7.4% -5.3% -11.0% Madewell Y/Y Revenue Growth NA 35.9% 22.4% 13.6% 3.8% 31.9% 21.4% 14.5% 24.3% 16.1% 14.7% 11.4% 13.0% 18.1% Other Y/Y Revenue Growth NA 14.7% 48.7% 13.8% 7.6% 37.5% 90.0% 40.0% 27.3% 27.3% -21.1% 21.4% 42.9% 35.7% Y/Y Total Revenue Growth 9.0% 6.3% -2.9% -3.2% -1.4% -1.7% -5.4% -5.3% 0.6% -2.6% -3.9% -4.4% -2.0% -6.2% Gross Margin 41.4% 37.6% 35.7% 36.1% 35.9% 37.2% 34.2% 38.5% 33.2% 36.2% 35.6% 38.1% 34.8% 35.3% Adj. EBITDA Margin 15.2% 9.9% 33.1% 7.7% 7.1% 7.6% 7.1% 11.9% 6.3% 7.9% 6.7% 8.9% 7.5% 5.1% YoY Change in Adj EBITDA $ 3.1% -30.8% -20.2% -8.0% -9.6% -33.3% -37.3% -8.6% 5.7% 2.3% -9.0% -28.4% 17.1% -40.0% LTM Adj. EBITDA Margin 15.2% 9.9% 8.2% 7.7% 7.1% 9.1% 8.2% 8.1% 8.2% 8.2% 8.2% 7.4% 7.8% 7.1% Net Income Margin 3.6% -25.5% -49.6% -0.9% -5.8% -79.4% -2.4% -122.6% -1.0% -1.4% -1.6% -1.3% 0.3% -23.1% Net Debt / LTM Adj. EBITDA 3.8x 5.6x 7.0x 7.3x 8.2x 6.2x 7.2x 7.5x 7.0x 7.1x 7.3x 8.2x 7.3x 8.2x Total Debt / LTM Adj. EBITDA 4.2x 6.1x 7.4x 8.0x 8.8x 6.5x 7.4x 7.7x 7.4x 7.4x 7.5x 8.4x 8.0x 8.8x Adj. EBITDA / Interest Expense 3.6x 3.4x 3.0x 2.4x 2.1x 3.3x 3.0x 2.9x 3.0x 2.9x 2.7x 2.3x 2.4x 2.1x

Sources: SEC Filings, Press Releases, Debtwire Analytics. 61 62 J. CREW GROUP, INC RETAIL, US CREDIT REPORT | 30 JUNE 2017 | HISTORICAL FINANCIALS

Balance Sheet FY13 FY14 FY15 FY16 LTM 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Current Assets Cash and equivalents 157 111 88 132 105 64 42 47 88 55 49 38 132 105 Merchandise inventories 354 368 372 315 325 410 413 483 372 391 392 446 315 325 Prepaid expenses and other current assets 71 80 66 59 77 89 89 96 66 69 67 77 59 77 Non-Current Assets PP&E, Net 375 404 398 362 344 397 397 403 398 388 377 371 362 344 Intangible assets 2,725 1,989 592 564 431 1,453 1,448 598 592 574 570 567 564 431 Total Assets 3,682 2,952 1,516 1,432 1,282 2,413 2,389 1,627 1,516 1,477 1,455 1,499 1,432 1,282 Current Liabilities CPTLD - - 16 16 16 16 10 20 16 16 16 16 16 16 Accounts Payable 237 244 248 194 214 256 276 299 248 236 251 255 194 214 Accrued Liabilities 173 164 170 190 203 160 158 179 170 172 154 189 190 203 Gross Debt 1,567 1,549 1,518 1,510 1,504 1,526 1,551 1,558 1,518 1,515 1,512 1,513 1,510 1,504 Net Debt 1,410 1,438 1,430 1,378 1,399 1,462 1,509 1,511 1,430 1,460 1,463 1,475 1,378 1,399 Total Liabilities 2,492 2,436 2,285 2,218 2,189 2,376 2,385 2,386 2,285 2,254 2,241 2,292 2,218 2,189 Shareholders' Equity (Deficit) 1,190 516 (769) (786) (907) 37 4 (759) (769) (777) (786) (793) (786) (907) Total Liabilities and Shareholders' Equity 3,682 2,952 1,516 1,432 1,282 2,413 2,389 1,627 1,516 1,477 1,455 1,499 1,432 1,282 Fiscal Period: FY13 FY14 FY15 FY16 LTM 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Cash Flow Net cash from operating activities 232 158 135 138 137 (5) 17 33 90 (10) 16 12 120 (11) Net cash from investing activities (131) (133) (105) (80) (69) (19) (27) (34) (25) (19) (18) (22) (21) (8) Net cash from financing activities (12) (71) (53) (13) (17) (23) (12) 6 (24) (4) (4) 0 (5) (8) Cash at Beginning of Period 68 157 111 88 54 111 64 42 47 88 55 49 39 132 Net Change in Cash 89 (46) (23) 44 51 (47) (22) 5 41 (33) (6) (10) 94 (27) Cash at End of Period 157 111 88 132 105 64 42 47 88 55 49 39 132 105 Adjusted EBITDA 370 256 204 188 170 44 42 74 44 45 38 53 52 27 Capital Expenditures (131) (128) (104) (80) (69) (18) (27) (33) (26) (19) (17) (23) (21) (8) Interest Expense (104) (75) (69) (80) (82) (17) (17) (18) (17) (18) (21) (21) (20) (20) Levered Free Cash 135 53 31 28 19 9 (2) 23 1 8 0 9 11 (1)

ANNUAL QUARTER Supplemental Information FY13 FY14 FY15 FY 16 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Same Store Sales Total Company 3.0% -1.0% -8.0% -7.0% -7.9% -11.4% -10.6% -4.0% -6.5% -8.0% -7.5% -5.0% -9.0% J. Crew 3.0% -2.0% -10.0% -8.0% -9.6% -13.4% -12.0% -5.0% -8.0% -9.0% -9.2% -7.0% -11.0% Madewell 9.0% 14.0% 8.0% 5.0% 11.6% 8.1% 1.0% 12.0% 5.9% 3.0% 4.1% 6.0% 10.0% Gross Profit Margin, Actual Margin Change -2.9% -2.9% -3.8% -1.9% -1.3% -3.4% -1.6% -1.2% -1.0% 1.4% -0.4% 1.5% -0.8%

Sources: SEC Filings, Press Releases, Debtwire Analytics.

J. CREW GROUP, INC RETAIL, US CREDIT REPORT | 30 JUNE 2017 | COMPS AND RECOVERY VALUE

PEER COMPS

COMPS, USD m Enterprise EBITDA NTM EBITDA Revenue NTM Revenue Company LTM EBITDA NTM EBITDA LTM Revenue NTM Revenue Value Multiple Multiple Multiple Multiple

Ascena Retail Group 1,722 581 527 3.0x 3.3x 6,804 6,339 0.3x 0.3x

Chico's FAS Inc 1,100 281 264 3.9x 4.2x 2,417 2,307 0.5x 0.5x

Express Inc 389 162 157 2.4x 2.5x 2,157 2,135 0.2x 0.2x

The Gap, Inc 8,629 2,051 1,897 4.2x 4.5x 15,518 15,571 0.6x 0.6x

Tailored Brands 2,040 342 342 6.0x 6.0x 3,333 3,250 0.6x 0.6x

Peer Average 3.9x 4.1x 0.4x 0.4x

J. Crew (Implied TEV ) 1,840 170 10.8x 2,391 0.8x

VALUATION AT PEER GROUP RANGE Adjusted EBITDA (USD m) Recovery Value Notes Multiple $160 $170 $180 $190 $200 $210  We have calculated the recovery value for the Term Loan and the New 13% Notes on a pari 2.5x 400 425 450 475 500 525 passu basis. The Term Loan Facility should have a priority claim on cash, but the transfer of the 3.0x 480 510 540 570 600 630 Intellectual Property Rights to newly created entities 3.5x 560 595 630 665 700 735 that secure and guarantee in various forms the 13% Notes will create a series of complex inter- 4.0x 640 680 720 760 800 840 relationships between the J. Crew operating entities and the newly created corporate entities, collec- 4.5x 720 765 810 855 900 945 tively IPCos, that will own the various tradenames 5.0x 800 850 900 950 1,000 1,050 and other intellectual property.  Among other security interests and guarantees, $ the 13% Notes will have a first-priority lien on the % Coverage for First Lien Lenders Secured Debt 1,650 rights of the IPCos under IP Licensing Agreements between the IPCos and the OpCos, rights which 2.5x 24% 26% 27% 29% 30% 32% ABL - include a per annum licensing fee of USD 42.5m. Term Loan Facility 1,408 3.0x 29% 31% 33% 35% 36% 38%  We think the structure of the corporate entities New 13% Notes 347 3.5x 34% 36% 38% 40% 42% 45% and the pledges and guarantees will create competing claims that will likely need to be sorted Less: Cash (105) 4.0x 39% 41% 44% 46% 48% 51% out by a Bankruptcy Court if the debt instruments try and realize on the value of their respective Total Net Debt 1,650 4.5x 44% 46% 49% 52% 55% 57% collateral. For that reason, we don’t think a recovery value can so easily be split within the first lien 5.0x 48% 52% 55% 58% 61% 64% level by coverage on each respective instrument.

Sources: SEC Filings, Press Releases, Debtwire Analytics. 63 64 99 CENTS ONLY STORES RETAIL, US CREDIT REPORT | 21 JUNE 2017

SUMMARY CAPITAL STRUCTURE (USD m) Face Amount Market As of 28 April 2017 Coupon Maturity Price Yield Leverage at Face Leverage at Market Outstanding Amount USD 165m ABL Facility Libor+ 3% 8-Apr-21 33 100 33 4.0% 0.6x 0.6x USD 625m First Lien Term Loan Facility L+ 3.5% 13-Jan-19 590 90 531 11.8% 11.8x 10.7x

Secured Debt 623 564 11.8x 10.7x Senior Notes 11% 15-Dec-19 250 85 213 19.0% 16.5x 14.7x Capital Leases 55 55 Consolidated Debt 928 832 17.5x 15.7x Cash and Cash Equivalent 2 - 2 Net Debt 926 829 17.5x 15.7x LTM Adjusted EBITDA 53

The company amended the ABL on 8 April 2016. As part of the amendment, the maturity date now has a springing feature, which would cause it to mature 90 days prior to the maturity of the term loan and the senior notes, unless those instruments have been repaid, refinanced or amended with a maturity date that is 180 days after April 2021.

