💰Retail Roundup (Long $FB, Long $RILY, Short Retail)💰

In “Thanos Snaps, Retail Disappears“ and “Even Captain America Can’t Bring Back This Much Retail (Long Continued Closures)“ we listed out the stupendous volume of retail closures that have transpired already in 2019. As we’ve stated before, there are no signs of this trend abating. Indeed, since the second piece shipped on April 28, 2019, several more companies have announced closures.

For instance, Francesca’s announced the closure of 20 stores. Regis Corporation ($RGS), the owner of Supercuts, is shedding 330 locations and, like so many other corporates, offloading risk onto unsuspecting franchisees. While its stock performance is strong, Carter’s Inc. ($CRI) closed a net 10 stores amid negative 3.7% comps. Sally Beauty Holdings Inc. ($SBH) closeda net 69 stores in the last year, primarily under its Sally Beauty Supply outlet. Outside of the conventional retail space, CVS Health Corporation ($CVS) is closing 46 locations this quarter.

One beneficiary of all of this: the liquidators. We can put some numbers around this.

Back in March, B. Riley Financial Inc. ($RILY) reported fiscal 2018 earnings. On the earnings call, the company noted the following:

Last year was also a banner year for our Great American Group retail liquidation division. We successfully completed the liquidation of the inventory assets of Bon-Ton Stores. For a sense of scale Bon-Ton was one of the largest U.S. liquidations in retail history by inventory value.

We completed the liquidation of over 200 stores with associated inventory value at approximately $2.2 billion. In 2018, we also participated in the liquidation of Toys "R" Us which contributed to our strong results in the segment. Momentum in this business is carrying forward into 2019 as a liquidation of Bon-Ton real estate assets continues to be under way and with our recently announced participation in the liquidations of Gymboree and Payless Shoes.

The Payless store closing event, which began on February 17, is the largest liquidation by store count in retail history with sales being conducted at approximately 2,100 stores and associated inventory value at over $1 billion. In January, the firm announced participation in the liquidation of 798 Gymboree and Crazy 8 stores across the U.S. and Canada.

RILY reported Q4 revenues of $10.1mm, a meaningful uptick from the $4.2mm the company reported in Q4 ‘17. Income rose from $0.1mm to $2.3mm YOY. For the year, revenues were $55mm and income was $27mm, a solid 49% margin. As for guidance, the company foreshadowed:

…momentum has already carried over into 2019. We expect to realize significant contributions from the Bon-Ton liquidation results for the first half, in addition to the results from our current involvement in Gymboree and Payless liquidations. We expect to see high levels of market activity to continue through Q2 as distressed retailers continue to focus on retail – real estate consolidation and purging excess inventory.

Last week, RILY reported Q1 ‘19 earnings and Great American Group continued to crush it. The “auction and liquidation segment” generated $20.7mm in revenue — double what it did in Q4 and more than 25% better YOY. Income increased to $11.5mm, or approximately 5x the income reported in Q4. This adds up to a margin of 55%.

Think about those numbers for a second: while retail employees are getting steam-rolled, stores are closing everywhere, malls are undeniably shaken and CMBS investors are, by necessity, vigilantly monitoring credit with a watchful eye, here is Great American Group absolutely rolling in dough on account of these retail liquidations. Great revenue, great income. Stellar margins.

Now, as we’ve discussed previously, there is an anti-competitive element in all of this. Rather than face off against one another and compress those beautiful margins, the liquidators all continue to engage in club deals for these big retailers. If the revenue, income and margin is THAT good, doesn’t that mean that debtors — and by extension, creditors thereof — are leaking a significant amount of value?🤔

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Meanwhile, the news out of Facebook Inc. ($FB) probably had the liquidators over at Great American Group licking their chops. This week, Instagram is rolling out the ability for influencers to tag specific products in their photos, enabling consumers to click a photo, see what’s for sale, and purchase that product without ever leaving the Instagram feed. For those of you with zero design sensibility, suffice it to say that this is a big deal. No more friction of going back and forth between Instagram and external check out pages. This is going to mint tons of cash by the Kardashian and other influencer-influenced faithful.

