💰Retail Roundup (Short Mall Traffic; Long Discounting)💰

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Ah, the fourth quarter. The fourth quarter is critical for retailers as they play out the “holidays” option and hope to stave off bankruptcy. How’s that working out for them?

Per CNBC:

U.S. retail sales increased less than expected in November as Americans cut back on discretionary spending, which could see economists dialing back economic growth forecasts for the fourth quarter.

The Commerce Department said on Friday retail sales rose 0.2% last month.

Surveys had predicted a 0.5% retail sales acceleration.

Excluding automobiles, gasoline, building materials and food services, retail sales edged up 0.1% last month after rising by an unrevised 0.3% in October.

The so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.9% annualized rate in the third quarter.

The breakdown is as follows:

  • Auto sales ⬆️ 0.5%;

  • Gasoline ⬆️ 0.7%;

  • Online/Mail-Order Retail ⬆️ 0.8%;

  • Electronics/Appliances ⬆️ 0.7%; and

  • Furniture ⬆️ 0.1%.

On the negative side, however:

  • Apparel ⬇️ 0.6%;

  • Restaurants/Bars ⬇️ 0.3%; and

  • Hobby/Music/Book Stores ⬇️ 0.5%.

It gets worse for apparel. The Bureau of Labor Statistics’ latest CPI report revealed weakness for November — which, significantly, includes Black Friday and Cyber Monday. 😬

Men’s and women’s apparel decreased by 0.9% and 3.6% YOY, respectively, while boys’ and girls’ apparel decreased 3.9% and 2.2%. Said another way, there’s an epidemic of markdowns/discounts. That can’t bode well for retail’s bottom line.

Indeed, several retailers acknowledged that markdowns are a significant issue. American Eagle Outfitters Inc. ($AEO) CEO Jay Schottenstein* noted “the challenging environment promotional activity increased relative to our expectations,” a theme that was reiterated by management teams at Urban Outfitters ($URBN), Francesca’s ($FRAN), Children’s Place ($PLCE) and Designer Brands ($DBI). Gamestop Corp’s ($GME) CEO George Sherman — while reporting dogsh*t numbers — noted:

“At this stage, we've entered the commoditization phase of the console cycle, where promotional pricing is driving sales. And if you're out shopping or doing store checks over Black Friday or Cyber Monday you likely saw a clear example of [those] discount stands.”

The problem is that retailers need to draw foot traffic and when your retail experience is commoditized and your product sucks sh*t, how do you do that?

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💥Good Retail Numbers. Bad Malls.💥

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⚡️Update: CBL & Associates Properties ($CBL)⚡️

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We did a deep dive into Tennessee-based CBL & Associates Properties ($CBL) back in March’s “Thanos Snaps, Retail Disappears👿” and, in the context of Destination Maternity’s bankruptcy filing, followed-up in an October update. To refresh your recollection, CBL is a real estate investment trust (REIT) that invests primarily in malls based in the southeastern and midwestern US. At the time of the aforementioned “Thanos” piece, the REIT’s stock was trading at $1.90/share; its ‘23 unsecured notes were priced around $80 and its ‘24 unsecured notes around $76. In case you haven’t noticed — all Black Friday ($7.4b in online sales, $2.9b via mobile ordering) and Cyber Monday (a record $9.2b) talk about gangbusters retail sales notwithstanding — the malls haven’t particularly fared much better since Q1. To put an exclamation point on this, early reports are that brick-and-mortar stores saw an overall 6% decline in sales over Black Friday.

When it reported Q3 earnings at the end of October, CBL’s numbers weren’t pretty. Revenue fell approximately $20mm YOY, net operating income declined 5.9% YOY, and same-center mall occupancy, while up on a quarter-by-quarter basis, was down 200 basis points YOY.