OVERVIEW Issuer Summary (USD)  99 Cents Only Stores, under a new management group that joined in September 2015, has done a credible job in reversing a slide in revenue and profitability. It has Country US accomplished this while reducing inventory levels and shoring up vendor-provided financing, so that working capital improvements have been able to offset negative free cash flow. However, the company is still generating adjusted EBITDA that is well below the levels of several years ago, and it faces a maturity wall in 2019 that must be addressed by Sector Retail the latter part of calendar 2018. The company was able to reduce inventory levels for several consecutive quarters so that inventory at 1Q18, the period that ended 28 April Total Assets 1,542 2017, was USD 187m as compared to USD 302m at 1Q16 ended 1 May 2015. That reduction in inventory has enabled it to turn over every 43 days, as compared to every 78 days two years ago. There are a lot of positives in the credit story—but with leverage still at 17.5x and inventory reductions having likely run their course, the company has to Total Debt 920 see even stronger improvements in profitability and potentially look to additional asset monetization to maintain liquidity levels. Ticker NDN  For fiscal 1Q18, total sales rose year-over-year by 6.7%, on a 6.4% rise in same store sales. On a dollar basis, revenue increased to USD 547m from USD 513m a year earlier. The company saw improvement from a combination of customer traffic that was 4.2% higher and an average ticket that rose 2.5%. At the operating level, management believes its Book Equity 135 customers are responding favorably to the improved product mix, better in-store execution to maintaining relationships with vendors that have improved the quality of its produce. In Fiscal Year-End 27-Jan the early stages of its turnaround last year, the company got the benefit from an increase in the average ticket, but traffic counts were declining. The fact that it is now getting both is a very favorable sign, as it indicates that the company is gaining momentum with its customers. While the maturity wall and the continued negative FCF are impediments, at least USD m FY15 FY16 FY17 LTM operationally 99 Cents Only has given itself a chance for a turnaround. Revenue 1,927 2,004 2,062 2,096  On a valuation basis, the three most direct comps to 99 Cents Only are Dollar Tree, Dollar General and Big Lots. On an EV/EBITDA multiple, they trade at an average valuation of 8.1x. With 99 Cents Only valued at 15.7x market on an LTM adjusted EBITDA of USD 53m, it seems the EV at market is not supported by peer valuations. Certainly, there is Adj. EBITDA 144 39 50 53 an expectation built in that results will continue to improve at 99 Cents Only, bringing the valuation closer to its peers. However, on a multiple of revenue basis, its peers trade Interest 63 65 69 70 at an average valuation of 0.8x revenue whereas 99 Cents Only is valued at 0.4x. If there is an “intrinsic” value in 99 Cents Only, it may be that it has 283 of its 390 stores in California, a market in which competitors Dollar General and Dollar Tree have 185 stores and 679 stores, respectively. With its peers trading at an average EV/Revenue Capex 111 66 46 40 multiple of 0.8x, it may be worth noting that 99 Cents Only “covers” its debt at par at a valuation of approximately .45x revenue, which could imply 99 Cents Only Sales can be FCF (30) (92) (65) (57) acquired “cheaply” relative to how the market values its competitors’ revenue.

PREVIOUS DEBTWIRE EDITORIAL COVERAGE DISTRESSED CREDIT | DEBTWIRE NORTH AMERICA 99 Cents Only Stores reports 1Q18 net sales up 6.7% YoY to USD 547.5m 8-June-2017 Philip Emma 99 Cents Only Stores expected to shop variety of strategies to clear 2019 maturity wall 17-April-2017 Senior Analyst 646.378.3132 BUSINESS DESCRIPTION [email protected] 99 Cents Only Stores describes itself as an extreme value retailer of general merchandise and consumables. Ares Management, the Canada Pension Plan Investment Board and the Gold/Schiffer family acquired the company on 13 January 2012 for USD 1.6bn, or 8.9x adjusted EBITDA. According to Debtwire editorial content, Ares and Canada Pension Plan own more than half of Timothy Hynes the senior note issue. At 28 April 2017. the company operated 390 stores, 283 of which are in California. Head of North American Research [email protected]

Sources: SEC Filings, Press Releases, Debtwire Analytics 99 CENTS ONLY STORES RETAIL, US CREDIT REPORT | 21 JUNE 2017 | LIQUIDITY AND WORKING CAPITAL SUMMARY

Liquidity: Liquidity (USDm)  Although the company has been FCF negative, it has managed to maintain a liquidity cushion through a combination of asset sales Cash 2 and reductions in working capital. In the fiscal year that ended on 27 January 2017, the company had adjusted EBITDA of USD 50m, but interest expense of USD 69m and capex of USD 46m. As a result, the company had negative free cash flow of USD 65m, but was able to generate USD 54m in cash from working capital improvements and an additional USD 6.2m from asset sales. In the last two ABL Facility Availability 51 full fiscal years, negative free cash flow was a combined USD 157m. However, cash flow from working capital reductions and asset sales generated USD 165m during the same period. Even with the negative free cash flow, the company has been able to steadily Total Liquidity at 28 April 2017 53 reduce borrowings under the ABL.

Working Capital:

 At 1Q18, inventory levels were USD 187m, which was the first YoY rise in several quarters. The company was able to offset much of the loss of operating cash flow over the last several quarters by working down bloated inventory levels, thereby creating opportunities to improve profit margins and generate much-needed cash through the inventory reductions. But on the positive side, the improving business performance appears to be allowing the company to access high levels of vendor-provided financing. Although the company has made substantial progress over the last two years on reversing the decline in revenue and profitability, it is still not generating enough adjusted EBITDA to cover interest and capex, so the company will need to continue to be more efficient in its use of working capital flows to sustain the business, until it reaches a point at which adjusted EBITDA can once again cover interest and capex—if that is still possible.

WORKING CAPITAL ANALYSIS USD millions FY15 FY16 FY17 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 30-Jan-15 29-Jan-16 27-Jan-17 1-May-15 31-Jul-15 30-Oct-15 29-Jan-16 29-Apr-16 29-Jul-16 28-Oct-16 27-Jan-17 28-Apr-17 Sales 1,927 2,004 2,062 506 489 491 518 513 496 500 553 547 Merchandise inventories 296 197 176 302 275 266 197 167 175 188 176 187 Accounts receivable 2 2 4 2 2 0 2 2 2 3 4 3 Accounts Payable 156 79 87 146 86 99 79 74 104 88 87 111 Ratio Analysis Inventory as % of Sales 15.4% 9.8% 8.5% 59.7% 56.3% 54.1% 38.0% 32.6% 35.3% 37.6% 31.8% 34.2% Payable as % of Inventory 52.6% 40.1% 49.4% 48.3% 31.1% 37.2% 40.1% 44.3% 59.4% 46.8% 49.4% 59.4% Receivables as % of Sales 0.1% 0.1% 0.2% 0.4% 0.3% 0.0% 0.4% 0.4% 0.4% 0.6% 0.7% 0.5% Inventory Change YoY 43.5% -33.5% -10.7% 34.6% 9.3% -3.4% -33.5% -44.7% -36.4% -29.3% -10.7% 12.0% Payables Change YoY 119.4% -49.3 10.1% 89.6% -19.5% -10.5% -43.3% -49.3% 21.4% -11.1% 10.1% 50.0% Inventory Turnover 5.5x 5.5x 6.4x 4.7x 4.9x 5.3x 6.6x 8.0x 8.3x 7.8x 8.5x 8.5x Borrowing Base Metrics FCF Per Quarter before WC (30) (92) (82) (17) (29) (22) (24) (16) (21) (21) (7) (9)

Reported Availability 115 91 37 120 66 107 91 56 76 49 37 51 ABL Outstanding 57 48 39 53 107 76 48 40 21 42 39 33 Letters of Credit 2 2 32 2 2 2 2 11 15 32 32 32 Total Borrowing Base 174 141 108 175 175 185 141 107 112 123 108 116 Borrowing Base as % of Inv.+ A/R 58.4% 70.9% 60.0% 57.5% 63.2% 69.5% 70.9% 63.3% 63.3% 64.4% 60.0% 61.1% ABL+ LOCs as % of Inventory 19.9% 25.4% 40.3% 18.2% 39.6% 29.3% 25.4% 30.5% 20.6% 39.4% 40.3% 34.8% P/P Change - Sequential Merchandise inventories 44% -33% -11% 2% -9% -3% -26% -15% 5% 7% -6% 6% Accounts Payable 119% -49% 10% 5% -41% 16% -20% -6% 41% -15% -1% 28% Sales 5% 4% 3% -1% -3% 1% 5% -1% -3% 1% 11% -1% Sales YoY 4.7% 4.0% 2.9% 5.9% 6.6% 2.8% 1.1% 1.4% 1.5% 1.7% 6.7% 6.6% Sources: SEC Filings, Press Releases, Debtwire Analytics

