RETAILERS TO WATCH
FOR
POSSIBLE BANKRUPTCY FILING
IN 2023
2023 APRIL ISSUE
Written by: Terri Fisher
From the Desk of the Publisher
This is the second piece from our retail specialist, Terri Fisher, who wrote about those retailers who may file for bankruptcy during the year. Without any question that the Covid pandemic played a very big role in the last three years and we saw a lot of business failures. Shoppers are careful with their spending and the lockdown had made a damage that is still beyond any repair.
There is no longer any success business model or even any formula that can be used at this time except to hold our breath and try to steer the business with full alert.
Terri has used three examples to show to us the reason for their potential failure. We can refer to them as the case studies. She also mentioned those who will perhaps seek for bankruptcy protection in the later part of the year. There are ten of them and it is scary to watch them fail.
I hope that we can bring you more positive news and perhaps we should also look for the successful case study for our reference. I think that the advice that we can use is to be ready to change and to react quickly to the market.
This year holds lots of anticipation. Prices remain high, unemployment persists at record lows even though so many employers are cutting back. Continuing supply chain issues persist as China reopens in the face of its Covid crisis. And consumer spending is definitely tightening in preparation for tough times ahead. The rise of Amazon and a company’s inability to modernize and adapt to today’s shoppers are among the reasons why some venerable U.S. retail chains have all but shut down over the past several years. Think Kmart and Sears. This volatile mix of economic data may lead several retailers to declare Chapter 11 protection in order to stay viable. I have pulled together some of the most likely retailers to file in 2023. Most of these are based on economic facts and a few on gut instincts.
NUMBER ONE: BED BATH & BEYOND: Is this formerly successful retailer beyond saving?
BB&B has many stores in the US, Canada, Mexico, and Puerto Rico. It was founded in 1971 and is counted among the Fortune 500 and the Forbes Global 2000. The stock symbol is BBBY on the NASDAQ exchange. The CEO is Sue E. Gove since 10/26/22 when Mark Tritton (formerly Target and Nordstrom) was ousted. Their revenue in 2022 was $7.87 billion. One can only wonder how a company of that size can get into so much trouble. The stock is currently trading at $1.79 and plunging 88.1% over the past 12 months.
BB&B plans to close 150 stores this year out of its nearly 770 BB&B stores in the US, and laying off 20% of its workers with the goal of saving $250M in this fiscal year, USA Today reported. BB&B has missed payments to banks and bondholders, and former employees say they have not been paid severance as promised. The company said it would switch its focus back to selling national brands instead of its own house brands and obtained $500 million in new financing.
At its peak in 2017, BB&B had 1560 stores with 65,000 employees, bringing in $12.3billion in revenue. But in the 9 months through November 2022 it posted sales of just $4.2 billion and its headcount was fewer than 30,000.
A September report from CNBC said the company faces a variety of issues to overcome, including a lack of permanent corporate leadership, debt, and a “tense relationship with vendors”. Neil Saunders, managing director at GlobalData Retail, told CNN that to survive, BB&B must work with those vendors to fill the shelves with unique items that make the store a destination. “If Bed Bath & Beyond simply stocks the same sort of things as can be found at Target, Walmart, or Amazon, then it will struggle to differentiate and will find margins compressed as it needs to match on price,” he said.
When other well-known stores spiraled into distress in recent years, the internet was often blamed. But in the case of BB&B, it is more complicated. While the chain was hurt by online rivals like Amazon.com, its undoing is also a story of how deciding to rip it up and start again can leave a company in tatters. Call it “throwing out the baby with the bath water”.
Arthur Stark, BB&B’s longtime president who left in 2018 said in an interview, “Everything that we did was for the customer. If it meant carrying too much inventory in the store, it was OK. If customers made the commitment to come to our store, we would have it in stock”. The company’s executives, however, had a blind spot: the web. As Amazon.com and other online shopping sites geared up, BB&B’s executives prioritized their brick-and-mortar business. Eventually that caught up with them. According to Stark, the company’s success made it reluctant to change. This is a very important lesson for us all. It had been profitable for years and seemed to go from strength to strength, expanding across the US and Canada.
Due to short-term market pressures, one of the best-known discounts in US retail history was added to the strain. BB&B’s 20% off coupons, sent to tens of millions of households for years, lured shoppers and boosted sales. But they also eroded profits greatly. “Like any form of promotion, it becomes a drug,” Stark said. All attempts to pull back on the mailings or reduce the discount backfired.