On Monday, the company announced that “it is suspending all future dividends on its common stock, 7.375% Series D Cumulative Redeemable Preferred Stock and 6.625% Series E Cumulative Redeemable Preferred Stock.” The company’s CEO, Stephen Lebovitz said:

“We anticipate a decline in net operating income in 2020 as a result of heightened retailer bankruptcies, restructurings and store closings in 2019. Offsetting these declines by retaining available cash is necessary to maintain the market dominant position of our properties and to reduce debt. CBL has also made significant efforts over the past 18 months to reduce operating costs, including executive compensation and overall corporate G&A expense, as well as execution of a strategy to utilize joint venture and other structures to reduce capital expenditures. Ultimately, we believe these actions will allow the Company to return greater value to its shareholders.”

Given the above, it’s worth revisiting the alleged benefit of REITs to investors. Among them are that:

  • post 1960, REITs provided small investors with an opportunity to benefit from commercial property rental streams; and

  • they are, typically, high dividend payers — considering that by law, they must distribute at least 90% of their taxable income to shareholders as dividends.

WOMP. WOMP. Not so much these days, it seems. But, we bet you’re asking: how can it terminate its dividend while maintaining its REIT status? From the company:

“The Company made this determination following a review of current taxable income projections for 2019 and 2020. The Company will review taxable income on a regular basis and take measures, if necessary, to ensure that it meets the minimum distribution requirements to maintain its status as a Real Estate Investment Trust (REIT).”

Umm, that doesn’t portend well. The answer is: it may not have “taxable income.” B.R.U.T.A.L.

How did the market react?

The stock market puked on the news. The stock was down 6% with a general market drawdown, but after-hours, upon the announcement, the stock gave up an additional ~30% on Monday and closed at $1.02/share on Tuesday:

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Meanwhile, the preferred stock also obviously traded down (lots of Moms and Pops chasing yield, baby yield, getting burned here), and the ‘23 unsecured notes and the ‘24 unsecured notes, at the time of this writing, last sold at $72.75 and $64.1, respectively.

The GIF above says it all about this story. And, worse yet: it may get uglier.

🤪Malls, Malls, Malls (Long Eccentric High-AF CEOs)🤪

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Things continue to get worse for certain players in the mall REIT space.

On October 24th, Washington Prime Group Inc. ($WPG) reported earnings and managed to surpass rock bottom expectations. The above-referenced net operating income decrease came from a $4.3mm “negative impact of cotenancy and rental income from 2018 anchor bankruptcies (Bon-Ton Stores, Sears, Toys R Us), and $2.1mm was attributable to 2019 bankruptcies (Charlotte Russe, Gymboree and Payless ShoeSource).” Occupancy decreased 1.1% to 92.9% during Q3 and the company lowered guidance (negative EPS).

S&P Ratings subsequently downgraded WPG from BB to BB- saying:

…despite slight sequential improvement, same-property NOI growth at tier 1 enclosed properties remained extremely negative, declining 8.8% with negative 7.6% releasing spreads over the past year, affected by co-tenancy clauses and additional bankruptcies/liquidations, with some expected redevelopment deliveries delayed. We believe overall metrics are modestly worse when factoring in the company's 14 remaining tier 2 and noncore malls, which we continue to include in our analysis of Washington Prime. Due to third-quarter results, management downwardly revised its publicly stated operating target for same-property NOI growth in 2019.

Washington Prime Group Inc.'s operating performance has continued to deteriorate such that we now view the company's business less favorably, with weaker cash flow, lower EBITDA margins, and diminishing prospects for stabilization in 2020.

Louis Conforti, WPG’s CEO, took to alt rock to explain the company’s negative performance, saying “[t]ake it from the Strokes, one of my all-time favorite bands, it's not hard to explain” before describing the effects of the #retailapocalypse on performance.