65 66 99 CENTS ONLY STORES RETAIL, US CREDIT REPORT | 21 JUNE 2017 | HISTORICAL FINANCIAL SUMMARY

FINANCIAL SUMMARY USDm FY15 FY16 FY17 LTM to 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 YoY % ∆ Quarter End Date 30-Jan-15 29-Jan-16 27-Jan-17 28-Apr-17 1-May-15 31-Jul-15 30-Oct-15 29-Jan-16 29-Apr-16 29-Jul-16 28-Oct-16 27-Jan-17 28-Apr-17 Revenue 99 Cents Only Stores 1,882 1,961 2,023 2,059 495 477 481 508 502 487 490 544 538 7.2% Bargain Wholesale 45 43 39 37 11 11 11 10 11 9 10 9 9 -18.2% Revenue 1,927 2,004 2,062 2,096 506 489 491 518 513 496 500 553 547 6.6% Cost of Goods Sold (1,309) (1,442) (1,460) (1,481) (350) (353) (359) (380) (364) (355) (355) (386) (385) Gross Profit 618 562 602 615 156 136 132 138 149 141 145 167 162 8.7% Gross Margin 32.1% 28.0% 29.2% 29.3% 30.9% 27.8% 26.9% 26.7% 29.0% 28.4% 29.0% 30.2% 29.6% 0.6% SG&A (546) (614) (654) (650) (150) (155) (147) (162) (157) (159) (165) (173) (153) -2.5% Non-recurring Items (92) 0 0 (120) 28 Operating Income 72 (144) (52) (35) 6 (19) (135) 4 (8) (18) (20) (6) 9 - Operating Income margin 3.7% -7.2% -2.5% -1.7% 1.2% -3.8% -27.4% 0.8% -1.6% -3.6% -4.0% -1.1% 1.6% - D&A 56 68 71 71 16 17 17 18 17 18 18 18 17 - Stock-based compensation 3 2 2 5 1 1 0 0 0 1 1 0 3 - Executive related expenses 6 8 4 4 0 3 2 3 0 0 4 0 - Impairment charges 94 4 (14) 120 (26) 0 0 3 1 (18) Other (Net impact) 8 12 21 22 1 4 1 4 4 6 5 6 5 - Adjusted EBITDA 144 39 50 53 25 6 5 3 13 7 7 23 16 26.0% Adj, EBITDA margin 7.5% 2.0% 2.4% 2.5% 4.9% 1.2% 1.1% 0.6% 2.5% 1.4% 1.4% 4.2% 2.9% - Capex (111) (66) (46) (40) (26) (18) (11) (11) (13) (11) (11) (11) (7) 0.0% Interest Expense (63) (65) (69) (70) (16) (16) (17) (16) (16) (17) (17) (19) (18) - Levered Free Cash Flow (30) (92) (65) (57) (17) (29) (22) (24) (16) (21) (21) (7) (9) -

Net cash from operating activities 38 32 17 (5) 20 (43) 24 31 26 1 (19) 9 4 - Net cash from investing activities (111) (34) (38) (28) (24) (18) 9 (1) (13) (10) (11) (4) (3) - Net cash from financing activities 51 (7) 22 34 (6) 61 (33) (30) (12) 10 31 (6) (1) - Cash beginning of the period 35 12 2 2 12 2 2 2 2 2 2 2 2 - Net cash change (22) (9) 0 0 (10) (0) 1 0 0 0 0 0 0 - Cash end of the period 12 3 2 2 2 2 2 2 2 2 2 2 2 - LTM Adjusted EBITDA 144 39 50 53 123 92 71 39 27 28 30 50 53 Total Debt 908 917 949 920 903 955 957 917 911 920 951 949 920 - Debt/Adjusted EBITDA 6.3x 23.3x 19.1x 17.4x 7.4x 10.3x 13.6x 23.3x 33.4x 32.5x 31.9x 19.1x 17.4x - Adj EBITDA/Interest 2.3x 0.6x 0.7x 0.8x 1.9x 1.4x 1.1x 0.6x 0.4x 0.4x 0.5x 0.7x 0.8x -

Sources: SEC Filings, Press Releases, Debtwire Analytics

99 CENTS ONLY STORES RETAIL, US CREDIT REPORT | 21 JUNE 2017 | BALANCE SHEET/COMPS

BALANCE SHEET USDm FY16 FY17 LTM to 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Quarter End Date 29-Jan-16 27-Jan-17 28-Apr-17 1-May-15 31-Jul-15 30-Oct-15 29-Jan-16 29-Apr-16 29-Jul-16 28-Oct-16 27-Jan-17 28-Apr-17 Current Assets Cash and Equivalents 2 2 2 2 2 3 2 2 2 2 2 2 Accounts Receivable 2 4 3 2 2 2 2 2 1 3 4 3 Merchandise Inventories 197 176 185 302 275 266 197 167 176 188 176 185 Prepaid Expenses and Other Current Assets 25 19 28 84 63 51 25 20 23 18 19 28 Total Current Assets 225 201 218 390 342 321 225 191 203 212 201 218 PP&E, Net 543 508 486 584 570 555 543 540 531 522 508 486 Intangible and Other Assets 834 828 827 939 937 816 834 840 838 837 828 827 Other Current Assets 8 12 11 23 22 20 8 13 13 12 12 11 Total Assets 1,610 1,548 1,542 1,936 1,871 1,713 1,610 1,584 1,584 1,583 1,548 1,542 Current Liabilities Short-term Debt 8 37 7 8 9 8 8 8 36 36 37 7 Accounts Payable 79 87 112 146 86 99 79 75 105 88 87 112 Other Short-term Liabilities 147 159 167 146 134 145 147 153 149 167 159 167 Total Current Liabilities 234 283 286 300 229 253 234 235 290 291 283 286 Gross Debt 918 950 920 930 992 959 918 911 921 951 950 920 Net Debt 916 947 917 928 989 957 916 909 918 949 947 917 Net Debt/Adjusted EBITDA 23.4x 19.1x 17.3x 7.6x 10.7x 13.5x 23.4x 33.3x 32.5x 31.9x 19.1x 17.3x Other Long Term Liabilties 204 209 208 205 227 230 204 202 201 205 209 208 Total Liabilities 1,349 1,404 1,406 1,426 1,439 1,433 1,349 1,340 1,376 1,411 1,404 1,406 Shareholders' Equity (Deficit) 261 144 135 510 432 280 261 244 209 172 144 135 Total Liabilities and Shareholders' Equity 1,610 1,548 1,542 1,936 1,871 1,713 1,610 1,584 1,584 1,583 1,548 1,542 PEER COMPS COMPS, USD m NTM EBITDA NTM Revenue Company Enterprise Value LTM EBITDA NTM EBITDA EBITDA Multiple LTM Revenue NTM Revenue Revenue Multiple Multiple Multiple

Dollar Tree, Inc 21,456 2,301 2,664 9.3x 8.1x 20,920 22,448 1.0x 1.0x

Dollar General Corp 22,407 2,449 2,519 9.1x 8.9x 22,331 23,866 1.0x 0.9x

Big Lots Inc 2,121 368 415 5.8x 5.1x 5,184 5,284 0.4x 0.4x

Peer Average 8.1x 7.4x 0.8x 0.8x

99 Cents Only Stores - Implied EV 829 53 15.7x 2,096 0.4x

Sources: SEC Filings, Press Releases, Debtwire Analytics, S&P CapIQ

67 68 99 CENTS ONLY STORES RETAIL, US CREDIT REPORT | 21 JUNE 2017 | ORGANIZATIONAL CHART

CLAIRE ’S STORES, INC RETAIL, US CREDIT REPORT | 26 JUNE 2017

CAPITAL STRUCTURE Face Amount Leverage at Leverage at As of 29 April 2017 Coupon Price Market Amount Yield Maturity Outstanding Face Market Second Amended US Credit Facility, USD 75m L + 4.5% 59 100 59 4.5% 4-Feb-19 New USD 75m ABL L + 4.5% 0 100 0 5.5% 4-Feb-19 Claire's Stores T/L 30.9m USD 9.0% 31 100 31 9.0% 20-Sep-21 New USD 100.5m CLSIP LLC Senior Secured Term Loan 9.0% 100 100 100 9.0% 20-Sep-21 New USD 50m Claire's Gibraltar T/L effective 5 January 2017 15.0% 50 100 50 15.0% 31-Jan-19 9% Senior Secured First Lien Notes due 2019 9.0% 1,131 51 577 57.7% 15-Mar-19 6.125% Senior Secured First Lien Notes due 2020 (Thinly Traded) 6.125% 210 48 101 39.2% 15-Mar-20 Capital Leases NA 17 17 Total Secured First Lien Debt 1,598 935 8.3x 4.8x 8.875% Senior Secured Second Lien Notes due 2019 8.875% 222 14 31 189.7% 15-Mar-19 Total Secured Debt 1,820 966 9.4x 5.0x New USD 46.4m Claire's (Gibraltar) Term Loan 9.0% 46 100 46 9.0% 20-Sep-21 New Money USD 40m Claire's Gibraltar Credit Facility (Thin Pricing) L + 4.5% 40 100 40 5.8% 4-Feb-19 7.75% Senior Notes due 2020 7.75% 217 15 33 106.1% 1-Jun-20 Unamortized Debt Issuance Cost 82 82 Total Debt 2,205 1,166 11.4x 6.0x Cash 56 56 Net Debt 2,149 1,110 11.1x 5.8x LTM Adj EBITDA 193

OVERVIEW Issuer Summary (USD ) Claire’s continues to show some improvement in its performance, which has provided some operational breathing room. This, when combined with actions taken over the Country US last year to push off its debt maturities, does not make it a certainty that Claire’s will need an in-court restructuring in the near-future. However, the company is still early in its Sector Retail attempts to rebuild its revenue and profitability, and it has limited borrowing availability, so it cannot afford to stop making progress in its results, particularly with the average number of transactions per store. We think 2Q17 will provide increased visibility on the pace of progress and the potential for Claire’s to meet its challenges without needing to Total Assets 1,978 avail itself of the reorganization process. During the last two quarters, 4Q16 and 1Q17, adjusted EBITDA was a combined USD 119m, which compares favorably to the USD 118m generated for 4Q15 and 1Q16, and the USD 123m for 4Q14 and 1Q15. However, a year ago the drop in 2Q16 from 2Q15 was USD 23m, or a reduction of 37.9%. LTM Total Debt 2,188 adjusted EBITDA at 1Q17 was USD 193m compared to USD 217m for the LTM period ending 1Q16; effectively, all of that decline was the result of the USD 23m slip that Fiscal Year-End 28-Jan occurred in 2Q16. If the upcoming second-quarter results look like 2Q15, during which adjusted EBITDA was USD 60m, and not the USD 37m of a year ago, then the business has a chance to begin to generate positive free cash flow and create optimism that the improvements are sustainable. USD m FY15 FY16 LTM  In 1Q17, same store sales increased by 0.3% in North America, the first improvement in more than a year, and by 13% in Europe. In North America, the average transaction Adj. EBITDA 217 188 193 value increased 9.8%, but offset by an 8.7% decrease in the average transactions per store. In Europe, the average transaction value increased 20.8%, partially offset by a 3.4% decrease in the average transactions per store. The gross profit margin increased in both regions, which flowed through to a consolidated adjusted EBITDA margin that Interest 219 200 189 increased to 14% from 12.4% in 1Q16. The company attributes the transaction count decrease to a change in promotional strategy that favored margin retention over low- margin transactions that drive traffic, but not profits. While we continue to anticipate the benefits of carrying higher-quality merchandise in its margins, we think there is a Capex 28 16 15 finite level of gains that can made without increasing transaction counts. We hope to see progress on the traffic count metrics during the coming quarters. FCF (30) (28) (11)  Claire’s ended the quarter with cash of USD 26m and USD 12m of capacity under its revolver for total liquidity of USD 38m. With the refinancing transactions that took place over the last year, the company should begin to see the benefit of reductions to its level of cash interest, savings which it estimates at USD 24m per year. The company has DISTRESSED CREDIT | DEBTWIRE NORTH AMERICA also made some progress in reducing its inventory levels, benefitting working capital. If the company can make progress in 2Q17 on improving its adjusted EBITDA margin, then we may begin to see modestly positive free cash flow. However, with book leverage at 11.4x, Claire’s will need to get back to adjusted EBITDA levels well above USD Philip Emma 200m to give it enough cushion to keep making progress on reducing debt. Senior Analyst 646.378.3132 BUSINESS DESCRIPTION [email protected] Claire’s Stores, Inc is a specialty retailer of jewelry and accessories for young women, teens and tweens. As of 29 April 2017, the company operated 2,680 stores in 17 countries throughout North America and Europe. In addition, there are 603 Claire’s franchisee locations globally and 933 locations where stores are operated on concession. Apollo Timothy Hynes Management, LP acquired the company in May of 2007. The purchase price was USD 3.1bn, which reportedly approximated an EV multiple of 9.5x—the then-prevailing TTM EBITDA. Head of North America Research 212.574.7878 [email protected] Sources: SEC Filings, Press Releases, Debtwire Analytics 69

