Clifton, NJ, December 16, 2005-- When Linens 'n Things Inc., accepted a $1.3 billion buyout offer from private equity investors last month, analysts wondered if the home furnishings retailer could meet the sales and earnings targets required to finance the deal.
Fortunately for the company, the holiday shopping season was only weeks away, and Linens 'n Things generally had posted upbeat fourth-quarter numbers.
But now there are signs that the holidays have not been very cheery for the retailer, according to analysts, who monitor stores closely during the vital November-December shopping season.
Black Friday, the traditionally busy shopping day after the Thanksgiving holiday, was "lackluster" for Linens, according to Deutsche Bank analyst Michael Baker. Only a small percentage of stores appeared to be busy, he added.
Last weekend was not busy either, said Wedbush Morgan Securities analyst Joan Storms, who rates the stock at "sell."
"We saw a significant pickup (in customer traffic) in most of the other stores we follow, while Linens 'n Things seemed not as busy as it had been," she said.
That leaves the company about two weeks to get holiday sales rolling -- a tough but not impossible task because U.S. consumers are increasingly waiting until the last minute to buy holiday gifts and cashing in gift cards after Christmas.
Storms noted that Linens has added more toys to its stores and is featuring the category prominently in its advertising, suggesting it is looking for more ways to lure customers. A recent advertising insert featured a guitar -- something not usually associated with a home decor store.
In announcing the takeover deal on Nov. 8, Linens said the buyer, Apollo Management LP, had received debt financing commitments from Bear Stearns and UBS Securities LLC .
The lenders are requiring Linens to post full-year earnings of at least $140 million before interest, taxes, depreciation and amortization, a financial measure known as EBITDA.
When the deal was announced, Deutsche Bank's Baker expected full-year EBITDA of just $133 million. The holiday sales trends to date have supported his belief that the company will miss the $140 million target.
The debt agreement also stipulates that fourth-quarter sales fall no more than 6 percent at stores open at least a year.
Comparable-store sales fell 10.2 percent in the third quarter and were down 8.4 percent for October.
Given the October results, "they have a big hurdle for November and December," Storms said.
Her recent store checks have turned up hefty inventory levels, which if not properly managed could lead to steeper markdowns, she added.
Sales and profits at Linens have slumped as it tries to fend off stiff competition from discounters like Target Corp. (TGT.N: Quote, Profile, Research) and rival specialty chains such as Bed Bath & Beyond Inc. (BBBY.O: Quote, Profile, Research) .
If Linens misses the financing target, Apollo may walk away from the deal or reduce its bid.
Apollo and Linens declined to comment.
The current offer of $28 a share is about 9.6 times Linens' trailing EBITDA, a multiple roughly in line with where its competitors trade. The stock closed at $26.07 on Wednesday.
In a regulatory filing last week, Linens shed some light on the events leading up to its sale.
The company said it received an offer of $27 per share from a corporate buyer that it did not identify.
That deal never panned out. But in late spring, Linens' financial advisers Credit Suisse First Boston (CSGN.VX: Quote, Profile, Research) mulled offers from another corporate buyer and three buyout firms, including Apollo.