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🍴Declining Restaurant Trends Ripple Through (Short Dinnerware)🍴

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There are a number of trends that are taking hold currently that may be disruptive to a company that manufactures and distributes glass tableware (i.e., shot glasses, tumblers, stemware, mugs, bowls, etc.) and ceramic dinnerware products (i.e., servicing utensils and trays) to food service distributors, mass merchants, department stores, retail distributors, houseware stores, breweries and other end users of glass container products. First, people don’t go to department stores or houseware stores anymore (in case you hadn’t heard, check out the stock performance of every department store in the US and, for good measure, Bed Bath & Beyond ($BBBY)). Second, millennials aren’t drinking as much as Generation Z did. Third, people are ordering food more frequently and cooking and hosting dinner parties far less often than they did prior to VC-subsidized companies like UberEats ($UBER), Postmates and Caviar coming along. Indeed, per the company’s most recent report:

In U.S. foodservice, restaurant traffic for Q3 as reported by Black Box was down 3.6% compared to down 1.3% in Q3 of 2018.

All of these things are headwinds to a company like Libbey Glass ($LBY), an Ohio-based company founded in 1888. The longevity of the business is uber-impressive, but the year is currently 2019, and sh*t is unforgiving out there: Libbey is starting to look a bit troubled.

The company reported Q2 numbers back in August and revenue was down across all segments: food service and retail. The company cited “intense global competition” and trade headwinds (in both Mexico and China) as major factors. Net sales were $206.2mm, down 3.5% YOY, and the company reported a net loss of $43.8mm in the quarter (primarily due to a non-cash impairment charge). Notably, business was particularly bad in EMEA: $5.5mm decline. It was the second straight quarter where the business performed poorly on a year-over-year basis.

On the August 1 earnings call, the company noted:

“We do…continue to see declines in U.S. & Canada foodservice traffic, as has been reported by third-party research firms Knapp-Track and Blackbox every quarter since 2012. Our U.S. & Canada foodservice channel is currently performing in-line with market trends. Management expects these trends, and the challenging environment experienced during 2018 and the first half of 2019, to continue for the remainder of the year.”

In particular, one disturbing trend is takeout and delivery:

While this channel continues to adapt to the new norm of takeout and delivery, we've seen our focus on new products and differentiated service begin to pay dividends. In addition to these ongoing efforts, we are adapting our approach and resource deployment to expand into growing and/or underpenetrated segments of the channel, like health care and hospitality. As previously mentioned, we also see a significant opportunity to leverage digital tools to reach end users and further support our distribution partners.

Sure, they did. And they certainly needed to: a quick look at their numbers shows that the second quarter is typically the business’ strongest. This didn’t portend well for Q3 performance.

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🇺🇸Forever 21: Living the (American) Dream🇺🇸

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Back in June we kicked off coverage of Forever 21 Inc. with “💥Nothing in Retail is "Forever💥".

We then issued quick follow-ups in “💥Fast Forward: Forever21 is a Hot Mess💥” and “🍩Forever21 is Forever F*cking Up.🍩”

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Forgive us, then, for feeling like the company’s inevitable bankruptcy filing — which happened earlier this week — was a wee bit anticlimactic. After all, we all knew it was coming. As such, we felt the need to crank up some Kanye West to help get us through this additional coverage…

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What you doing in the club on a Thursday?
She say she only here for her girl birthday
They ordered champagne but still look thirsty
Rock Forever 21 but just turned thirty — Kanye West in “Bound 2”

Just kidding, y’all. Kanye is garbage. We don’t listen to Kanye.*

Anyway, we’ve talked time and time again about how the papers that accompany a company’s chapter 11 bankruptcy petition are a perfect opportunity for a company to frame the narrative for the judge, parties in interest, the media and more. A company’s First Day Declaration, in particular, is the bankruptcy equivalent of home field advantage. Coupled with the first day hearing — usually held within a day or two of the bankruptcy filing — a debtor can leverage the First Day Declaration and the opportunity to present first to a courtroom to gain some sympathy from the judge for their current predicament and plant the seeds in the judge’s ears as to the direction of the case.