70 CLAIRE ’S STORES, INC RETAIL, US CREDIT REPORT | 26 JUNE 2017 | LIQUIDITY AND VALUATION

LIQUIDITY (USD m) RUN-RATE 12-MONTH LIQUIDITY FORECAST Cash 26 Liquidity 38 Adjusted EBITDA at LTM Level 193 US Revolver Availability 12 LTM Capital Expenditure (15) Europe Revolver Availability 0 PF Est. Cash Interest Expense (175) Total Liquidity at 29 April 2017 38 Total Est. Liquidity Forecast 41

COMPS, USD m

Enterprise NTM EBITDA Revenue NTM Revenue Company LTM EBITDA NTM EBITDA EBITDA Multiple LTM Revenue NTM Revenue Value Multiple Multiple Multiple

Bed Bath & Beyond 5,296 1,365 1,272 3.9x 4.2x 12,220 12,533 0.4x 0.4x

JCPenney 5,666 921 970 6.2x 5.8x 12,442 12,153 0.5x 0.5x

Tailored Brands 2,011 342 342 5.9x 5.9x 3,333 3,250 0.6x 0.6x

Ascena Retail Group 1,672 581 527 2.9x 3.2x 6,804 6,339 0.2x 0.3x

The Children's Place 1,508 195 239 7.7x 6.3x 1,802 1,835 0.8x 0.8x

Peer Average 5.3x 5.1x 0.5x 0.5x

Claire's Stores (Implied EV) 1,110 193 5.8x 1,311 0.8x

PREVIOUS DEBTWIRE EDITORIAL COVERAGE: Claire’s 1Q17 adjusted EBITDA up 13% YoY to USD 41.8m 7-Jun-2017 RESEARCH: Claire’s Stores, Inc 4Q16 Earnings—Analyst Snapshot 13-Apr-2017 Claire’s reports prelim 4Q16 adjusted EBITDA of USD 76.9m, down from 80.6m YoY 13-Apr-2017 Claire’s Gibraltar enters into USD 50m credit agreement with Angelo Gordon & Co 10-Jan-2017 LEGAL ANALYSIS: Claire’s exchange holdouts banking on avoiding near-term Chapter 11, could benefit from litigation upside 13-Oct-2016

Sources: SEC Filings, Press Releases, Debtwire Analytics. CLAIRE ’S STORES, INC RETAIL, US CREDIT REPORT | 26 JUNE 2017 | SEGMENT AND WORKING CAPITAL SUMMARY

SEGMENT INFORMATION ANNUAL QUARTER Segment Information FY14 FY15 FY16 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 USD Millions 31-Jan-15 30-Jan-16 28-Jan-17 2-May-15 1-Aug-15 31-Oct-15 30-Jan-16 30-Apr-16 30-Jul-16 29-Oct-16 28-Jan-17 29-Apr-17 Segment Information North America Sales 890 876 835 205 210 202 259 199 195 193 248 196 Same Store Sales -2.9% -0.1% -2.1% -1.9% 0.7% 0.1% -0.2% -0.8% -4.4% -1.0% -2.3% 0.3% Gross Profit Percentage 48.4% 48.7% 48.8% 47.3% 48.5% 46.4% 51.8% 49.9% 46.1% 46.3% 52.0% 50.9% Operating Profit 98 110 99 20 25 15 50 25 16 15 43 26 D&A 48 38 35 9 10 10 9 9 8 9 9 7 Segment EBITDA 146 148 134 29 35 25 60 34 24 24 52 33 EBITDA Margin 16.4% 16.9% 16.0% 14.0% 16.7% 12.1% 23.1% 17.1% 12.3% 12.2% 21.1% 16.8% Company-operated Stores 1,837 1,741 1,641 1,832 1,808 1,793 1,741 1,716 1,699 1,688 1,641 1,630

Europe Sales 604 525 476 114 137 130 144 100 122 119 135 103 Same Store Sales -1.2% -3.0% -5.2% -3.6% -5.2% -1.6% 0.7% -12.7% -7.8% -2.5% -1.3% 13.0% Gross Profit Percentage 49.0% 45.9% 46.4% 43.7% 48.5% 45.3% 45.7% 41.6% 46.3% 47.0% 49.5% 46.4% Operating Profit 57 32 21 0 14 7 11 (8) 9 6 14 3 D&A 26 22 21 5 6 6 6 5 5 5 6 4 Segment EBITDA 83 54 42 5 20 13 17 (3) 14 11 20 7 EBITDA Margin 13.7% 10.3% 8.8% 4.4% 14.2% 9.6% 11.8% -3.0% 11.5% 9.2% 14.8% 6.8% Company-operated Stores 1,161 1,126 1,069 1,151 1,146 1,133 1,126 1,115 1,102 1,081 1,069 1,050

WORKING CAPITAL SUMMARY USD millions ANNUAL QUARTER Fiscal Period: FY14 FY15 FY16E 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Period Ended: 31-Jan-15 30-Jan-16 28-Jan-17 2-May-15 1-Aug-15 31-Oct-15 30-Jan-16 30-Apr-16 30-Jul-16 29-Oct-16 28-Jan-17 29-Apr-17 Total Sales 1,494 1,404 1,311 320 348 333 403 299 317 312 383 299 Merchandise inventories 146 152 130 156 171 192 152 162 154 152 130 141 Prepaid expenses and other current assets 45 42 40 60 49 63 42 60 43 46 40 43 Accounts Payable 70 73 70 81 81 99 73 77 67 71 70 70 Other Short-term Liabilities 163 159 146 129 159 131 159 121 151 108 146 107 Ratio Analysis Inventory as % of Sales 9.8% 10.8% 9.9% 48.8% 49.1% 57.7% 37.7% 54.2% 48.6% 48.7% 33.9% 47.2% Payable as % of Inventory 47.9% 48.0% 53.8% 51.9% 47.4% 51.6% 48.0% 47.5% 43.5% 46.7% 53.8% 49.6% Working Capital Changes Merchandise Inventories - Sequential -18.4% 4.1% -14.5% 6.8% 9.6% 12.3% -20.8% 6.6% -4.9% -1.3% -14.5% 8.5% Accounts Payable - Sequential -16.7% 4.3% -4.1% 15.7% 0.0% 22.2% -26.3% 5.5% -13.0% 6.0% -1.4% 0.0% Sales Change - Sequential -1.3% -6.0% -6.6% -22.3% 8.7% -4.3% 21.0% -25.8% 6.0% -1.6% 22.8% -21.9% Sales Change - Y/Y -1.3% -6.0% -6.6% -9.3% -7.9% -5.1% -2.2% -6.6% -8.9% -6.3% -5.0% 0.0% Merchandise Inventory - Y/Y -18.4% 4.1% -14.5% -10.9% 0.0% 6.7% 4.1% 3.8% -9.9% -20.8% -14.5% -13.0% 71

72 CLAIRE ’S STORES, INC RETAIL, US CREDIT REPORT | 26 JUNE 2017 | HISTORICAL FINANCIALS—INCOME STATEMENT AND BALANCE SHEET

