Tag Archives: Retailers

Post-Lockdown New Normal: Many Brick & Mortar Stores Will Not Reopen, CMBS will Default, Mess to Ensue, by Wolf Richter

Posted on March 31, 2020 | 1 comment

The coronavirus will be the end of many brick and mortar stores and their jobs. From Wolf Richter at wolfstreet.com:

Neither the Fed nor the Treasury can bail out brick-and-mortar retailers.

Macy’s announced today that it would lay off “the majority” of its 123,000 employees after it had closed all its Macy’s, Bloomingdale’s and Bluemercury stores on March 18. Even before the lockdowns, its headcount was already down 17% from four years ago, in line with the decline of its brick-and-mortar operations. It said these stores would “remain closed until we have clear line of sight on when it is safe to reopen.”

Whenever that may be. But “at least through May,” the furloughed employees who were already enrolled in its health benefits program “will continue to receive coverage with the company covering 100% of the premium.” And it said, “We expect to bring colleagues back on a staggered basis as business resumes.” That is, if business at these brick-and-mortar stores resumes.

Department stores have been on a 20-year downward spiral that has ended for many of them in bankruptcy court where they got dismembered and sold off in pieces. The survivors, which have been shuttering their brick-and-mortar stores for years, are now getting hit by the lockdowns.

The chart depicts the brick-and-mortar business that Macy’s, Nordstrom, Kohl’s, JCPenney, Neiman Marcus, Sears, Bon-Ton Stores, Barney’s and others are in – or were in. Over the past 20 years, department store revenues declined by 43%. And now they’re getting whacked for good by the lockdowns. That declining line of revenues is going to make a 90-degree downward kink in Q1, Q2 and Q3, to violate the WOLF STREET beer-bug dictum that “Nothing Goes to Heck in a Straight Line”:

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Retail’s Existential Threat? Private Equity Firms, by John McNellis

Posted on April 19, 2019 | 1 comment

What private equity firms do to companies they buy is often nothing short of criminal. From John McNellis at wolfstreet.com:

A “bust out” is a fraud tactic used in the organized crime world wherein a business’s assets and lines of credit are exploited and exhausted to the point of bankruptcy — Wikipedia.

Bleeding badly, Debenhams, a 200 year old British department store chain, died last week. The coroner trotted out the usual suspects — the internet, the oversupply of retail, rising rents, tighter margins and, at the end of the dreary line-up, private equity. As it happens, Debenhams had been purchased by a private equity consortium led by Texas Pacific Group (TPG) in 2003.

That group paid £1.8 billion for the company, using £600 million in equity and £1.2 billion in debt it forced Debenhams to assume. The private equiteers promptly began selling off assets, dramatically cutting costs (store refurbishments dropped 77%) and awarding themselves large dividends for their efforts. And, no surprise, consumers lost interest in the fraying stores.

Since I first wrote about private equity’s looting and ultimate devastation of Mervyn’s (“On Private Equity and Real Estate” September 2012, behind paywall), retailer after retailer has been similarly gutted. Payless Shoes, Toys ‘R’ Us, Gymboree, Sears Holding, Mattress Firm and Radio Shack — all companies at one point owned or controlled by private equity firms — have since filed Chapter 11. In fact, Debtwire, a financial news service, calculates that about forty percent of all US retail bankruptcies in the last three years were private equity backed.

How do the private equiteers do it? Simple, the leveraged buyout. The LBO is the financial world’s pick and roll, that is, a highly effective play that is difficult to counter, especially if the PE firm takes the prudent first step of bribing its intended victim’s CEO into going along with their acquisition.

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Brick & Mortar Meltdown Pummels These Stores the Most, by Wolf Richter

Posted on May 17, 2018 | 1 comment

Many brick and mortar stores are getting killed by e-commerce. From Wolf Richter at wolfstreet.com:

Only about half of retail is under attack from e-commerce, but that half is getting crushed.

E-commerce sales in the first quarter soared 16.4% from a year ago to a new record of $123.7 billion (seasonally adjusted), according to the Commerce Department this morning. E-commerce includes sales by online retailers such as Amazon but also by the online operations of brick-and-mortar retailers, such as Walmart, Target, or Macy’s. Over the past five years, e-commerce sales have doubled:

Many observers keep pointing out that e-commerce still accounts for only a small part of total retail sales — in Q1 a new record of 9.3%. And so these observers say the brick-and-mortar meltdown isn’t happening. But it’s not that simple.

