With Restructuring, Toms Shoes Suffers Fate Common to Mall-Based Retailers

Philanthropic brand pioneered the one-for-one donation model

Philanthropic brand Toms Shoes proved as vulnerable to the retail apocalypse as any legacy mall-based brand, agreeing to an out-of-court restructuring more than a week ago.

Toms Shoes was saddled with a roughly $300 million loan due in 2020, according to credit rating agency Moody’s Investors Service. That debt was acquired when founder Blake Mycoskie sold half of his business to private equity firm Bain Capital in 2014, a transaction that reportedly valued the company at $625 million.

Fast forward to late 2019 and the high leverage as a result of that deal consequently pushed the company to agree to a debt-for-equity swap with a group of creditors led by Jefferies Financial Group, Nexus Capital Management and Brookfield Asset Management.

The Toms Shoes story began in 2006, when it was founded by Mycoskie. The company became famous for a canvas shoe inspired by a version commonly worn in Argentina called alpargatas. For every pair sold, the brand would donate another pair of shoes to a child in need. The company’s philanthropic approach, which was also the centerpiece of its marketing and tied to founder Mycoskie’s personal history, ultimately propelled it to rapid growth.

But while Toms Shoes was generating more than $400 million in revenue annually by the time of Bain Capital’s buyout, it was already experiencing a decline in the sales of its flagship canvas shoes, said Raya Sokolyanska, a vice president and retail analyst at Moody’s. That created a problem for the company because the canvas shoe contributed higher margins than its other products.

In order to grow, Toms was already adding new categories such as eyewear and coffee. But the expansion required more capital to invest in operations, further adding to its woes.

Crucially, the philanthropic efforts that provided most of the company’s marketing and differentiated it from competitors invited imitation, diluting Toms Shoes’ appeal. Skechers, for example, launched a cheaper knockoff line of canvas shoes called Bobs Shoes. The one-for-one donation model was no longer unique, Sokolyanska said.

Leverage at Toms Shoes grew to 10 times Ebitda (earnings before interest, taxes, depreciation and amortization) as of the second quarter of 2019, according to Moody’s, while revenue for the 12 months ended June 30 declined to $299 million. The ratings agency deemed the capital structure unsustainable.

Toms Shoes may serve as a cautionary tale for other brands. Though a pioneer of the one-for-one product donation strategy, Toms was not the first company to marry commerce with philanthropy. It followed in the footsteps of brands such as Newman’s Own and Clif Bar, for example. Interestingly, neither Newman’s Own, which is owned by a foundation established by founder Paul Newman, nor Clif Bar, which backed out of a deal to be acquired by a large food conglomerate, would end up selling, choosing instead to maintain their independence.

Regardless, don’t expect Toms Shoes to disappear. With the restructuring, the brand will get a $35 million cash injection from its new owners to support growth.

Toms Shoes, Jefferies and Bain did not respond to requests for comment as of publication.