USD millions ANNUAL QUARTER Fiscal Period: FY14 FY15 FY16 LTM 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Period Ended: 31-Jan-15 30-Jan-16 28-Jan-17 29-Apr-17 31-Jan-15 2-May-15 1-Aug-15 31-Oct-15 30-Jan-16 30-Apr-16 30-Jul-16 29-Oct-16 28-Jan-17 29-Apr-17 Income Statement Consolidated Revenue 1,494 1,404 1,311 1,311 412 320 348 333 403 299 317 312 383 299 Cost of goods sold 767 734 683 676 207 173 179 180 202 158 171 167 187 151 Gross Profit 727 670 628 635 205 147 169 153 201 141 146 145 196 148 SG&A 506 473 458 460 128 113 116 118 126 108 112 113 125 110 Depreciation and amortization 74 61 55 53 16 15 16 15 15 14 14 14 14 11 Other 131 151 179 172 131 0 (2) (1) 154 5 (4) 138 40 (2) Operating Income (loss) 17 (15) (64) (50) (70) 19 39 21 (94) 14 24 (120) 17 29 EBITDA 230 206 176 185 80 36 54 37 79 31 38 35 72 40 Stock compensation and non-cash rent 6 4 2 2 1 (0) 4 (1) 1 0 0 1 1 0 Other items, net 13 8 10 6 4 2 2 3 1 6 (1) 1 4 2 Adjusted EBITDA 249 217 188 193 85 38 60 39 81 37 37 37 77 42 LTM Adj EBITDA 249 217 188 193 249 238 234 221 217 217 194 192 188 193 Interest Expense 217 219 200 189 54 54 55 55 55 55 55 47 43 44 Net Income (Loss) (212) (238) 54 86 (126) (35) (19) (36) (148) (39) (32) 150 (25) (7) Balance Sheet Current Assets Cash and equivalents 29 19 56 26 29 22 83 24 19 49 75 41 56 26 Merchandise inventories 146 152 130 141 146 156 171 192 152 162 154 152 130 141 Prepaid expenses and other current assets 45 42 40 43 45 60 49 63 42 60 43 46 40 43 Total current assets 220 213 226 210 220 238 303 279 213 271 272 239 226 210 PP&E, net 221 186 146 140 221 214 206 199 186 181 169 154 146 140 Goodwill and intangibles 1,937 1,770 1,588 1,587 1,937 1,935 1,930 1,928 1,770 1,774 1,771 1,630 1,588 1,587 Other assets 48 44 40 41 48 76 74 71 44 45 46 42 40 41 Total Assets 2,426 2,213 2,000 1,978 2,426 2,463 2,513 2,477 2,213 2,271 2,258 2,065 2,000 1,978 Current Liabilities Short-term debt 0 41 18 0 0 67 111 122 41 159 426 74 18 0 Accounts payable 70 73 70 70 70 81 81 99 73 77 67 71 70 70 Other short-term liabilities 163 159 146 107 163 129 159 131 159 121 151 108 146 107 Total Current Liabilities 233 273 234 177 233 277 351 352 273 357 644 253 234 177 Gross Debt + Cap Leases 2,363 2,409 2,157 2,188 2,363 2,460 2,503 2,513 2,409 2,528 2,536 2,229 2,157 2,188 Net Debt 2,334 2,390 2,101 2,162 2,334 2,438 2,420 2,489 2,390 2,479 2,461 2,189 2,101 2,162 Net Debt/Adjusted EBITDA 9.4x 11.0x 11.2x 11.2x Other LT liabilities 162 153 144 135 162 160 160 161 153 151 151 147 144 135 Total Liabilities 2,758 2,794 2,517 2,500 2,758 2,830 2,903 2,904 2,794 2,877 2,905 2,555 2,517 2,500 Shareholders' Equity (Deficit) (332) (581) (517) (522) (332) (367) (390) (427) (581) (606) (647) (490) (517) (522) Total Liabilities and Shareholders' Equity 2,426 2,213 2,000 1,978 2,426 2,463 2,513 2,477 2,213 2,271 2,258 2,065 2,000 1,978 Sources: SEC Filings, Press Releases, Debtwire Analytics. CLAIRE ’S STORES, INC RETAIL, US CREDIT REPORT | 26 JUNE 2017 | CASH FLOW AND RATIO ANALYSIS

Cash Flow Statement Net cash from operating activities 21 (21) 8 39 84 (69) 26 (60) 82 (87) 34 (31) 92 (56)

Net cash from investing activities (49) (26) (16) (15) (7) (6) (7) (7) (6) (4) (5) (3) (4) (3)

Net cash from financing activities + F/X impact (4) 39 45 (47) (78) 67 44 9 (81) 121 (3) (243) 170 29

Cash Beginning of the Period 58 29 19 49 28 29 22 83 24 19 49 75 41 56

Net cash change (29) (10) 37 (23) 1 (7) 61 (59) (5) 30 26 (35) 16 (30)

Cash at the End of the Period 29 19 56 26 29 22 83 24 19 49 75 41 56 26

Adjusted EBITDA 249 217 188 193 85 38 60 39 81 37 37 37 77 42

Capital expenditures (49) (28) (16) (15) (7) (6) (8) (8) (6) (4) (4) (4) (4) (3)

Interest expense (217) (219) (200) (189) (54) (54) (55) (55) (55) (55) (55) (47) (43) (44)

Free Cash Flow before Working Capital (17) (30) (28) (11) 24 (22) (3) (24) 20 (22) (22) (14) 30 (5)

Ratio Analysis Total Same Store Sales Change % -2.2% -1.2% -3.3% - -2.3% -2.5% -1.7% -0.6% -0.2% -5.1% -5.7% -1.6% -3.3% 96.7%

Domestic Same Store Change % -2.9% -0.1% -5.6% - -1.5% -1.9% 0.7% 0.1% -0.2% -0.8% -4.4% -1.0% -2.3% 0.3%

Europe Same Store Sales Change % -1.2% -3.0% -2.4% - -3.8% -3.6% -5.2% -1.6% 0.7% -12.7% -7.8% -2.5% -1.3% 13.0%

Total Sales Change YoY % -1.3% -6.0% -6.6% -6.6% -5.3% -9.3% -7.9% -5.1% -2.2% -6.6% -8.9% -6.3% -5.0% 0.0%

Gross Margin 48.7% 47.7% 47.9% 48.4% 49.8% 45.9% 48.6% 45.9% 49.9% 47.2% 46.1% 46.5% 51.2% 49.5%

EBITDA Margin 15.4% 14.7% 13.4% 14.1% 19.4% 11.3% 15.5% 11.1% 19.6% 10.4% 12.0% 11.1% 18.9% 13.4%

Adjusted EBITDA Margin 16.6% 15.5% 14.3% 14.7% 20.7% 11.8% 17.1% 11.7% 20.1% 12.4% 11.7% 11.7% 20.2% 14.0%

SG&A as % of Sales 33.9% 33.7% 34.9% 35.1% 31.1% 35.3% 33.3% 35.4% 31.3% 36.1% 35.3% 36.2% 32.6% 36.8%

Net Debt / Adj. EBITDA 9.4x 11.0x 11.2x 11.2x 9.4x 10.2x 10.4x 11.2x 11.0x 11.4x 12.7x 11.4x 11.2x 11.2x

Total Debt / Adj. EBITDA 9.5x 11.1x 11.5x 11.3x 9.5x 10.3x 10.7x 11.4x 11.1x 11.7x 13.1x 11.6x 11.5x 11.3x

Adj. EBITDA / Interest Expense 1.1x 1.0x 0.9x 1.0x

Sources: SEC Filings, Press Releases, Debtwire Analytics.

74 CLAIRE ’S STORES, INC RETAIL, US CREDIT REPORT | 26 JUNE 2017 | RECOVERY WATERFALL

Adjusted EBITDA x Multiple Less Bankruptcy Fee Expense (USD m) Multiple $163 $173 $183 $193 $203 $213 Assumed Bankruptcy Fees 50 5.5x 847 902 957 1,012 1,067 1,122 6.0x 928 988 1,048 1,108 1,168 1,228 6.5x 1,010 1,075 1,140 1,205 1,270 1,335 7.0x 1,091 1,161 1,231 1,301 1,371 1,441 7.5x 1,173 1,248 1,323 1,398 1,473 1,548 8.0x 1,254 1,334 1,414 1,494 1,574 1,654 First Lien Debt $ 1,624 % Coverage for First Lien Lenders Second Amended US Credit Facility, USD 75m 59 5.5x 52% 56% 59% 62% 66% 69% New USD 75m ABL - 6.0x 57% 61% 65% 68% 72% 76% Claire's Stores T/L 31 6.5x 62% 66% 70% 74% 78% 82% CSLIP Sr Secured T/L 100 7.0x 67% 71% 76% 80% 84% 89% New 2017 Gibraltar T/L 50 7.5x 72% 77% 81% 86% 91% 95% 9% Senior Secured First Lien notes due 2019 1,131 8.0x 77% 82% 87% 92% 97% 102% 6.125% Senior Secured 1st Lien note due 2019 210 $ 222 Residual Value for Second Lien Debt Holders Capital Leases+ Unallocated Discount 99 5.5x ------Less: Cash (56) 6.0x ------Subtotal 1,624 6.5x ------7.0x ------7.5x ------8.0x - - - - - 30 Second Lien Debt $ 222 % Coverage for Second Lien Debt Holders 8.875% Sr Secured Second Lien 222 5.5x ------6.0x ------6.5x ------7.0x ------7.5x ------8.0x - - - - - 14% $ 303 Residual Value for Unsecured Debt Holders

5.5x ------6.0x ------6.5x ------7.0x ------7.5x ------8.0x ------Unsecured Debt $ 303 % Coverage for Unsecured Debt Holders 7.75% Senior Notes due 2020 217 5.5x ------2016 Gibraltar T/L and New Credit Facility 86 6.0x ------Subtotal Unsecured Debt 303 6.5x ------7.0x ------Total Net Debt 2,149 7.5x ------8.0x ------

Sources: SEC Filings, Press Releases, Debtwire Analytics.

SEARS HOLDINGS CORPORATION RETAIL, US CREDIT REPORT | 20 JUNE 2017

CAPITAL STRUCTURE As of 29 April 2017 Coupon Face Amount Price Market Amount Yield Maturity USD 1.971B Asset Based Revolver L+ 3.5%-L+ 4.0% 536 100 - - 20 Jul 2020 Domestic Credit Facility Term Loan L+ 4.5% 729 100 729 6.2% 30 Jun 2018 8% 2016 Secured Loan Facility with affiliates of ESL. (Extended on 23 May 2017) 8% 400 100 400 8.0% 22 Jan 2018 2016 Term Loan L+ 7.5% 750 101 758 8.3% 20 Jul 2020 2017 Secured Loan (With ESL, effective 3 January 2017) 8% 485 100 485 8.0% 20 Jul 2020 Senior Secured Notes (Second Lien) 6.625% 303 94 285 11.0% 15 Oct 2018 Second Lien Term Loan (New 3Q16 with affiliates of ESL) L+ 7.5% 300 98 294 9.2% 20 Jul 2020 Capital Leases 105 105 Secured Debt 3,608 3,055 Senior Unsecured Notes (Carrying Value USD 428m) 8% 625 81 506 18.1% 15 Jun 2019 Other 48 48 Total Debt 4,281 3,610 Cash 236 236 Net Debt 4,045 3,374 Market Capitalization USD Price Per Share: 6.67 715 715 Enterprise Value 4,760 4,090 (1) Usage under the domestic credit facility includes USD 477m of letters of credit. Bank of America is the administrative agent on the domestic credit facility, with the exception of the ESL secured loan.