There is a bitter reality hidden under these averages: Some retail sectors are getting totally crushed by e-commerce, but others remain largely resistant for now – and this has been borne out by retailer bankruptcies and liquidations over the past three years.

How did brick-and-mortar retail do on its own?

Total retail sales in Q1 – e-commerce and brick-and-mortar combined, but excluding sales at restaurants and bars – increased 5.3% year-over-year to $1.31 trillion.

Retail sales without e-commerce in Q1 rose 3.4% from a year ago.

The “online resistant” bunch: These are brick-and-mortar sectors whose sales have not massively migrated online, for various reasons, including the nature of the product. Most prominently: Gas stations, auto dealers, and grocery and beverage stores. These “online-resistant” sectors combined account for over half of all brick-and-mortar sales. In Q1, their combined sales rose 4.6% to $610 billion.

The “under-attack” bunch: Most of the remaining sectors are under all-out attack from e-commerce. And sales at the “under-attack” sectors edged up only 2.1% in Q4, below the rate of inflation as measured by CPI, even as e-commerce sales surged 16.4%. This chart shows how e-commerce is eating into the share of the brick-and-mortar retailers that are under attack:

But even that chart averages out the meltdown in specific sectors. Some brick-and-mortar sectors have already been largely wiped out, such as music stores and video stores. Others have been decimated by e-commerce, such as sales at book stores and toy stores, including Toys “R” Us which is currently being liquidated.

To continue reading: Brick & Mortar Meltdown Pummels These Stores the Most

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The Private Equity Firms at the Core of Brick & Mortar Retail Bankruptcies, by Wolf Richter

Posted on January 22, 2018 | Leave a comment

Private equity is often legalized theft. Here’s how it’s done, from Wolf Richter at wolfstreet.com.

An astounding list of the meltdown: PE firms doomed the retailers.

One of the big forces in the brick-and-mortar retail meltdown are private equity firms that acquired retail chains via leveraged buyouts during the LBO boom before the Financial Crisis or more recently. Numerous of those retail chains have now filed for bankruptcy.

A PE firm typically borrows to undertake the leveraged buyout. But instead of carrying the debt at the firm, the debt is loaded on the acquired company, on top of the debt it had before the buyout, and it has to service that large pile of debt.

In addition, PE firms typically extract fees and “special dividends” from their portfolio companies which will fund them with additional debt. These fees and special dividends are tools with which PE firms extract profits up front. Lenders and other creditors carry the risks.

The final goal is to unload the portfolio company by selling it either to a large corporation or to the public via an IPO within a few years (seven years is a rule of thumb).

This works ok-ish in a booming industry. But brick-and-mortar retail – particularly apparel stores, shoe stores, sporting goods stores, department stores, and the like – came under withering attack from online sales in recent years, while suffocating under their debts.

Toys ‘R’ Us shows how this was done: PE firms KKR, Vornado Realty Trust, and Bain Capital Partners acquired the publicly traded shares of Toys ‘R’ Us in an LBO in 2005. In 2004, Toys R Us had $2.2 billion in cash and short-term investments. By Q1 2017, this had collapsed to just $301 million. Over the same period, long-term debt surged from $2.3 billion to $5.2 billion.

In other words, “cash minus debt” was -$112 million in 2004. By 2017, it had ballooned to -$4.9 billion.

While the PE firms were busy extracting cash, the company, cash-strapped and focused on cost-cutting, failed to create an online presence that could compete with Amazon and others, didn’t successfully make the transition to electronic devices, video games, and apps, and let its physical stores deteriorate. It should have spent the last decade investing heavily in its future. Instead, it was forced to borrow large amounts of money just to enrich its PE-firm owners. In September last year, it filed for Chapter 11 bankruptcy.

To continue reading: The Private Equity Firms at the Core of Brick & Mortar Retail Bankruptcies

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How US Debt Slaves Get Trapped by “Deferred Interest”, by Wolf Richter

Posted on November 2, 2017 | Leave a comment

Read the fine print on those “great deals” retailers offer to get you to sign up for their credit cards. From Wolf Richter at wolfstreet.com:

But over the next 2 months, they’ll try to prop up US retailers and the entire global economy.

Credit cards play a huge role in what the US retail industry hopes will be a $682-billion splurge by Americans over the holiday selling season. Already, total revolving consumer credit outstanding – mostly credit cards – has reached $1 trillion, up 5.4% from a year ago, and will surge over the next two months, as US consumers try to prop up the global economy by going deeper into debt.

