Fallout from Toys R US & More Distressed Retail

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Blah, Blah, Private Equity = Death to Retail?

Courtesy of the New Yorker, some more Toys "R" Us history here. Mattel ($MAT) had to amend its credit agreement, reflecting significant leverage ratio uncertainty after the Toys "R" Us bankruptcy filing. Jakks Pacific Inc. ($JAKK) reported that it now expects a net loss in '17 and then, as if to pour salt on the wound, the ratings agencies unleashed a downgrade. Folks are getting increasingly nervous about the retail fallout amidst conflicting reports about store closures/openings. PETITION NOTE: lost in all the noise around Toys is that their new business plan calls for increased employee wages - implying a belief that Walmart's ($WMT) wage increases have helped Walmart provide a better "experience."  PETITION NOTE II: It appears that the lenders firmly believe that comparisons between Toys "R" Us and (liquidated) Circuit City are misplaced. Toys is THE LAST LARGE free-standing toy seller. Circuit City was generally expendable given that, at the time, the space was considered saturated and uber-competitive. Now, Best Buy ($BBY - up ~26% YTD, which is down after cratering the other day) fills that void. Just like Barnes & Noble ($BKS - down ~37% YTD) fills the (physical) book void (well, at least until Amazon book stores sprout in force - already it's popping up in New York and LA). And Dick's Sporting Goods ($DKS - down ~50% YTD) now has significant sporting goods market share. We're not saying WE would invest on this "LAST" basis because we wouldn't be caught dead with DKS, BKS or BBY in the PETITION 401(K); but, we are saying that the lenders appear to be lending, at least in part, on that basis. And word is that the DIP is over-subscribed (and Reorg Researchcaptures how lenders are clamoring for inclusion). Meanwhile, the list of distressed retailers seems to grow by the day: note: Belk Inc., Fresh Market, Bi-Lo, 99 Cents Only Stores and more (blah blah, private equity). But, to put an exclamation point on this, see, "Private equity drove Toys "R" Us into bankruptcy, sure, but that isn't quite the same thing as destroying it."

Discounted Balls: Sports Retailers Getting Crushed

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We had previously warned that the pain trickling through the sporting goods retail space - combined with Nike's new efforts to go B2C via Amazon and otherwise - will hurt the Foot Lockers ($FL), Dick's Sporting Goods ($DKS), and Hibbett Sports ($HIBB) of the world. Well, we should have put our money where our mouth is: Hibbett Sports Inc. reported that it was going to miss its Q2 numbers BADLY with same store sales tumbling 10%. But, at least they've got a fancy new e-comm site up (with a lot of sale action going on).

Welcome to the Party, Hibbett Sports Inc. $HIBB

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6/26/17 Post: The past few years haven't been kind to the sporting goods and outdoor retailers with The Sports Authority, Eastern Mountain Sports (twice), City Sports, Golfsmith, Gander Mountain, MC Sporting Goods and JackRabbit Sports going bankrupt or being sold for parts. Now word is via Goldman Sachs that large brands like Nike ($NKE) will use Amazon's distribution channel directly and for exclusive products in an attempt to capture more of the millennial market. The news sent Foot Locker ($FL) and Dick's Sporting Goods ($DKS) stock reeling. This also doesn't bode well for the likes of Hibbett Sports Inc. ($HIBB). 

7/24/17 Update: "This also doesn't bode well for the likes of Hibbett Sports Inc. ($HIBB)." Well, we sure nailed that one on the head. This morning, HIBB is down over 29% on the news that it expects its Q2 same store sales to plummet approximately 10%. This, combined with gross margin pressures, will push the company to a Q2 loss - versus an expected consensus call of roughly 15 cents per share. The company also announced that it is launching an e-commerce site. Better late than never, we guess. 

Sporting Goods (Amazon Can Derelict Our Balls)

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The past few years haven't been kind to the sporting goods and outdoor retailers with The Sports Authority, Eastern Mountain Sports (twice), City Sports, Golfsmith, Gander Mountain, MC Sporting Goods and JackRabbit Sports going bankrupt or being sold for parts. Now word is via Goldman Sachs that large brands like Nike ($NKE) will use Amazon's distribution channel directly and for exclusive products in an attempt to capture more of the millennial market. The news sent Foot Locker ($FL) and Dick's Sporting Goods ($DKS) stock reeling. This also doesn't bode well for the likes of Hibbett Sports Inc. ($HIBB). 

Lots of Busted #Retail Narratives

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Get em' a body bag. This is getting ugly. A few counter-narratives got napalmed this week in the retail space. It was a solid flameout, but, by the end of the week, there were some relative positives...

First, the narrative that discounted apparel retailers are doing just fine. Well BAM! Then The TJX Companies Inc. ($TJX) reported totally lackluster numbers for its T.J. Maxx and Marshall's brands. The floor fell out from under the stock in response. (To be fair, though, Ross Stores Inc. ($ROST) reported revenue and earnings growth though, still, at a slower pace).