OVERVIEW Issuer Summary (USD )  Sears’ financial reports keep alluding to positives and to progress in its restructuring efforts. However, when looked at objectively, they offer little reason for optimism that the Country US business can make the dramatic strides it would need to change the status quo. We see the status quo as revenues and gross margin rates that continue to decline; adjusted EBITDA levels that remain negative each quarter, but show “improvement” because the level of loss is nominally lower and a targeted cost improvement of USD 1bn in 2017, Sector Retail which is barely keeping pace with the dollar decline in gross profit. The status quo has also included the ongoing sale of assets and funding that is supported by extensions of Total Assets 9,071 credit through loans and funding vehicles provided by its majority shareholder, ESL. During 1Q17, the company sold its iconic Craftsman tool brand to Black & Decker for a combination of USD 500m at closing, USD 250m in three years and a percent of sales going forward. Of the proceeds, USD 463m went towards debt reductions, with the Total Debt 4,281 application of the cash to reduce the Domestic Credit Facility Term Loan and the 2016 ESL-provided Term Loan. Subsequent to the end of 1Q17, the company extended the Ticker SHLD maturity of its 8% 2016 Secured Term Loan to January 2018 from July 2017, and reduced the amount due to USD 400m from USD 500m. But Sears’ capital structure, even with the ESL-provided loans, requires constant attention with maturities at various points, and all coming before July of 2020. Market Cap 715

 In most situations, the operating and balance sheet challenges that Sears faces would have ended in a restructuring long ago. But the company’s majority equity holder, ESL, Fiscal Year-End 28-Jan continues to fund the business, and in effect provides the bridge to asset sales that bring in cash. As stated by the company with the release of its fourth-quarter results, it formed a board of directors committee to market real estate properties with a target of USD 1bn in proceeds. While there are numerous reasons that strongly suggest Sears will USD m FY14 FY15 FY16 LTM end up filing for bankruptcy sooner rather than later, including the dire state of its operations, that isn’t a certainty because it has assets to raise cash, a controlling ownership Revenue 31,198 25,146 22,138 21,045 group that is willing to be creative in structuring transactions and access to funding. As long as ESL is supportive, we see the same familiar pattern continuing: The business loses substantial amounts of money, ESL provides it with secured debt, it sells assets and then reloads with more debt. At 1Q17, the company had USD 4.3bn of debt. The company Adj. EBITDA (736) (1,065) (1,096) (1,110) reduced its total assets by USD 4bn over the last two years, and absolute debt levels did drop for several quarters from a peak of USD 4.9bn at 3Q14. However, with the continued losses and need for funding, the debt reduction benefits have been short-lived. Interest 313 323 404 447

 In addition to the asset sales, the company continues to close stores, including 108 Kmart and 42 Sears locations as recently announced, 92 underperforming pharmacy Capex 270 211 142 124 operations within Kmart stores and 50 Sears Auto Center locations. However, despite all the changes, closures and asset sales, the company is no closer to narrowing the gap FCF (1,319) (1,599) (1,642) (1,681) between gross profit dollars and SG&A dollars than it was a year ago. On an LTM basis, at 1Q17 SG&A was 132% of gross profit; at 1Q16, it was 122%. PREVIOUS DEBTWIRE EDITORIAL COVERAGE DISTRESSED CREDIT | DEBTWIRE NORTH AMERICA Sears announces corporate layoffs; management taps counsel for balance sheet restructuring 22-March-2017 Sears management taps counsel for balance sheet restructuring 22-March-2017 Philip Emma Sears lenders organize—report 14-March-2017 Senior Analyst 646.378.3132 BUSINESS DESCRIPTION [email protected] Sears Holdings Corporation is a Hoffman Estates, Illinois-based retailer. Hedge fund manager Edward S. Lampert (ESL), who acts as the chairman and CEO of Sears, controls the company with a recently reported equity stake of 57.6% through various vehicles (In addition, ESL and related entities provide several credit vehicles and funding sources). The company operates in Timothy Hynes two principal segments: Kmart and Sears, with an emphasis on appliances, electronics and apparel at Sears, and on consumable products and grocery at Kmart. At 29 April 2017, the Head of North American Research company operated 651 Sears locations and 624 Kmart discount stores. At 1Q16, those figures were 726 and 896, respectively. [email protected]

Sources: SEC Filings, Press Releases, Debtwire Analytics 75

76 SEARS HOLDINGS CORPORATION RETAIL, US CREDIT REPORT | 20 JUNE 2017 | LIQUIDITY

LIQUIDITY (USD m) at 29 April 2017 LIQUIDITY COMPARISON (USD m) At 1Q17 At 1Q16 At 4Q16 Cash on Hand (Excluding Restricted Cash) 236 Cash on Hand 236 286 286 Availability on ABL 70 Availability on ABL 70 265 165 Availability on Short-Term Borrowing Basket 485 Total Primary Liquidity 791 Availability on Short-Term Borrowing Basket 485 114 250 Total Primary Liquidity 791 665 701 ADDITIONAL LIQUIDITY AND FUNDING SOURCES Equity in Inventory 2,923 3,691 2,911 Equity in Inventory 2,923 Total Liquidity with Inventory 3,714 Total Liquidity and Liquid Assets 3,714 4,356 3,612

Liquidity:

 The company continues to find ways to supplement its operations by a combination of asset sales and incremental debt facilities that are arranged and essentially funded by ESL. We continue to expect that in the coming year, with both having recently occurred. The one common factor between fiscal 2015 and fiscal 2016 is the need for additional sources of cash, as the company has had negative free cash flow of USD 1.6bn in both years. In 2015, the sale of real estate brought in much-needed cash, and in fiscal 2016 it was incremental debt facilities.

 The equity in inventory is a figure reported by the company, which it states is “turned into cash as inventory is sold.” We believe the figure approximates the residual value of inventory not used to support its borrowing base. While the company does not state it as such, we view it as an estimate of the inventory liquidation value. USD millions ANNUAL QUARTER Fiscal Period: FY14 FY15 FY16 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Period Ended: 1/31/15 1/30/16 1/28/17 5/2/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 10/29/16 1/28/17 4/29/17 Sales 31,198 25,146 22,138 5,882 6,211 5,750 7,303 5,394 5,663 5,029 6,052 4,301 Merchandise inventories 4,943 5,172 3,959 5,054 5,028 6,208 5,172 5,028 4,684 5,032 3,959 3,884 Accounts receivable 429 419 466 474 460 475 419 437 390 372 466 479 Prepaid expenses and other current assets 241 216 285 249 270 242 216 369 275 304 285 311 Accounts payable 1,621 1,574 1,048 1,685 1,704 2,295 1,574 1,337 1,345 1,556 1,048 961 Other short-term liabilities 3,765 2,996 3,043 3,087 3,705 3,466 2,996 2,811 2,894 2,962 3,043 2,715

Ratio Analysis Inventory as % of sales 15.8% 20.6% 17.9% 85.9% 81.0% 108.0% 70.8% 93.2% 82.7% 100.1% 65.4% 90.3% Payable as % of inventory 32.8% 30.4% 26.5% 33.3% 33.9% 37.0% 30.4% 26.6% 28.7% 30.9% 26.5% 24.7%

Working Capital Changes Merchandise Inventories - Sequential -29.7% 4.6% -23.5% 2.2% -0.5% 23.5% -16.7% -2.8% -6.8% 7.4% -21.3% -1.9% Accounts Payable - Sequential -35.1% -2.9% -33.4% 3.9% 1.1% 34.7% -31.4% -15.1% 0.6% 15.7% -32.6% -8.3% Sales Change - Sequential -13.8% -19.4% -12.0% -27.4% 5.6% -7.4% 27.0% -26.1% 5.0% -11.2% 20.3% -28.9% Sales Change - Y/Y -13.8% -19.4% -12.0% -25.3% -22.5% -20.2% -9.8% -8.3% -8.8% -12.5% -17.1% -20.3% Gross Margin 22.9% 23.1% 21.2% 25.8% 23.1% 21.9% 21.8% 21.8% 22.2% 19.1% 21.3% 21.6% Gross Margin Change, Actual -1.3% 0.2% -1.9% 2.6% 1.4% -0.3% -2.6% -4.0% -0.9% -2.8% -0.6% -0.2% Merchandise Inventory - Y/Y -29.7% 4.6% -23.5% -24.9% -21.2% -4.0% 4.6% -0.5% -6.8% -18.9% -23.5% -22.8% Working Capital, Net 227 1,237 619 1,005 349 1,164 1,237 1,686 1,110 1,190 619 998 WC Change LP/PP Increase/(Decrease) (924) 1,010 (618) 778 (656) 815 73 449 (576) 80 (571) 379

Sources: SEC Filings, Press Releases, Debtwire Analytics SEARS HOLDINGS CORPORATION RETAIL, US CREDIT REPORT | 20 JUNE 2017 | HISTORICAL FINANCIALS - INCOME STATEMENT AND BALANCE SHEET