Except, over time, the judges must begin to get bored. After all, repetitive themes begin to emerge when you track bankruptcy cases. Themes like “the retail apocalypse.” Blah blah blah. The “Amazon Effect.” Oh, f*ck off. Disruption overcame the business! Zzzzzzz. Private equity is evil because they dividended themselves all of the company’s value! Yawn. There’s too much debt on the balance sheet! Typical. The lenders won’t play ball! Mmmm hmmm. The prior management was corrupt AF. Yup, it happens. Weather this year was uncharacteristically bad. Riiiight…that’s retail excuse-making 101.

And, so, it was with great excitement that we read that the Forever 21 bankruptcy stemmed from…wait for it…the American Dream. That’s right, the American Dream.

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In other words, this is a story about unbridled ambition and optimism.

*****

Here’s the short version: two immigrants came to this country in the early 80s from South Korea. They had nothing; they worked hard; they sought out opportunity:

During his time as a gas station attendant, Mr. Chang took notice of the customers that drove the most luxurious cars—the customers working in the garment industry. This realization piqued Mr. Chang’s interest. He recognized that together with his wife, they were perfectly suited to enter the fashion industry. This would enable the couple to capitalize on Mr. Chang’s relationship-building prowess and Mrs. Chang’s keen sense of fashion.

Putting aside how shady the notion of your gas station attendant creeping on you is, this is pretty amazing sh*t.

Mrs. Chang, and her nearly-clairvoyant ability to predict trends, were part of the catalyst that boosted Forever 21’s upswing.

Take note, people: this is the kind of pandering you should get when you pay $1,600/hour.

Anyway, over the years, the Changs built a business that employed tens of thousands of people and generated billions in sales. The Changs put their two daughters through ivy league schools and they subsequently joined the family business. This is a beautiful story, folks. Especially so in today’s fraught political environment where immigration remains a hot button issue. Together, as a family, the Changs grew this company to be a behemoth:

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And therein lies the rub. The company went from 7 international stores in 2005 to 251 by 2015.

Unfortunately, this rapid international expansion challenged Forever 21’s single supply chain and the styles failed to resonate over time across other continents despite its initial success.

It appears that the same entrepreneurial spirit that allowed the Changs to conquer the US led them astray internationally. Indeed, those European and Asian adventures — and the Chang daughters’ vanity project, Riley Rose — proved to be too costly. As you can see, while the domestic business has been in decline,** it still shows some promise. The international business, on the other hand, has really sucked the air out of the business⬇️.

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Sure, aside from the international issue, some of the usual excuses exist. Mall traffic is down. Not enough attention to e-commerce. Product assortment could have been better. The company had borrowing base issues under its asset-backed loan. Yada yada yada. But this doesn’t appear to be the absolute train wreck that other recent retailers have been. At least not yet.

So what now?

At the first day hearing, company counsel spared us any in-court singing,*** but did rely on some not-particularly-complex imagery. He said the company’s predicament is like a puzzle and that, to paraphrase, you sometimes just need to get all of the pieces to fit.

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Those pieces are:

The Footprint. Right-sizing the business by shuttering underperforming locations, domestically and internationally. The company currently spends $450mm in annual rent, spread across 12.2mm total square feet. The company will close 178 stores in the US and 350 in total. In other words, the company is mostly erasing its overzealous expansion; it will focus on selling cheaply made crap to Americans and our southern friends down in Latin America rather than poisoning the clothes racks in Canada, Europe and Asia. The new footprint will be around 600 stores. Or, at least, that’s the plan for now. Let’s pour one out for the landlords. Here is CNBC mapping out where all of the closures are and which landlords are hit the most. Also per CNBC:

“At one point, two of Forever 21′s largest landlords, Simon Property Group and Brookfield Property Partners, were trying to come up with a restructuring deal where they would take a stake in the company to keep it afloat. It would’ve been similar to when Simon and GGP, which is now owned by Brookfield, bought teen apparel retailer Aeropostale out of bankruptcy back in 2016. But talks between Forever 21 and its landlords fell through, according to a person familiar with the talks. Simon and Brookfield are listed in court papers as two of Forever 21′s biggest unsecured creditors. Simon is owed $8.1 million, while Brookfield is owed $5.3 million, and Macerich $2.7 million.”