Taylor Lorenz at The Atlantic writes:

Millions of users rely on influencers to sift through products and make recommendations. But until now, figuring out, for instance, exactly what shade of lipstick an influencer is wearing has been hard. Apps such as LikeToKnowIt, which allows you to shop influencers’ posts by taking screenshots, have garnered millions of users by providing a stopgap solution. Brand-specific social-shopping platforms such as H&M’s Itsapark have also stepped into the market. Still, many would-be consumers spend hours commenting on influencers’ Instagram posts asking for more product information, or fruitlessly attempting to locate a product online.

Interestingly, the influencers “won’t receive a cut of the sales their posts generate.” They will, however, get access to advanced metrics that may (or may not, as the case may be) arm them with leverage in negotiations with ad buyers. More from Lorenz:

“As an influencer, I don’t care if I don’t get a cut [of the sales] at the moment,” Song continued. “If it makes my followers’ life easier and they don’t have to message me asking ‘Where do you get that product?,’ I’m okay with doing it for free for now.” Many influencers are also betting that the increased engagement and spike in followers they’ll likely get by incorporating shoppable posts will more than pay off in the short term.

Color us skeptical. Much like the media is grappling with having a more direct relationship with its readers and that notion is pushing more and more writers to newsletters/subscriptions and away from advertising, we can’t help but to wonder how long influencers will be okay peddling other people’s products without getting a cut. With products like Shopify Inc. ($SHOP) enabling basically anyone the ability to create a direct-to-consumer business, it doesn’t stretch the imagination to conclude that a number of influencers are going to start getting into their own private label wares, if they haven’t already. It’s not like Kylie Jenner was having trouble moving product before: this gives her a shot of steroids.

What does this mean for retail? For starters, they’re going to be paying Facebook an awful lot of money out of their advertising budgets in the short term. In the longer term, however, they may find newfound competition from the likes of various Gen Z influencers that Gen X may have never even heard of. If malls are having trouble drawing traffic now, just imagine how much harder it will be when its easier for teen age Molly to just click on Instagram, scroll to her favorite influencer, and click through to some makeup without even interrupting continued scrolling. Facebook is savage.

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

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⚡️Update: Pier 1 Reports Horrific Numbers⚡️

And then there is the “ghastly” sh*tshow that is Pier 1 Imports Inc. ($PIR). Back in January, we asked “Is Pier 1 on the Ropes? (Short “Iconic” Brands)” — a question that a lot of retail analysts now seem to be asking in the wake of a horrendous earnings report. How horrendous was it? Comp sales decreased 13.7% YOY, net sales decreased 19.5% YOY, and the company had a net loss of $68.8mm (or $0.85/share). And apropos to the discussion above, the company indicated that it’s considering closing 45 stores in fiscal 2020 due to lease expirations — a number that could rise by upwards of 15% if the company’s new cost-cutting action plan (to the tune of $110mm) doesn’t bear fruit. The company hired A&G Realty to help with this initiative.

So, about that action plan. Here’s what the company has to say about it:

Pier 1 is implementing an action plan designed to drive benefits in fiscal 2020 of approximately $100-$110 million by resetting its gross margin and cost structure. Approximately one-third of the benefits are expected to be realized in gross margin, with the remaining two-thirds coming from cost reduction. After reinvesting in the business, the Company believes it will be positioned to recapture approximately $30-$40 million of net income and $45-$55 million of EBITDA in fiscal year 2020. The Company expects to capture efficiencies and drive improvement in the following areas: 1) Revenue and Margin; 2) Marketing and Promotional Effectiveness; 3) Sourcing and Supply Chain; 4) Cost Cutting; and 5) Store Optimization.

As part of the $100-$110 million of benefits discussed above, the Company has identified approximately $70-$80 million of selling, general and administrative (“SG&A”) savings opportunity for fiscal 2020, the majority of which is expected to be realized in the second half of the year. This SG&A savings opportunity for fiscal 2020 reflects an expected annual run-rate of approximately $95-$105 million.

The subsequent earnings call was…uh…interesting. Led off by an outside investor relations firm, the company’s interim CEO then took over the call by sharing, in the first instance, that an AlixPartners’ restructuring MD is now serving the company as interim CFO. Awesome start. Recent retail quals include Bon-Ton Stores and Gymboree. The team then went on at length about all of the various improvements they hope to instill in the business.

The analysts on the call were…shall we say…NOT EVEN REMOTELY convinced.

Beryl Bugatch, an analyst from Raymond James & Associates pounded the team with questions…

What is the guidance? The company declined to guide.

Where is the delta between the $100mm in cost savings and the $55mm in EBITDA improvement going? The company abstractly answered “we are reinvesting a portion of the savings back in the business.”

Where though? Marketing? The company responded, “assortment strategy, our talent and capability and efficiencies and things to drive efficiency in the plan.” READ: HIGH PRICED ADVISORS.

What’s liquidity look like? The company said it had $55mm in cash, $50mm in the FILO tranche and an undrawn revolver — enough to get through fiscal 2020.

But how clean is the inventory?

By this point the company was like:

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More Retail Dominos Fall

Tax Credits Can't Save Failing Bon-Ton Stores

We're going to stay thematically on-point. If you missed us last week, we recommend that you go back and read our take on the Cenveo bankruptcy. In fact, we owe an apology to some of you: there were about 400 of you who did not get our a$$-kickingness at all due to an inexplicable Mailchimp screw-up. Mailchimp ≠ a$$-kicking (more on this soon). Anyway, here is a link to the entire newsletter.

A quick preface:

Protection of dying industry extends beyond federally-imposed #MAGA (see, e.g., coal, solar tariffs), and trickles down to local communities. Indeed, local-level legislators are looking at tax credits to prop up industry in the wake of, among other things, Appvion’s chapter 11 bankruptcy (and job cuts) and Kimberly-Clark’s reorganization (and mass job cuts). This is familiar: tax incentives to prop up industry aren’t extraordinary. Sheesh, just look at all the governors getting bent in the hope of drawing Jeff Bezos’ attention. The question is, though, how sound is the social contract? How many dying industries can we as taxpayers prop up all at once? We don’t have an answer. But keep reading.

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Inside and outside of the startup context, people often ask stupid questions about companies. "How many employees does it have?” That’s a regular one. Or “How many locations?” Also common. “What’s revenue?” Irrelevant on its own. Uber makes a ton of revenue but is still bleeding cash. Netflix has gobs of revenue but is free cash flow negative. Cenveo, as we noted last week, had $1.59 billion of gross revenue in ’17. Now it’s in bankruptcy court. 

What if we told you about a particular business that had 23,000 employees and that those employees had an average tenure of 12 years? That had 256 locations. That owned 22 properties. That made $2.55 billion - yes, BILLION - in revenue in 2017. That would sound like a pretty damn successful company wouldn’t it? 

It’s not. 

We omitted some key data points: like the company’s capital structure and business vertical. 

Here’s the capital structure:

• a Tranche A revolving credit facility of up to $730mm
• a Tranche A-1 term facility of up to $150mm

The interest rate on the debt is a formula but, if we understand it correctly, it was no less than 9.5%. Funded debt as of Monday was $339mm under Tranche A (ex-interest), $150mm under Tranche A-1 (ex-interest of $3.9mm), and millions more in letters of credit.  

The company also has $350mm of 8% senior secured notes outstanding (Wells Fargo Bank NA) and due in 2021. Combined with the above debt, that’s a hefty interest expense. Oh, and the company is publicly-traded. Because this particular company is NOT successful - and with equity ranking in “absolutely priority” below debt - we reckon that there are a lot of Moms and Pops eating sh*t right now in their personal accounts. They won’t be the only ones.

The problem is that this company operates in an “increasingly challenging retail environment.” And, therefore, its story  - The Bon-Ton Stores story - is wildly unoriginal. In the company’s words, "Like many other department store and retail companies, the Debtors have been subjected to adverse trends in the retail industry, including consumers’ shift from shopping in brick-and-mortar stores to online retail channels. Bon-Ton, with a significant geographic operating footprint and operating presence, is dependent on store traffic, which has decreased as customers shift increasingly toward online retailers. In addition to competing against online retailers, Bon-Ton faces competition from other established department stores, such as J.C. Penney, Kohl’s and Macy’s.” It's like a zombie cage fight.

More specifically, it continues, "The department store segment of the U.S. retail industry is a highly competitive environment that has evolved significantly in response to new and evolving competitive retail formats, such as the increased prominence of mass merchandisers and increased competition among national chain retailers, specialty retailers and online retailers, as well as the expansion of the internet and, most significantly, the ubiquitous role that mobile technology and social media now play in the retail consumer shopping experience. The Debtors’ results and performance (and that of their competitors) has been significantly impacted by the aforementioned factors in the U.S. retail industry. Presently, numerous business and economic factors affect the retail industry, including the department store sector. These include underemployment and the low labor participation rate, fluctuating consumer confidence, consumer buying habits and slow growth in the U.S. economy and around the globe.” But, but…#MAGA?!?

Given these factors, the company has been engaged in a tug-of-war with its senior creditors for the better part of months. We’ll spare you the back-and-forth but suffice it to say, no concrete long-term plan that would’ve avoided bankruptcy came to pass. Only the retention of a liquidation agent to close 42 stores. And acquisition of a new $725mm credit facility to fund the cases while the company scrambles to find a buyer. Or liquidate.

Remember all of those shiny, positive numbers up above? Um, yeah. 

It gets worse. Though they were ultimately shot down - at least for now - in court yesterday (Feb 6), the bondholders argued “that the best and only available path for the Debtors to maximize value for their creditors in these freewill bankruptcy cases is to conduct an immediate orderly liquidation of the Debtors’ inventory and other assets. The Second Lien Noteholders made this determination after conducting their own due diligence, and following repeated missteps by the Debtors and their various boards and management teams, who proved themselves unwilling and/or unable to adapt to the fierce headwinds facing brick and mortar retailers and in particular, department stores”(emphasis in original). Savage.

Unwilling. Or unable. To adapt. Sadly, this seems to sum up a lot of distressed retailers these days. 

Even sadder, remember those long-tenured 23k employees we mentioned above? Per the company, “[Bon-Ton] has been part of its employees’ and customers’ lives in their communities for years.”

Probably not for much longer. At this point, no tax credits can change that. 

Feature of the Week: More Earnings (Simon Property Group & Starbucks)

This past week was an earnings-fest with Amazon and Google pumping out redonkulous numbers, Vince Holding Corp. missing estimates by 10 cents, declining 26% and continuing its slide towards bankruptcy, and FTI Consulting missing estimates BADLY, declining 3% and charting -23% year-to-date (we wonder how Berkeley Research Group is doing?). While all of these reports were intriguing, we took particular interest in reports from Simon Property Group and Starbucks...

Simon Property Group

Upshot: increased net operating income, increased retail sales per square foot, and increased average base rent. The company reported a flat occupancy rate of 95.6% at Q1 end and affirmed it's previous '17 guidance (typically, the company raises guidance). Snoozefest, we know, but keep reading...

CEO David Simon had a number of choice things to say about the current state of affairs (PETITION commentary follows in italics):

• Retailers need to improve the in-store experience via technology, look and feel, and merchandising. He straight-up called his tenants to task alleging that they are overspending on the internet vs. the store fleet. He says this is reversing back and notes that pure e-commerce will need brick-and-mortar. Ironically, most recent bankrupt retailers claim that they filed for bankruptcy because they hadn't focused on their e-commerce fast enough! We can't recall one bankrupt retailer who cited too much expense associated with e-commerce as a cause for filing. He also makes no mention whatsoever of Amazon and Walmart's increased market share in clothing, the rise of mobile e-commerce, the rise of platforms, and millennials' lack of interest in shopping (and penchant for vintage clothing). 
• A lot of the current bad performance is driven by private equity leverage rather than the common theme, the internet. He expressly calls out dividend recaps. No quarrel here whatsoever and more victims of this are in the bankruptcy pipeline. 
• SPG has lowered apparel in its retail mix by 5-6%. Whether that was elective was not clear.
• Expect more discounters like TJ Maxx and HomeGoods and grocers like 365, Wegmans and Fresh Market in high end malls. Other specific new tenants include restaurants (Fig & Olive, Nobu) and several movie theater brands with the occasional Dave & Buster's thrown in for good measure. This all seems consistent with the narrative that more experiential-oriented tenants will fill these spaces. Query how long until and to what degree the pain in the grocer segment will come to roost, if at all.
• Because these long-term anchors aren't driving foot traffic and revenue to the malls, there is a lot of upside in reclaiming and redeveloping department stores for mixed use, lifetime or community-oriented activity. They are actively taking back space from unproductive retailers and they are "not putting good money in the rabbit hole," suggesting, at least, in part, that future Aeropostale-like deals are unlikely. Note, also, Aeropostale's performance shaved several basis points off performance and is likely to continue doing so through Q4. This sure sounds like a solid counter-narrative but won't this eventually boil down to a case of volume assuming the vacancy rate next quarter is lower than this quarter?
• Store closures in a market also kill internet sales for that business in-market too. Really interesting and speaks to the thesis promoted by the likes of Warby Parker that some retail presence helps scale.
• Expect improvements in technology in the mall environment. If people had an issue with Unroll.me selling their data, wait until the beacons scale! 
• The mall "traffic is there" and the retail apocalypse "narrative is way ahead of itself." Yet, he wouldn't provide traffic data noting that there aren't traffic counters in their malls. The parking trackers at their outlets, however, are up 2%. See also Starbucks below.
• The strong US dollar has had a significant impact on spending by international tourists. So has our President but we won't go there. Oh, wait, we just did. Not a political commentary: just a plain fact.
• He would not opine as to how much per capital retail needs to come out of the system. It was abstract but, as we noted last week, Vornado Trust's CEO noted somewhere between 10-30% in the next five years.

Macro narrative aside, Mr. Simon remained upbeat about SPG's quarter and guidance. But speaking of REITS, we'd be remiss if we didn't point out this doozy of a red flag piece by the WSJ, highlighting 10 retailers that S&P Global Market Intelligence has noted as at high risk of default: Sears Holding Corp. (for obvious reasons), DGSE Companies Inc. (millennials don't buy precious metals, apparently), Appliance Recycling Center of America Inc. (millennials haven't been buying homes, apparently, so no need for recycled appliances...?), The Bon-Ton Stores Inc. (specialty retailer massacre), Bebe Stores Inc. (what? nobody wants glittery hats and shirts shouting BEBE anymore?), Destination XL Group Inc. ("our financial condition is extremely healthy" says the CEO whose company has a projected net loss on $470mm of revenue), Perfumania Holdings Inc. (mall-based perfume including the foul-stench of the Trump family...also fact, just saying), Fenix Parts Inc. (doesn't Amazon have an auto parts reselling business? why, yes, as a matter of fact it does), Tailored Brands Inc. (tons of quality tuxedo options online these days), Sears Hometown and Outlet Stores Inc. (obvious).

Of SPG's top 10 anchors, Sears is #2 with 69 locations and 11.3mm square footage of space and The Bon-Ton Stores Inc. is #10 with 8 stores and 1.1mm square footage of space. Macy's is #1 with 121 stores and 23.1mm square footage. Top in-line stores? L Brands, Signet Jewelers and Ascena Retail Group - all of which are reporting rough numbers of late. Which may explain why, in the end, SPG's stock was down this week, is down for '17, and is close to its 52-week low. 

Starbucks

Starbucks is just fine from the restructuring community's perspective. With one exception: Teavana. The company indicated that it is "evaluating strategic options." Why? Good question and, quite frankly, the answer is very much at odds with what Mr. Simon says. See, Teavana is a mall-based retailer; it has 350 locations. And they're not faring well predominantly because, per Starbucks' CFO, there is dramatically reduced mall traffic. Accordingly, Teavana has been suffering from negative same store comps and operating losses "for some time" with the rate of decline over the last 6 months far worse than forecast. Now even further declines are expected. And so we did a quick check: there are 78 Teavana locations in Simon Properties which would be 22% of all Teavana locations. Is it possible that those locations are the outliers and are performing extremely well on account of steady foot traffic? Starbucks doesn't break out numbers of a per location basis. But we highly doubt it.