Entered Mark Tritton. The board, with 4 new members selected as part of an accord with activists, named former Target executive Mark Tritton CEO in October 2019. As Targets Chief Merchandising Officer, Tritton had overseen a private-label overhaul credited with helping speed up growth at the discount giant. Tritton and his team moved fast to tackle the falling profitability and revenue they inherited. They wanted a third of BB&B products to be private label, up from 10% within 3 years. It has been said that Tritton directed this without an in-depth analysis of what the BB&B customers cherished, desired, and shopped for. Tritton also said he planned to get rid of poorly performing labels and double down on well-known brands such as Kitchen Aid and Oxo. This turned out to be a very poor plan as major brands faced pandemic-supply chain problems and the company’s worsening cash crunch left it unable to pay for premium products, according to former managers.
In the first 5 months of 2021 Tritton pushed hard to introduce six new private label product lines, a very ambitious task by any retail standards. Once the private label brands eventually arrived in stores most were new to shoppers and did not resonate with them. At the same time, executives appeared overly optimistic that strong spending by cooped-up consumers in 2020 and 2021 would endure. The retailer atrophied as the year went on. Tritton was ousted in June. Sales in the 3 months ended August 27 fell 28% from the previous year. Inventories became increasingly sparse as many suppliers who were worried about getting paid, halted or restricted shipments. That meant consumers left the stores empty handed. This has happened to me personally as I shopped for towels I previously loved getting from BB&B. To my utter surprise there was not a white bath towel to be found in the entire store!
To put it mildly, BB&B has a lot to rectify really, really fast. And the purpose of these case studies is for all of us in the business to learn from other people’s mistakes.
LATE BREAKING NEWS: as of February 15, BB&B’s stock fell 65% as it announced it reached a financing deal with Hudson Bay Capital Management, leaving its current investors wondering is bankruptcy is off the table. (From The Wall Street Journal)
NUMBER TWO: Is the Party Over for Party City?
Our second case study is about a failing retail party goods and decorations store owned by Party City Holdco, Inc. based out of Union, New Jersey, who filed for Chapter 11 bankruptcy protection on January 17, 2023. This was due to many factors, as it always is, but soaring inflation and shifts in consumer spending habits were 2 of the main reasons that the party is over. When the pandemic closed down in-person party celebrations, the company struggled financially since it relied on social gatherings for revenue. They are the most recent retailer to not survive the current macroeconomic tailwinds
Many analysts are concerned that this could be a preview of what’s in store for other major retailers as inflation numbers remain high and concerns of a possible recession loom.
Party City reported $1billion in assets and $10 billion in liabilities during the bankruptcy filing. It is worth noting that Party City has landed a $150 million bankruptcy loan with the intent of using half of this money to promptly pay employees and vendors on top of other expenses.
There are over 800 company-owned and franchised Party City stores across North America. In November, the company announced plans that they were going to reduce the corporate workforce by 19% when it was revealed that losses for 2022 could reach $200 million.
On January 18, 2023, it was announced that trading would halt and the stock would be delisted, effective immediately.
When the world shut down during the Covid era, people were not celebrating major milestones like graduations, proms, and retirements since so many restrictions were in place. Many analysts pointed out how the company burned through cash to keep the roughly 800 stores open instead of focusing on the growth of an e-commerce platform. Are we seeing a trend here for both BB&B and Party City?
When Covid restrictions loosened, the company had to deal with the same issues as other major retailers, from a labor shortage to supply chain issues. One of the unique issues for Party City was the problem with the helium shortage that led to the price of helium going up. Balloons are a key business driver for Party City and this cut into sales at the very worst time. To make matters worse, Party City had increased competition from large retailers like Target and Walmart that started offering more decoration options. On top of the major retailers, more e-commerce brands and dollar stores entered the space. This led to a shrinking market cap for Party City.
Then there is the issue of sustainability. Many former consumers of Party City’s paper and plastic party goods are concerned about throwing out all that waste after a one-time celebration. Something to think about for sure.
As an investor, you must be highly concerned about a company declaring bankruptcy since the stock would drop to zero, and you’ll likely never see your money again.
NUMBER THREE: Apparel retailer EXPRESS, Inc. (NYSE:EXPR)
Apparel retailers are not excluded from bankruptcy concerns. Express has been a meme stock a few times over the last eighteen months and COULD become a casualty of the developing recession. This leveraged apparel retailer sells fashion to mostly thin and “woke” women and men with significant disposable incomes in the 18-30 age group, who could become much more practical in their purchases during this much weaker economic period.
Since they are highly leveraged, Express can’t afford to be wrong on their merchandise and with their vendors becoming much more restrictive in financing, they could be in serious financial trouble in 2023.