Only one of the locations marked for closure, however, belongs to Simon Property Group ($SPG).

The company notes:

To assist with the initial component of the strategy, Forever 21’s management team and its advisors worked with its largest landlords to right size its geographic footprint. Four landlords hold almost 50 percent of its lease portfolio. To date, Forever 21 and its landlords have engaged in productive negotiations but have not yet reached a resolution. The parties have exchanged proposals and diligence is ongoing. Forever 21 looks forward to continuing to work with its landlords to reach a mutually agreeable resolution and proceeding through these chapter 11 cases with the landlords’ support.

In tandem with these negotiations, Forever 21 and its advisors met with nearly all of its individual landlords to discuss potential postpetition rent concessions and other relief on a landlord-by-landlord basis. Many of these smaller, individual negotiations proved more fruitful than negotiations with the larger landlords. Although Forever 21 has not finalized the terms of a holistic landlord deal as of the Petition Date, Forever 21 anticipates that good-faith negotiations with its landlord constituency will continue postpetition, and that all parties will work together to reach a consensual, value-maximizing transaction.

Company counsel asserts that, for landlords, Forever 21 is “too big to fail.” This kinda feels like this:

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But don’t worry: the A Malls are totally fine. 

And don’t worry about the loans (CMBX) at all. Noooooo.

Merchandising. Getting “Back-to-Basics” on the merchandising front and focus on the company’s “core customer base.” Here is Bloomberg’s Jordyn Holman casting some shade on this plan. And here is Bloomberg’s Sarah Halzack. While the bankruptcy papers certainly don’t highlight the competition, bankruptcy counsel made a point of highlighting H&M, Zara and Fashion Nova. Retail Dive writes:

‘They did not grow with their target customer and the Millennials have graduated to Zara & H&M,’ Shawn Grain Carter, professor of fashion business management at the Fashion Institute of Technology, told Retail Dive in an email. ‘Gen. Z is more interested in rental fashion and vintage hand-me-downs because they are more environmentally conscious.’

Interestingly, Stitch Fix Inc. ($SFIX) was up 5% on Monday while the RealReal Inc. ($REAL) was up 15%. (PETITION Note: both got clobbered on Tuesday, but so did everything else).

The Washington Post piles on:

“Slimming down the operation and reducing costs is only one part of the battle,” Neil Saunders, managing director of GlobalData Retail, said in a note to clients. “The long-term survival of Forever 21 relies on the chain creating a sustainable and differentiated brand. This is something that will be very difficult to accomplish in a crowded and competitive sector.

Indeed, we’ve been writing for some time now that fast fashion seems out of sorts. Going “back to basics” may not actually be the right move in the end.

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🤔

Vendor Management. A quick digression: back in May, we wrote about Modell’s Sporting Goods avoidance of bankruptcy. Mr. Modell himself worked the phones and reassured most of his vendors, prompting them to continue doing business with the shrinking sporting goods retailer. This is a feature that you don’t get in PE-backed retail bankruptcies where you have hired guns on management. There, Mr. Modell’s legacy was at stake. He hustled. Likewise, here, the Changs personal business is threatened. Accordingly, the company met with 100 vendors representing 80+% of the vendor base and got them comfortable with continued business; they secured 130 vendor support agreements for equal or better terms. Everyone is invested in making a viable go of the ‘19 holiday season. Sometimes it pays to have someone who is truly invested be all over the supply chain.

Financing. The company’s capital structure is rather simple:

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The ABL is with JPMorgan Chase Bank NA as agent. The term loans were provided by the family. One from Do Won Chang for $10mm and the second from the Linda Inhee Chang 2012 Trust. Because nothing says “American Dream” like raiding your kid’s trust fund.

In conjunction with the bankruptcy, the company proposed a DIP credit facility in the form of (a) a $275 million senior secured super-priority ABL revolving credit facility, which includes a $75 million sub-limit for letters of credit and a “creeping roll up” of the pre-petition ABL Facility, and (b) a $75 million senior secured super-priority term loan credit facility, reflecting $75 million of new money financing. The company sought access to $60mm of the term loan at the hearing, indicating that with $40mm due in rent and $18mm in payroll, it would run out of cash without it. The judge approved this request.

And so here we are. The company intends to march forward with negotiations with its landlords, close tons of locations, sure up the vendor base, locate exit financing, and get this sucker out of bankruptcy in Q1 next year.

Ending up in bankruptcy certainly isn’t part of the American Dream. But living long enough to fight another day might just be.

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*H/t to @JordynJournals, retail reporter for Bloomberg News on this.

**The company notes that domestic sales have increased over the last 4 quarters.

***For those new to PETITION, the same lawyer from Kirkland & Ellis LLP that represents Forever 21 represented Toys R Us. In the now-infamous “first day” hearing in Toys, the attorney sang the Toys R Us jingle — “I don’t want to grow up…” — in the courtroom. Suffice it to say considering the outcome of that case, that tactic didn’t particularly age well. Indeed, this will age better, we reckon (won’t play in email, only in browser):

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📚Resources📚

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We recently added “Super Pumped: The Battle for Uber” by Mike Isaac, which we blew through rather quickly. Next up on our list: “What it Takes: Lessons in the Pursuit of Excellence” by Stephen A. Schwarzman, “The Ride of a Lifetime: Lessons Learned from 15 Years as CEO of the Walt Disney Company” by Bob Iger, and “That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea,” by Netflix co-founder Marc Randolph.

💰New Opportunities💰

PETITION LLC lands in the inbox of thousands of bankers, advisors, lawyers, investors and others every week. Our website(s) are visited by thousands more. Are you looking for quality people. Posting your job opportunities with PETITION is a great way for your listing to stand out from the LKDN muck.

Email us at petition@petition11.com and write “Opportunities” in the subject line if you’re interested in information about posting your opportunities with us.

Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.

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💥Another Gangbusters Quarter from Pier 1 (Long Slow Deaths)💥

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Callback to previous Pier 1 Imports ($PIR) coverage here (Q1 ‘19 earnings summary), here (Q4, fiscal ‘18), and here ($71mm in cash remaining). Unfortunately, this will be our last coverage of the retailer because it appears to have pulled off a miracle turnaround of epic proportions: it CRUSHED Q2 earnings and appears to be well on its way to reclaiming “iconic” status!

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THIS THING IS A STEAMING TURD.

It’s even worse than we initially tweeted. Gross profit was 16.7% vs. 26.3% last year. The company’s operating loss expanded to $93.1mm compared to $62.5mm a year ago; it reported a net loss of $100.6mm or $24.29/share ($51.1mm and $12.68/share loss last year). The company noted “lower average customer spend” and “decreased store traffic.” And it sank $7mm into professional fees to help it right the ship. Management surely would’ve gotten torn up on the earnings call except, well, only one analyst was actually on the call. Nobody cares anymore. Anywho…

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🍩Forever21 is Forever F*cking Up🍩

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On one hand, you have to respect the desire to sure up liquidity by entering into partnerships. On the other hand, well this:

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☄️Future First Day Declaration: Forever21☄️

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We figured we'd take the first crack at the First Day Declaration for Forever21 Inc.'s potential bankruptcy* and spare the company some professional fees.

******
"Preliminary Statement in Support of Forever21's Chapter 11 Petition"

As you know, retail sucks. The list of bankrupted retailers is long and “iconic” and so we got FOMO and decided, what the heck! Everyone’s failing, so we might as well also!

But first, we did want to make sure that we could explain to our uber-loyal fanbase (who clearly isn’t buying enough of our sh*t) that we did everything in our power to stay out of bankruptcy court. And so we did what all retailers today do: we focused on omni-channel; upped our Insta spend; updated the lighting in our stores and refurbished our “look”; stretched our vendors; sh*tcanned some employees; negotiated extensively with our landlords; closed a few underperforming locations; negotiated with our lenders, and more! According to Bloomberg, we’ve hired Latham & Watkins LLP to deal with this hot mess, including our $500mm asset-backed loan. We’ve been busy bees!!

We had one Hail Mary trick up our sleeves that we thought would really save the business: partnerships. With first class brands. Like Cheetos. That’s right Cheetos!! GET PUMPED!!! Everything is so 🔥🔥🔥.

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This sh*t got ~45k likes (“worst things since the Kardashians!” haha). Which pales compared to this doozy, which got ~47k likes:

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“This is the most ridiculous clothing line I’ve ever seen.”

Nothing drives sales sales sales like thoughts of “ball cheese” (PETITION Note: sorry…we had to). #Fail.

But, wait! There’s more. We brought back Baby Phat too!!

May G-d have mercy on all of us.

*Sources tell us that the company may not be as close to a bankruptcy filing as some previous media reporting implied. Nevertheless, the name has been kicking around for some time now within the lender community and it does appear that the company is focused on some operational fixes. This “mock” first day declaration should not be construed as indicating that a bankruptcy is, in fact, imminent.

Retail Roundup (Long Tourniquets, Long Headwinds).

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The retail bloodbath continues.

Earlier this week, Abercrombie & Fitch Co. ($ANF) joined Ralph Lauren Corp. ($RL), Gap Inc. ($GPS), and Calvin Klein ($PVH) by ditching “flagship” stores situated in expensive parts of town. The stock got crushed on earnings. But the “Peace Out Flagship Square Footage” club didn’t stop growing there. To the contrary, it is expanding. Rapidly.

On Wednesday, J. Crew announced that it plans to shutter 20 flagship and outlet stores. “Why might it be trying to shrink its footprint,” you ask? Good question. And the comps give you all the answers you need. While total revenue rose 7% across the enterprise, J.Crew sales fell 4% with comps down 1%. In contrast, Madewell sales rose 15% and comps rose 10%. 

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⚡️Earnings Season Ushers in More Bad News for Retail⚡️

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In “Thanos Snaps, Retail Disappears👿,“ “Even Captain America Can’t Bring Back This Much Retail (Long Continued Closures)“ and “💸The #Retailapocalypse is a Boon for...💸,” we’ve chronicled the seemingly endless volume of retail store closures that continue to persist in the first half of 2019. As we’ve said time and time again, there are no signs of this trend disappearing. In fact, it continues to get worse.

Last week brought us a deluge of retail news and earnings. And, indeed, along with earnings came more store closure announcements and more indications of who are the “haves”* and the “have nots.”

Let’s start with department stores where there’s a lot of pain to go around in “have not”-ville.

Macy’s ($M) kicked things off with a surprise increase in same-store sales and so it was ONLY down approximately 0.9% on the week. In contrast, Kohl’s ($KSS), Dillard’s ($DDS), J.C. Penney ($JCP) and Nordstrom ($NWN) all got hammered — each down more than 7% — after across-the-board dismal earnings. Kohl’s performance was particularly interesting given its acclaimed experimentation, including partnerships with Amazon ($AMZN) and, coming soon, Fanatics. The company reported a 2.9% revenue decline and a same-store comp decline of 3.4%. Adding fuel to the fire: the company cut its full-year earnings guidance, citing…wait for it…tariffs(!) as a massive headwind.

Kohl’s wasn’t alone there. Home Depot ($HD) also indicated that new tariffs on China might cost it $1b in revenue — on top of the $1b it already anticipated from the prior round of tariffs. 😬

Other have nots in retail? Party City ($PRTY) is closing 45 stores. Tuesday Morning Corp. ($TUES) is closing a net 12 stores. Fred’s ($FRED) announced 104 more closures in addition to the 159 previously announced closures. Burberry Group Plc ($BURBY) is closing 38 stores. Topshop is now bankrupt and will close 11 stores in the US (and more abroad). Hibbett Sports ($HIBB) is adding 95 store closures to the pile (despite otherwise nice results). Of course, we’d be remiss if we didn’t mention the dumpster fire that is Dressbarn:

Finally, all of the pain in retail already has at least one ratings agency questioning whether David’s Bridal is out of the woods post-bankruptcy. We can’t wait to add that one to our “Do We have a Feasibility Problem?” series.

All of this has people scattered wondering what’s the next shoe to drop (more tariffs!) and, in turn, what can possibly stop the bleeding? Here is a piece discussing how private brands are on fire.

Here is to hoping that Generation Z saves malls. What draws them to malls? Good food. Malls with great food options apparently experience more sales. Now Neiman Marcus and H&M are going the resale route. Urban Outfitters ($URBN) is experimenting with a monthly rental service. Startups like Joymode look to benefit from the alleged shift from ownership to “access.”

As for continued bleeding, here is yet another sign that things may continue to worsen for retail:

Notably, production of containerboard — a type of paperboard specially manufactured for the production of corrugated board (or cardboard) — is suffering a YOY production decline. Is that indicative of a dip in e-commerce sales to boot? 😬

*On the flip side, there have been some clear winning “haves.” Take, TJX Companies Inc. ($TJX), for instance. The owner of T.J. Maxx reported a 5% increase in same store sales. Target Inc. ($TGT) and Walmart Inc. ($WMT) also appear to be holding their own. The former’s stock had a meaningful pop this week on solid earnings.

👚Resale is Real Real. Eff “The Amazon Effect.”👚

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The #RetailApocalypse is More Than Amazon Inc.

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In September 2017 in “Minimalistic Consumption by Inheritance,” we wrote:

Much has been made about the death of retail and the "Amazon Effect." We mention it quite a bit … but we are also on record as calling the Amazon narrative lazy. After all, there's a reason why resale apps are among the highest downloaded apps in the Itunes app store. We've noted this before: millennials have no problem buying, reselling, buying, and reselling. I mean, sh*t, we're now seeing commercials for OfferUp on television. We've noted the rise of Poshmark and other apps here and here. Perhaps there's more here than meets the eye.

We doubled down with “Enough Already With the ‘Amazon Effect’” in April 2018. Citing the ThredUp 2018 Resale Report, we noted:

…the resale market is on pace to reach $41 billion by 2022 and 49% of that is in apparel. Moreover, resale is growing 24x more than overall apparel retail. “[O]ne in three women shopped secondhand last year.” 40% of 18-24 year olds shopped resale in 2017. Those stats are bananas. This comment is illustrative of the transformation taking hold today,

“The modern consumer now has a choice between shopping traditional retail or trying new, innovative business models. New apparel experiences and brands are emerging at record rates to replace old ones. Rental, subscription, resale, direct-to-consumer, and more. The closet of the future is going to look very different from the closet of today. When you get that perfectly curated assortment from Stitch Fix, or subscribe to Rent the Runway’s everyday service, or find that killer handbag on thredUP you never could have afforded new, you start realizing how much your preferences and behavior is changing.”

Finally, we wrote in January — in “ Retail May Get Marie Kondo'd ,” — that the Force is now strong(er) with the resale trend.

We concluded:

…The RealReal is signaling that resale is so big that it’s ready to IPO. Talk about opportunistic. No better time to do this than during Kondo-mania. The company has raised $115mm in venture capital … most recently at a $745mm valuation.

None of this is a positive for the likes of J.C. Penney. They need consumers to consume and clutter. Not declutter. Not go resale shopping. We can’t wait to see who is first to mention Marie Kondo as a headwind in a quarterly earnings report. Similarly, we wonder how long until we see a Marie Kondo mention in a chapter 11 “First Day Declaration.” 

So, where are we going with all of this?

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