USD millions ANNUAL QUARTERLY Fiscal Period: FY12 FY13 FY14 FY15 FY16 LTM to 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Period Ended: 2/2/13 2/1/14 1/31/15 1/30/16 1/28/17 4/29/17 5/2/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 10/29/16 1/28/17 4/29/17 Income Statement Sears domestic 20,977 19,198 17,036 14,958 13,488 13,041 3,526 3,752 3,503 4,177 3,255 3,442 3,141 3,650 2,808 Kmart 14,567 13,194 12,074 10,188 8,650 8,004 2,356 2,459 2,247 3,126 2,139 2,221 1,888 2,402 1,493 Discontinued segments 4,310 3,796 2,088 ------Consolidated Revenue 39,854 36,188 31,198 25,146 22,138 21,045 5,882 6,211 5,750 7,303 5,394 5,663 5,029 6,052 4,301 Cost of sales 29,340 27,433 24,049 19,336 17,452 16,606 4,364 4,776 4,488 5,708 4,217 4,403 4,067 4,765 3,371 Gross Profit 10,514 8,755 7,149 5,810 4,686 4,439 1,518 1,435 1,262 1,595 1,177 1,260 962 1,287 930 SG&A (10,660) (9,384) (8,220) (6,857) (6,109) (5,873) (1,681) (1,694) (1,630) (1,852) (1,503) (1,484) (1,543) (1,579) (1,267) D&A, impairment and extraordinary items (692) (298) (437) 47 (555) 126 (15) 358 (14) (282) (42) (45) (43) (425) 639 Operating Income (loss) (838) (927) (1,508) (1,000) (1,978) (1,308) (178) 99 (382) (539) (368) (269) (624) (717) 302 EBITDA (146) (629) (1,071) (1,047) (1,423) (1,434) (163) (259) (368) (257) (326) (224) (581) (292) (337) Closed store reserve 140 130 224 98 384 373 39 (2) (1) 62 87 (18) 113 202 76 Other items, net 200 (151) 111 (116) (57) (49) (74) (22) (21) 1 (14) (21) 21 (43) (6) DW Adj. EBITDA 194 (650) (736) (1,065) (1,096) (1,110) (198) (283) (390) (194) (253) (263) (447) (133) (267) DW Adj EBITDA LTM 194 (650) (736) (1,065) (1,096) (1,110) (701) (648) (707) (1,065) (1,120) (1,100) (1,157) (1,096) (1,110) Company addback pension expense 165 160 89 229 288 261 57 57 58 57 72 72 72 72 45 Company Reported Adjusted EBITDA 359 (490) (647) (836) (808) (849) (141) (226) (332) (137) (181) (191) (375) (61) (222) Company Adj EBITDA LTM (647) (836) (808) (849) (577) (490) (513) (836) (876) (841) (884) (808) (849) Interest expense 267 254 313 323 404 447 90 85 74 74 85 99 105 115 128 Net Income (Loss) (930) (1,365) (1,682) (1,129) (2,221) (1,506) (303) 208 (454) (580) (471) (395) (748) (607) 244 Balance Sheet FY12 FY13 FY14 FY15 FY16 LTM 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Current Assets Restated Restated Cash and equivalents 618 1,038 250 238 286 236 286 1,819 294 238 286 276 258 286 236 Restricted cash 28 28 Accounts receivable 635 553 429 419 466 479 474 460 475 419 437 390 372 466 479 Merchandise inventories 7,558 7,034 4,943 5,172 3,959 3,884 5,054 5,028 6,208 5,172 5,028 4,684 5,032 3,959 3,884 Prepaid expenses and other current assets 454 334 241 216 285 311 249 270 242 216 369 275 304 285 311 Total Current Assets 9,265 8,959 5,863 6,045 4,996 4,938 6,063 7,577 7,219 6,045 6,120 5,625 5,966 4,996 4,938 PP&E, net 6,053 5,394 4,449 2,631 2,240 2,130 4,351 2,732 2,668 2,631 2,520 2,465 2,392 2,240 2,130 Intangible and other assets 4,022 3,908 2,897 2,661 2,126 2,003 2,855 2,858 2,882 2,661 2,535 2,524 2,507 2,126 2,003 Total Assets 19,340 18,261 13,209 11,337 9,362 9,071 13,269 13,167 12,769 11,337 11,175 10,614 10,865 9,362 9,071 Current Liabilities Short-term debt 1,177 1,415 690 868 590 1,135 787 76 757 868 446 714 1,212 590 1,135 Accounts payable 2,761 2,496 1,621 1,574 1,048 961 1,685 1,704 2,295 1,574 1,337 1,345 1,556 1,048 961 Other short-term liabilities 4,476 4,274 3,765 2,996 3,043 2,715 3,087 3,705 3,466 2,996 2,811 2,894 2,962 3,043 2,715 Gross Debt 3,120 4,249 3,800 2,976 4,163 4,281 3,867 3,144 2,881 2,976 3,758 3,551 4,299 4,163 4,281 Net Debt 2,502 3,211 3,550 2,738 3,877 4,045 3,581 1,325 2,587 2,738 3,472 3,275 4,041 3,877 4,045 Pension liabilities 2,730 1,942 2,404 2,206 1,750 1,677 2,329 2,258 2,133 2,206 2,137 2,072 2,072 1,750 1,677 Total Liabilities 16,168 16,078 14,154 13,293 13,186 12,598 14,451 14,073 14,062 13,293 13,535 13,307 14,240 13,186 12,598 Shareholders' Equity (Deficit) 3,172 2,183 (945) (1,956) (3,824) (3,527) (1,182) (906) (1,293) (1,956) (2,360) (2,693) (3,375) (3,824) (3,527) Total Liabilities and Shareholders' Equity 19,340 18,261 13,209 11,337 9,362 9,071 13,269 13,167 12,769 11,337 11,175 10,614 10,865 9,362 9,071 Sources: SEC Filings, Press Releases, Debtwire Analytics 77

78 SEARS HOLDINGS CORPORATION RETAIL, US CREDIT REPORT | 20 JUNE 2017 | CASH FLOW AND RATIO ANALYSIS

USD millions Fiscal Period: FY12 FY13 FY14 FY15 FY16 LTM to 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Period Ended: 2/1/13 2/1/14 1/31/15 1/30/16 1/28/17 4/29/17 5/2/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 10/29/16 1/28/17 4/29/17 DW Adjusted EBITDA 194 (650) (736) (1,065) (1,096) (1,110) (198) (283) (390) (194) (253) (263) (447) (133) (267) Capital Expenditures (378) (329) (270) (211) (142) (124) (44) (42) (66) (59) (40) (35) (40) (27) (22) Interest Expense (267) (254) (313) (323) (404) (447) (90) (85) (74) (74) (85) (99) (105) (115) (128) Free Cash Flow before Working Capital (451) (1,233) (1,319) (1,599) (1,642) (1,681) (332) (410) (530) (327) (378) (397) (592) (275) (417) Cash Flow Statement Net cash from operating activities (303) (1,109) (1,387) (2,167) (1,381) (1,539) (535) (917) (602) (113) (722) 82 (768) 27 (880) Net cash from investing activities 191 664 327 2,519 244 989 64 2,384 108 (37) (2) 141 20 85 743 Net cash from financing activities (27) 902 285 (364) 1,185 528 507 176 (815) (232) 772 (233) 730 (84) 115

Cash beginning of the period 747 618 1,038 250 238 286 250 286 1,819 294 238 286 276 258 286 Net cash change (129) 420 (788) (12) 48 (22) 36 1,533 (1,525) (56) 48 (10) (18) 28 (22) Cash at the End of the Period 618 1,038 250 238 286 264 286 1,819 294 238 286 276 258 286 264 Ratio Analysis Sears Domestic Y/Y Revenue Growth NA -8.5% -11.3% -12.2% -9.8% -3.3% -17.7% -12.9% -9.9% -8.2% -7.7% -8.3% -10.3% -12.6% -13.7% Kmart Y/Y Revenue Growth NA -9.4% -8.5% -15.6% -15.1% -7.5% -18.7% -15.9% -17.0% -11.9% -9.2% -9.7% -16.0% -23.2% -30.2% Y/Y Total Revenue Growth NA -9.2% -13.8% -19.4% -12.0% -4.9% -25.3% -22.5% -20.2% -9.8% -8.3% -8.8% -12.5% -17.1% -20.3% Gross Margin 26.4% 24.2% 22.9% 23.1% 21.2% 21.1% 25.8% 23.1% 21.9% 21.8% 21.8% 22.2% 19.1% 21.3% 21.6% SG&A as % of Sales 26.7% 25.9% 26.3% 27.3% 27.6% 27.9% 28.6% 27.3% 28.3% 25.4% 27.9% 26.2% 30.7% 26.1% 29.5% Net Debt / Adj. EBITDA 12.9x ------Total Debt / Adj. EBITDA 16.1x ------Adj. EBITDA / Interest Expense 0.7x -2.6x -2.4x -3.3x -2.7x -2.5x PEER COMPS COMPS, USD m Enterprise LTM NTM NTM LTM NTM Revenue NTM Company EBITDA Multiple Value EBITDA EBITDA Estimate EBITDA Multiple Revenue Revenue Estimate Multiple Revenue Multiple

Kohl's Corp 10,334 2,326 2,217 4.4x 4.7x 18,557 18,478 0.6x 0.6x

JCPenney 5,808 921 970 6.3x 6.0x 12,442 12,154 0.5x 0.5x

Macy's 12,504 2,764 2,781 4.5x 4.5x 25,345 24,558 0.5x 0.5x

Peer Average 5.1x 5.0x 0.5x 0.5x

Sears 4,090 (1,110) (734) - - 21,045 - 0.2x -

Sources: SEC Filings, Press Releases, Debtwire Analytics, S&P CapIQ SEARS HOLDINGS CORPORATION RETAIL, US CREDIT REPORT | 20 JUNE 2017 | ORGANIZATIONAL CHART/DEBT LEVEL RECONCILIATION

Sears Holdings Corp

Sears, Roebuck and Co Kmart Holding Corp SRE Holding Corp

80% 20%

REMIC Structure * Sears Holdings Sears Reinsurance Company LTD *

Sears Brands Business

Sears Brands LLC *These are Bankruptcy Remote, Special Purpose Entities

KCD IP, LLC *

Source: Sears Reinsurance and Securitization Transactions presentation March 2014

INVOLVED PARTIES

Notable Equity Holders

Edward S. Lampert, Chairman/ESL/RBS 57.6%

Equity Fairholme Capital Management LLC 26.9%

Cumulative Ownership 84.5% 79

80 TOPS HOLDING II CORPORATION CONSUMER: RETAIL, US TEARSHEET | 29 JUNE 2017

CAPITAL STRUCTURE as of 22 April 2017 (USD m) Est. Lev. at Lev. at Instrument Coupon Maturity Face Price Market Yield Annual Face Market Interest USD 129.3m ABL Facility (1) L+ 1.25%-1.75% 30-Dec-21 86 - 86 2 0.7x 0.7x Senior Secured Notes (2) 8.00% 15-Jun-22 560 82.3 461 13.0% 45 5.2x 4.4x Capital Leases various 147 - 147 - 6.4x 5.6x Total Secured Debt 793 694 47 6.4x 5.6x Other Loans - - 5 - 5 - 6.4x 5.6x Senior Unsecured Notes (Holdco Notes) 8.75%/9.50% PIK 15-Jun-18 86 - 86 29.1% 7 7.1x 6.3x Total Debt 884 784 54 7.1x 6.3x Cash and cash equivalents 25 25 Net Debt 859 759 6.9x 6.1x LTM 1Q17 EBITDA 124 Source: SEC Filings, Company Press Releases, M arketAxess, Capital IQ 1) Secured by first lien on the company's receivables, deposit accounts and inventory. Click Here for the excel model. 2) Secured by a first lien on substantially all of the company’s assets.

OVERVIEW Tops Holding II Corporation is a Williamsville, NY-based retail supermarket chain that also operates pharmacies and fuel stations. As of 22 April, the company operated 172 supermarkets (165 leased and seven owned), including 171 under the Tops banner and one under the Orchard Fresh banner. TOTAL LIQUIDITY (USD m) - 04/22/2017 Tops segregates its revenue on the basis of product type, which includes: Non-perishables (57.3% of 1Q17 revenues), Perishables (29.8%), Pharmacy Cash and Cash Equivalents 25 (6.4%), Fuel (5.6%) and Others (0.9%). Availability under the credit facility 18 ‹ Operating in an already thin margin industry, the company’s margins continued to bear the brunt of headwinds arising from food deflation and cuts Est. Total PF Liquidity 43 in federal funding for Supplemental Nutrition Assistance Program. Higher promotional activities to increase sales also suppressed Tops’ margins. Current maturities of long-term debt and (12) ‹ Tops’ 1Q17 revenue grew 3.8% YoY to USD 741m, mainly on the back of promotional activities and incremental sales from stores acquired in August capital leases 2016. However, same-store sales declined 3.4% YoY, due to lower traffic and food cost deflation in certain categories. Total Liquidity less Current Maturities 31 Source: SEC Filings, Debtwire Analytics ‹ Despite the growth in revenue, gross margin plunged 80 bps YoY to 29.3% in 1Q17. The main cause was a rise in promotional activities, as well as a shift in product mix towards lower-margin fuel sales. Consequently, adjusted EBITDA plummeted 20% YoY to USD 31m in 1Q17, with the margin declining by 100 bps to 4.2%. For 2Q17, at the expense of margins the company plans to continue increased promotional activities to improve sales growth. ‹ Tops reported a cash burn of USD 3m in 1Q17 versus a levered FCF of USD 3m in 1Q16, mainly due to decline in EBITDA. Interest expense and capex Distressed Credit | Debtwire North America remained flat YoY at USD 25m and USD 9m, respectively, in 1Q17. Management reaffirmed its FY17 capex guidance of USD 20m-USD 25m, compared to Sagar Joshi USD 35m in FY16. The company has been consistently generating free cash flow on an annual basis, though at very low margins of ~ 0.5%, with USD 8m Manager NA Credit Research (Offshore) in LTM 1Q17, USD 15m in FY16 and USD 11m in FY15. [email protected] ‹ With a drop in EBITDA and increase in borrowings under the ABL facility, the company’s net leverage escalated to 6.9x at 1Q17-end from 6x at1Q16, which is materially higher than the peer average of 3.0x. ‹ Tops faces an upcoming maturity of its 8.75%/9.50% PIK senior unsecured notes due June 2018, with USD 86m outstanding as of 22 April. Given TOPS declining financial performance, high leverage and weak liquidity postilion, it is unlikely the notes will be refinanced through conventional methods. ‹ As of 22 April, Tops had a total liquidity of USD 43m, with USD 25 cash and USD 18m available under the credit facility. ‹ The company’s 8% senior secured notes due 2022 last traded on 20 June at 82.3, yielding 13.4%, a decline of six points YoY. TOPS HOLDING II CORPORATION CONSUMER: RETAIL, US TEARSHEET | 29 JUNE 2017

FINANCIAL SNAPSHOT (LTM 1Q17) COMPANY INFORMATION COMPANY TIMELINE TTM Revenue: USD 2 .48bn Headquarters: Will Last earnings release: 6-Jun-17 iamsville, NY TTM Adjusted EBITDA: USD 124m Next Total Debt/TTM Adj. EBITDA: 7.1x Issuer rating: B-/Caa1 earnings release(est): Mid Aug Adj. EBITDA/TTM Interest: 1.5x Administrative agent of ABL Facility: Bank of AmericaNext significant maturity: 15-Jun-18 Net Debt/TTM Adj. EBITDA: 6.9x

Net Debt/ TTM Revenue: 0.3x Net Debt: USD 859m Next coupon due: 15-Dec-17

FINANCIAL SUMMARY (USD m) 2014 2015 2016 LTM 1Q17 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Calendar Period 27-Dec 2-Jan 31-Dec 22-Apr 18-Apr 11-Jul 3-Oct 2-Jan 23-Apr 16-Jul 8-Oct 31-Dec 22-Apr Net sales 2,508 2,472 2,457 2,484 723 586 561 602 714 590 569 585 741 Cost of goods sold (1,752) (1,699) (1,686) (1,708) (494) (404) (386) (414) (487) (404) (389) (406) (509) Distribution costs (50) (45) (45) (48) (14) (12) (9) (10) (12) (10) (12) (12) (15) Gross profit 707 728 726 728 214 170 165 178 215 176 168 167 217 Gross profit margin 28.2% 29.5% 29.6% 117.2% 29.7% 29.0% 29.5% 29.6% 30.1% 29.8% 29.6% 28.5% 29.3% Wages, salaries and benefits (346) (361) (365) (373) (109) (83) (80) (88) (108) (85) (85) (88) (116) Selling and general expenses (125) (121) (120) (122) (38) (27) (27) (29) (37) (27) (28) (28) (38) Administrative expenses (69) (83) (83) (81) (23) (18) (18) (24) (25) (19) (22) (17) (24) Rent expense, net (26) (28) (30) (31) (8) (6) (6) (7) (9) (7) (7) (8) (10) Depreciation and amortization (59) (64) (64) (65) (19) (15) (15) (16) (20) (15) (15) (15) (20) Advertising (21) (23) (23) (23) (6) (6) (5) (6) (6) (6) (5) (6) (6) Impairment 0 (2) (2) (2) 0 0 0 (2) 0 (2) 0 0 0 Gains on sale of assets 0 11 0 0 11 0 0 0 0 0 0 0 0 Total Operating expenses (646) (670) (687) (697) (192) (154) (152) (172) (205) (159) (162) (161) (214) Operating Income (Loss) 61 58 39 31 22 16 14 6 10 16 6 6 3 Depreciation and amortization 69 76 77 77 22 17 18 19 24 18 18 18 23 Store acquisition and integration costs 0 0 3 3 0 0 0 0 0 0 2 1 0 LIFO inventory valuation adjustments 3 (0) (0) 0 0 0 0 (1) 0 (0) (0) (1) 1 Other adjustments 2 (2) 12 13 (9) 0 1 6 3 3 6 1 3 Adj. EBITDA 135 133 130 120 35 34 32 30 35 34 32 24 31 EBITDA Margin 5.4% 5.4% 5.3% 4.8% 4.9% 5.8% 5.8% 5.0% 4.8% 5.7% 5.6% 4.1% 4.2% Interest Expense (83) (84) (81) (81) (26) (19) (19) (21) (25) (19) (19) (19) (25) CAPEX (39) (38) (35) (34) (10) (12) (9) (7) (9) (10) (7) (10) (9) Levered Free Cash Flow 12 11 15 5 (0) 3 5 3 1 6 6 (4) (3) Cash Flow Statement 2014 2015 2016 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Net Cash from Operating Activities 38 55 32 22 31 13 10 1 10 11 8 4 (0) Net Cash from Investing Activities (39) (30) (52) (52) 1 (12) (9) (11) (8) (10) (24) (10) (9) Net Cash from Financing Activities (3) (15) 9 22 (26) 2 0 9 (5) (5) 19 (1) 8 Cash and Cash Equivalents, Beginning of Period 30 26 36 33 26 32 35 36 36 33 29 31 25 Net increase (decrease) in cash and cash equivalents (4) 9 (11) (9) 6 3 2 (1) (3) (4) 2 (6) (1) Cash and Cash Equivalents, End of Period 26 36 25 24 32 35 36 36 33 29 31 25 24 Total debt 816 848 884 884 792 816 820 848 837 835 854 884 884 Net debt 790 813 859 859 760 781 784 813 804 805 823 859 859 Net debt/Adj.EBITDA 5.9x 6.1x 6.6x 7.1x ------81 82 TOPS HOLDING II CORPORATION CONSUMER: RETAIL, US TEARSHEET | 29 JUNE 2017

Shareholders(1)

Tops MBO Corp (1)

Tops Holding II Corporation(4)

Tops Holding LLC(3)(4)

(3)(4) Tops Markets II Corporation Tops Markets LLC(2)(4)

Tops PT LLC(2) Tops Gift Card Company LLC

Source: Prospectus dated 7 January 2014, SEC Filings

1) In November 2013, Tops MBO Co purchased substantially all of the outstanding common stock of Tops Holding II from Morgan Stanley Private Equity and other stockholders. Tops MBO Co is owned and controlled by members of Tops’ management. 2) Borrowers under the ABL facility. 3) Issuers of Senior Secured Notes due 2022. 4) Issuers of Senior Unsecured Notes 2018. TOPS HOLDING II CORPORATION CONSUMER: RETAIL, US TEARSHEET | 29 JUNE 2017

PRODUCT-WISE REVENUE BREAKDOWN (USD m) 2014 2015 2016 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 27-Dec 2-Jan 31-Dec 18-Apr 11-Jul 3-Oct 2-Jan 23-Apr 16-Jul 8-Oct 31-Dec 22-Apr Non-perishables 1,416 1,413 1,416 413 325 322 353 413 331 330 341 425 Perishables 734 729 734 212 181 162 174 212 184 167 170 221 Fuel 132 158 132 46 41 38 32 36 35 31 31 47 Pharmacy 152 148 152 45 33 33 37 46 34 35 36 42 Other 24 23 24 7 5 5 7 7 5 5 6 7 Total Revenue 2,457 2,472 2,457 723 586 561 602 714 590 569 585 741

COMPS, USD m LTM EBITDA LTM Revenue Company Enterprise Value LTM EBITDA LTM Revenue Total Debt Total Leverage Multiple Multiple Ingles Markets Inc 1,549 231 6.7x 3,849 0.4x 877 3.8x SUPERVALU Inc 2,020 482 4.2x 12,480 0.2x 1,478 3.1x Peer Average 5.5x 0.3x 3.4x Tops Holdings II Corp (1) 859 124 6.9x 2,484 0.3x 884 7.1x 1) EBITDA and revenue multiples are calculated using net debt, as the company is private. Source: Debtwire Analytics, S&P Capital IQ 83 DEBTWIRE CONTACTS Reshmi Basu, Associate Editor, North America +1 646 378 3163, [email protected] Tim Hynes, Head of Research, North America +1 212-574-7879, [email protected] Andrew Ragsly, Managing Editor, North America +1 646 378 3111, [email protected] Jack M. Tracy II, Head of Legal Analysis, Americas +1 646 378 3177, [email protected] Aja Whitaker-Moore, Deputy Editor-in-Chief +1 646 412 5342, [email protected] Natasha Brooks, Head of Fixed Income Sales, Americas +1 212 686 5340, [email protected]

XTRACT RESEARCH CONTACTS Justin Smith, Managing Director +1 203 291 7724, [email protected] Richard Goldman, Director of Legal Operations, North America +1 646 412 5372, [email protected]

Images sourced from Shutterstock.

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