Second, that "there will be winners from the bankruptcies." Well, that narrative got absolutely dumped on when Dick's Sporting Goods ($DKS) reported numbers. We're old enough to remember the bump that Dick's was supposed to get from The Sports Authority liquidation. Well, the stock got no such bump on its way to a 14% decline (though, there could be some credence to the argument that this is short term pain once the COB sales of recently liquidated competitors, e.g., Gander Mountain, end).

Can Super Hipster save the day? No, no, of course not. His jeans are too frikken tight...as evidenced by the bloodshed that was Urban Outfitters ($URBN) earnings report.

Okay, enough doom and gloom already: footwear is clearly safe. Wait. No. No its not. Foot Locker ($FL) reported and the stock immediately got pummeled. Apparently the white Adidas thing is over. Next?

Now, on the flip side, Target ($T) busted expectations favorably despite declining numbers across the board (other than a fairly meaningful increase in e-commerce); Ralph Lauren ($RL) exceeded pretty low expectations, though same stores sales comps declined 11%; Gap Inc. ($GPS) generally surprised all around and saw its stock rewarded. And then there was Walmart ($WMT). The behemoth reported growth in revenue and same store sales numbers and a KICKA$$ 63% sales growth figure for e-commerce (though this perhaps shows they were starting from virtually nothing).

Some narratives that DID hold: consumers don't want to spend discretionary income to be a walking billboard for brand. Apropos, American Eagle Outfitters' numbers were bloody. And women's specialty retail continues to be beaten down: Ascena Retail Group ($ASNA) - better known for brands like Dress Barn and Ann Taylor - offered horrible guidance and subsequently traded down 29%. Bon-Ton Stores showed same store sales down 8.8% and a net loss of nearly $60mm. Fresh off of getting a target painted on its back by the ratings agencies, big and tall men's apparel retailer Destination XL Group Inc. ($DXLG) announced some pretty bearish guidance. Finally, Florida-based department store Stein Mart Inc. ($SMRT) got OBLITERATED by the perfect storm of massive discounts and light foot traffic on its way to suspending its dividend and a massive stock plummet (though e-commerce showed improvement). 

Did you get all of that?

News for the Week of 2/26/17

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  • Busted Startups. Here, Beepi. Despite $150mm of VC and a last raise at a $564 valuation, the used-car marketplace is selling for parts, with Sherwood Partners acting as assignee. With auto-lending for new cars at subprime levels, this capitulation isn't all-too surprising.
  • Busted Startups II. Some argue that part of the failing brick-and-mortar narrative relates to delivery services like Birchbox. Maybe not. Trunk Club sold to Nordstrom and has languished and now JackThreads looks like it's worth JackSh*t. 
  • Clean Energy. Challenges. But progress with storage.
  • Disruption. The fall of Blackberry.
  • Distressed Investing. In malls. These guys have cajones.
  • Greece. Remember the bailout controversies that sent the markets into a tizzy a few years back? Yeah, they're back. Europe looks staged for a lot of volatility in coming months with elections looming in France and Germany. This could create some real interesting investment opportunities. Of course, that's what people said of Brexit, too.
  • Power. Maybe. Maybe not. This week the denials poured down from Toshiba re: Westinghouse. Meanwhile, FirstEnergy drops some bombs in its investor presentation.
  • Restaurants. Five chains that look like dogsh*t in 2017.
  • Retail. Apparently President Trump's promises to make America great again did not take into account all of the vitriol that would be unleashed towards his brands and resulting domino effect: case and point, Perfumania, which was teetering BEFORE folks wanted to wash themselves of the Trump stank. Speaking of mall-based stench, L Brands' Victoria's Secret ain't looking so hot these days as forward guidance looked bleak. And Amazon announced the release of its discount bras. Cue Jaws theme song.
  • Retail II. People have been talking about Toys R' Us for years and in '16 they took steps to deal with the over-levered balance sheet. The company continues to cut costs on the ops side too. Meanwhile, other companies like J.Crew are engaging in Intellectual Property machinations to stave off the inevitable and raise financing - the legality of which remains an open question.
  • Retail III - Department Stores. AlixPartners makes a cameo appearance in this interesting summary of the state of department stores. Choice stat: "As recently as 1999, department stores had total sales of $230 billion. Last year they came in at $155.5 billion, according to Census data." Accordingly, JC Penney is closing 140 stores (and probably still has 300 too many) and Sears is continuing to cut costs with 130 HQ firings. On point, Macy's reported numbers this past week. And so did Walmart - and the market initially responded in a way that is a smack to Warren Buffett (see last week's newsletter). Meanwhile TJX Cos. (TJ Maxx, Home Goods, Marshalls) showed that brick-and-mortar still has some legs (as did Nordstrom).
  • Fast Forward: Ocean Rig acknowledged that it's effed and the stock took a dive: a possible bankruptcy is on the horizon. And Cumulus Media had a setback in its efforts to restructure.
  • Rewind I: Sporting goods - analysts are starting to notice the massive bloodbath and, accordingly, downgraded Dick's Sporting Goods.
  • Rewind II: Let's hope that Sycamore Partners' purchase of The Limited fares better than Versa Capital Management's investment in Eastern Outfitters. $26.8mm price tag. Meanwhile, Wet Seal is available.
  • Chart of the Week: 
  • Tweet of the Week:

News for the Week of 01/29/17

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  • Artificial Intelligence. Throw the phrase "AI-based" in front of anything and all of the sudden it's like gold. Including retail. We're pretty sure we'll start seeing established companies start rebranding to curtail further devolution, e.g., neiman-marcus.ai or Macy's.ai. After all, we have MacGuyver back on TV and Luke Skywalker back in the theaters...might as well get nostalgic for .com-style frenzy. 
  • Boutique IBanking. An interesting review of the stock performance of one of the original public boutique investment banking firms out there: Greenhill & Co. 
  • Coal. Longview Power CEO Jeff Keffer's assessment of the industry. TL;DR...at least under Trump there's a chance...
  • Conflicts. Believe it or not, conflicts DO exist in bankruptcy court. We're just as shocked as you, but in the Transtar bankruptcy cases, Willkie Farr & Gallagher LLP submitted a motion seeking to withdraw from the case after it determined that "in responding to requests by the Examiner in the course of its investigation, WF&G's own interests may conflict with the interests of the Debtors, or create an appearance of such a conflict." Pinch us. Jones Day LLP is apparently taking Willkie's place for the debtors.
  • Hedge funds. This about sums it up: "No matter what initial capital you give the hedge fund to start with, the hedge fund will become richer than you since its real talent is transferring your wealth into its coffers..."  Indeed, with 2/20, a hedge fund making 10% will make more money than its investors in 17 years.
  • Malls. We probably give the impression that we really love to shop given all of the mall talk lately. But, c'mon, you can talk to us until you're blue in the face about A Malls and C Malls but the truth is that A-LL malls are looking increasingly screwed. There are so many experiential possibilities. 
  • Neiman Marcus as a High Yield Sinkhole. The debt is plummeting: some holders are hitting eject on high yield retailers. And more concerns about liquidity in the bond market.
  • Taxis. So, the Uber effect is contagious? Seemingly so. Capital One Financial holds a distressed (and distressing) taxi medallion lending portfolio. Ugly chart here. Clearly the business traveler has embraced non-taxi options.
Natural gas price projections.

Natural gas price projections.

News for the Week of 12/04/16

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Filings down this week so packing in the news...

  • Aeropostale. Cascading effect. American Eagle Outfitters blames Aeropostale's going-out-of-business sales for same store sales declines and lowered forward guidance. Seems, however, that the pain is more widespread than that: this week mall retailer Express Inc.'s stock got trounced after reporting YOY net and comp sales declines (silver lining: e-commerce sales were up 15%). E-commerce isn't immune to downtrends either: Bodybuilding.com laid off 90 workers this week with minority owner Ryan DeLuca stating the VERY obvious, "E-commerce is tough and getting tougher with competition from Amazon and thousands of others." 
  • Salus Capital. The zombie that was once Salus Capital is in the news again as it funds the Chapter 11 wind-down of Hampshire Group.
  • Sobey's. Another deadbeat (Canadian) grocer. Apparently the synergies expected from buying Safeway's Canadian stores haven't come to fruition.
  • Solar. A synopsis of the industry's convergence with restructuring and challenges that lay ahead.
  • Fast Forward: Many are now starting to call Uber's business model into question: an argument made easier by a $1.2b cash burn loss in the first six months of '16. 
  • Rewind I: Cosi Inc. was unable to find a new buyer, settling, in the end, on a $10mm sale to the original stalking horse bidder (including a credit bid).
  • Rewind II: Nasty Gal. If this report is true, there is something strangely disturbing about a company called "Boohoo" buying another called "Nasty Gal." 
  • Rewind III: Bennu Oil & Gas, LLC filed for Chapter 7 weeks after the involuntary chapter 11 filing against its subsidiary, Bennu Titan. Last week we discussed feasibility and the (seeming) proliferation of Chapter 22s. This story is too brutal to even be a 22.  
  • Chart of the Week: This International Energy Agency chart forecasts that we've reached peak oil demand. Still, tepid interest in Verengo Inc.'s SoCal solar assets (no bid topping stalking horse: effectively sold for credit bid).

Chart of the Week II: Nike. The sneaker manufacturer announced this week that it would skip conventional wholesale channels like Dicks Sporting Goods, Foot Locker and others and sell its self-tying $720 HyperAdapt sneakers BtoC via its Nike+ app and at the NYC retail store. Clearly, Nike is paying attention to these recent consumer trends: