Tops, Toys, Amazon & Owning the Robots

In a continuation of the recent grocery bloodbath, Tops Holding II Corporation, a northeastern grocer with 169 stores, filed for bankruptcy on February 21 in New York. As is customary, the company filed a “First Day Declaration” as evidentiary support for its bankruptcy petition which tells the company’s story, including how and why it ended up in bankruptcy court. Notably, the Declaration launches that story with union metrics - a not-so-swell sign for employees.

Tops has 14k total employees. 12.3k of them are unionized There are 12 different collective bargaining agreements. And, there is an ongoing dispute with pensioners:

"[T]he Company has been embroiled in a protracted and costly arbitration with the Teamsters Pension Fund concerning a withdrawal liability of in excess of $180 million allegedly arising from the Company’s acquisition of Debtor Erie Logistics LLC…." 

The company continues, 

"Utilizing the tools available to it under the Bankruptcy Code, the Company will endeavor to resolve all issues relating to the Teamsters Arbitration and address its pension obligations, and the Company will take reasonable steps to do so on a consensual basis."

(Shaking heads). Mmmmm. We bet it will “address its pension obligations.” For the record, the pension is underfunded to the tune of $393mm.

But that is not all. The company will also seek to deleverage its ballooning balance sheet and take care of some leases and supply agreements. The company has secured $265mm in DIP financing to fund the cases; it says that it "intend[s] to remain in chapter 11 for approximately six (6) months." We'll believe that when we see it. Anyway, WHY does Tops need to take all of these steps? Well, private equity, of course:

Despite the significant headwinds facing the grocery industry, over the past five years, the Company has experienced solid financial performance and has sustained stable market share. The vast majority of the Company’s supermarkets generate positive EBITDA and the Company generates strong operating cash flows. Transactions undertaken by previous private equity ownership, however, saddled the Company with an unsustainable amount of debt on its balance sheet. Specifically, the Company currently has approximately $715 million of prepetition funded indebtedness...." 

Ah, private equity = a better villain than even Amazon ($AMZN). But hold on, you didn’t actually think Amazon would skate by unscathed did you? The company continues,

“The supermarket industry, including within the Company’s market areas in Upstate New York, Northern Pennsylvania, and Vermont, is highly competitive. The Company faces stiff competition across multiple market segments, including from local, regional, national and international supermarket retailers, convenience stores, retail drug chains, national general merchandisers and discount retailers, membership clubs, warehouse stores and “big box” retailers, and independent and specialty grocers. The Company’s in-store delicatessens and prepared food offerings face competition from restaurants and fast food chains. The Company also faces intense competition from online retail giants such as Amazon.”

In Bentonville, Arkansas some Walmart Inc. ($WMT) employee is sitting there thinking, “Why does Amazon always get the credit and free publicity? WTF.” Anyway, the company adds that food deflation, price wars and its higher cost structure (read: unions) compressed margins relative to the competition, furthering the need for a restructuring.

Now, the company notes that all but 21 stores are “currently generating positive EBITDA.” And in court, attorneys from Weil Gotshal & Manges LLP represented that there wouldn’t be a significant footprint reduction (note: a motion is on file to reject the leases of 3 “dark stores”). All of this seems right if the stores are EBITDA positive but we’d bet that (i) there’ll be some closures and (ii) the company will try to “consensually” squeeze its unions for some meaningful union/pension concessions. In other words, the little guy definitely isn’t getting out of this situation at par.

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Speaking of the affected little guy, it looks increasingly like Toys R Us is, in fact, an explosive dumpster fire. Consider this week’s news:

  • Toys R Us UK is on the ropes with more than 3k jobs at stake.

  • CNBC reported that Toys R Us is in danger of breaching a covenant in its $3.1b DIP credit facility. Like, already. Why? Because holiday sales were obviously abysmal.

  • The Wall Street Journal reported that Toys R Us may close another 200 stores AND renege on its previous promise to pay severance to those employees burdened with digging their own graves, so to speak. Note, though: a Toys R Us spokesperson claimed that talk of additional closures is premature. Premature but not necessarily inaccurate.