The men’s business accounts for 43% of apparel sales and attracts men 18-30. Many of their items for men are “extra slim” or “slim” but nothing for men with a few extra pounds. The female side is 57% of apparel sales, in order to be “politically correct” offer some items for women who have a few extra pounds but most items are for females very careful about their weight. I think the biggest issue is that too many items are just too fashion/trendy oriented and are often not something that can be worn more frequently. Just how often can a guy wear a lime green suit? The clothes are designed by Express and made overseas. This means they are always slightly behind any new fashion trends because of the longer lead time between designing and the stores actually receiving the product.
Revenue from Express was $1.339 billion in 2021, and revenue from Express Outlet was $482 million. I feel there is a very real risk that consumers could at some point consider Express just some discount/outlet brand because over 35% of their stores are just outlets (342 Express and 202 Outlet stores). This would have a negative effect on their brand’s image. A similar issue is at hand at Nordstrom vs. Nordstrom Rack.
Express is very social media and woke-focused. They frequently mention their fashion influencers and social media discussions about Express as part of their marketing model. Management must be careful to continuously conform to the current “woke’ social media culture or risk being “cancelled”, in my opinion, because their business model relies so heavily on fashion influencers with very large followings. Express probably considers their influencers as assets, but in reality, they are potential downsides. In addition, their current business model risks further alienating a larger number of potential customers by integrating their social/political opinions in their business model.
I worry that the recession could have a dramatic impact on buying clothes, especially if they are not really practical. Their very high inventory level could become a major liability. I recently saw on their website an “up to 75% off clearance and an extra 60% off today only”.
Many retailers, including Express, were struggling even before Covid, but at least Express was able to stay out of bankruptcy court so far. They received $140 million life-line financing in early 2021 from Sycamore Partners, who tried to buy JC Penney in 2022 and currently owns a long list of retailers such as The Limited. This hedge fund often “loans to own”.
To recap, we are expecting a recession will continue through 2023. Their inventory level is too high and may need steep discounts to clear. It appears that vendors are already becoming more restrictive in their financing terms. Their target market is too narrow, and Express has too much financial and operating leverage.
Express is headquartered in Columbus, Ohio and has 500+ stores in US, Puerto Rico, Mexico, Costa Rica, Panama, El Salvador and Guatemala. The CEO is Timothy Baxter since June 2019 and the President is David Kornberg. The company was founded in 1980.
Conclusion:
I have given you 3 case studies, one in home, one in party goods, and one in apparel to give you a taste of what is happening out there and why. There are many other retailers in trouble that I will have to discuss in a later issue. They include the following:
Digital Brands Group – apparel
Kirkland’s – home
The RealReal – apparel
Rite Aid – drugstores
Tuesday Morning – off-price
Wayfair – home
Joann – craft and specialty
Casper – home
Dollar General – discount
Kohl’s – department store
I’d like to take a minute to talk about Wayfair, a company which really surprised me that was on this list.
Wayfair has become a force in the home goods realm. Few can rival it in e-commerce home goods sales. Yet for most of its life, the company has lost money. By July 2022 the company was the only e-commerce retailer to lose revenue among the top in the sector according to GlobalData. In August, the company announced a 10% cut to its corporate staff as they looked to rein in their costs. For all its challenges and history of losses, Wayfair’s market cap remained near $4 billion at the end of September 2022, a sign that the market still has confidence in Wayfair’s potential for profitability.
The other company to watch closely is Kohl’s who I thought was doing very well. Thin margins with inflation and a decline in discretionary spending are squeezing the company and could eventually lead to a bankruptcy filing.
One last note, more layoffs have hit the retail industry due to economic challenges and restructuring. Kohl’s cut about 60 staffers. Ruggable, a DTC brand known for its washable rugs, eliminated 100 of its corporate staffers. REI, in a note to employees on Jan 31 announced that 167 positions, about 8% of its total corporate workforce would be eliminated. Eric Artz, the President and CEO of REI Co-op said in this same letter “We will need to make hard choices, and that will be the work ahead for all of us.”
WWD in an article on February 15 stated the Neiman Marcus Group is laying off hundreds of workers, representing just under 5% of its workforce. The cutbacks at the Dallas-based Neiman Marcus Group follows those announced in recent weeks at Saks.com, Saks Off 5th, TheBay.com, and Amazon.
I hope you found this article interesting and informative. Please let me know if there are any retailers you’d like me to do a case study on in a future issue. I can be reached at: terri@iappareljournal.com.
Warm regards,