All of this noise will do nothing but create a negative cascading effect with those very parties who were supposed to take comfort from Toys’ massive $3.1b DIP financing package. Apropos, suppliers are contingency planning. Per USAToday:

“Industry analysts who attended Toy Fair said they saw manufacturer support for Toys R Us shift during the four days of the fair, with vendors signaling that they are preparing for life after Toys R Us.”

And, rightfully so. JAKKS Pacific Inc. ($JAKK) reported earnings earlier this week and the company led with Toys R Us in its earning release:

“A number of factors contributed to a soft fourth quarter, including the bankruptcy of Toys R Us….”

Net sales were down $31mm YOY and gross margin decreased by 8.1%. The company reported a net loss per share of $1.33. Ouch. Better contingency plan faster, dudes.

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So back to Amazon. Tops blames Amazon. Toys R Us blames Amazon. Everyone blames Amazon. For bankruptcy. For job loss. And yet Amazon Prime subscriptions grow exponentially (to 64% of households). Amazon’s stock price hit $1500/share on Friday; Amazon may soon race past Apple in market cap. As Scott Galloway points out:

“Consider that Amazon, with a market cap of $591 billion, is worth more to the stock market than Walmart, Costco, T. J. Maxx, Target, Ross, Best Buy, Ulta, Kohl’s, Nordstrom, Macy’s, Bed Bath & Beyond, Saks/Lord & Taylor, Dillard’s, JCPenney, and Sears combined.”

Where does this take us? Columbia professor Tim Wu recently wrote in The New York Times,

“Americans say they prize competition, a proliferation of choices, the little guy. Yet our taste for convenience begets more convenience, through a combination of the economics of scale and the power of habit. The easier it is to use Amazon, the more powerful Amazon becomes — and thus the easier it becomes to use Amazon. Convenience and monopoly seem to be natural bedfellows.

Given the growth of convenience — as an ideal, as a value, as a way of life — it is worth asking what our fixation with it is doing to us and to our country.” 

Yes. Yes, it is. Eric Newcomer writes in Bloomberg,

“And we haven't event talked about Amazon yet. Cities are prostrating themselves at the company's feet, trying to secure its second headquarters. Amazon can do no wrong in consumers' eyes. But if you talk to bankers or business people, Amazon is the one that strikes the most fear in their hearts. It controls more than two-thirds of the U.S. e-book market now. Amazon alone has the stock market's support to enter new industries, drive margins to zero and destroy rivals in search of more scale. It's great for shoppers and terrifying if you're in the grocery or pharmaceutical business.”

Galloway, in calling for the breakup of the “Big Four,” mind you, adds the following,

“Consider: Amazon has become such a dominant force that it’s now able to perform Jedi mind tricks and inflict pain on potential competitors before it enters the market. Consumer stocks used to trade on two key signals: the underlying performance of the firm (Pottery Barn’s sales per square foot are up 10 percent) and the economic macro-climate (more housing starts). Now, however, private and public investors have added a third key signal: what Amazon may or may not do in the respective sector.”

To his point, in the absence of some externality (and, to be clear, we’re not taking a position on regulation here), Amazon’s reach is astounding. Said another way: many more bankrupted companies are going to blame Amazon in First Day Declarations.

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Which brings us back to the viral Josh Brown “Just Own the Damn Robots” piece we’ve referred to before. As businesses are disintermediated and people lose their jobs, pensions, and employee stock plans (here, Appvion), its no wonder that the FANG stocks continue to shoot through the roof. Just. Own. The. Damn. Robots. But it’s not the people who are losing their jobs, pensions and employee stock plans that are buying Amazon stock at $1500/share. Significantly, Jeff Bezos is reticent to do a stock split. And so, more likely than not, those very same people are shut out from that equity growth story too. No job and no wherewithal makes ownership - of robots, of anything - pretty damn hard.