So the consumer finance industry is proffering its services via store-branded credit cards to make this happen. It’s not doing this for the love of the US economy but to extract its pound of flesh from consumers who don’t make enough money to pay off their credit card balances every month – the very debt slaves that carry the $1 trillion on their backs – and who don’t read the fine print. For them, the finance industry has a special money extraction tool: “deferred interest.”

When consumers are at the cashier or online, they may get offers of 0%-financing and a discount on the first purchase if they sign up for a store-branded credit card on the spot. A study by WalletHub of the financing options offered online by 75 large US retailers found that all retailers that offer store-branded cards with 0% financing use “deferred interest” clauses:

Deferred-interest financing is like a wolf in a sheep’s clothing, pairing an enticing offer – something like “no interest if paid in full” or “special financing” – with a clause that allows the deal to turn ugly if you make the slightest mistake. Paying your bill a day late or owing even $1 when the promotional period ends would enable the issuer to retroactively apply finance charges to your entire original purchase amount, as if the intro rate never existed.

These “deferred interest” clauses are “commonly found in the fine print of retailer payment plans,” it says. They’re easily overlooked in the heat of the checkout battle. But they specify that high interest rates – up to 29.99% among the credit cards studied – may be applied retroactively to the full purchase amount back to the purchase date if one of these two common things happens:

  • Customer misses a monthly payment, or
  • Customer doesn’t repay the full balance within the 0% intro period.

 

 

To continue reading: How US Debt Slaves Get Trapped by “Deferred Interest”

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The Big Amazon Subsidy is Doomed, by Wolf Richter

Posted on October 10, 2017 | Leave a comment

One huge advantage for Amazon over it’s brick-and-mortar competition is that it hasn’t had to collect sales taxes. From Wolf Richter at wolfstreet.com:

But for many retailers it’s too late.

Amazon battled states for years to avoid having to collect sales taxes. Walmart was on the other side of the fight, along with state revenue offices. Walmart had to add sales taxes to all its sales in California, whether online or brick-and-mortar, which at the time ranged from 7.25% to 9.75% depending on location. For shoppers, that price difference was reason enough to switch to Amazon. It was in essence a massive taxpayer subsidy for Amazon.

But Amazon lost that battle and started charging sales taxes in California in September, 2012. State after state followed. By early 2017, Amazon was charging sales taxes in all 45 states that have state-wide sales taxes and in Washington DC.

Still, even in 2016, online retailers dodged paying $17.2 billion in sales taxes on out-of-state sales, according to the National Conference of State Legislatures. For them, it’s a massive price advantage that other retailers didn’t get.

The fight over sales taxes is based on a Supreme Court case of 1992 – Quill Corp. v. North Dakota – that barred states from forcing companies to collect sales taxes if they didn’t have physical facilities in those states, such as stores or warehouses.

For Amazon, this got increasingly complicated as it is building out its distribution network, with warehouses and facilities around the country. So now Amazon is collecting sales taxes.

Problem solved? Nope.

Amazon only collects sales taxes on sales of inventory that it owns (first-party sales). But Amazon is also a platform that sells merchandise owned by other sellers (third-party sales). About half of the goods sold on the Amazon platform fall into this category. Amazon leaves sales tax collections to the 2 million merchants on its platform. But they claim that it’s not their job to collect sales taxes, and most of them don’t collect them. Hence, third-party sales still get the taxpayer subsidy.

Amazon isn’t the only out-of-state retailer or platform. It’s just the biggest one. eBay and many others are impacted by it too. Legally, this remains murky. But states and brick-and-mortar retailers are fighting to get the subsidy scrapped.

“It’s a fairness issue,” Minnesota Senator Roger Chamberlain told Bloomberg. “Right now, there’s an unlevel playing field that disadvantages brick-and-mortar stores.”

To continue reading: The Big Amazon Subsidy is Doomed

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State of Retail: JCPenny Plunges, Now a “Penny” Stock; Amazon to Blame? by Mike Mish Shedlock

Posted on August 13, 2017 | Leave a comment

The retail sector is undergoing a huge and painful transformation, not all of which is driven by Amazon. From Mike Mish Shedlock at mishtalk.com:

JCPenney announced a $62 million dollar loss for the quarter. With the announcement, its share price plunged 16% breaking the $4 barrier for the first time. Stocks under $5 are considered “penny” stocks.

Please consider JCPenney Nosedives to All-Time Low on Big Loss.

Yup. JCPenney is now a penny stock — a Wall Street term for a company trading under $5. JCPenney (JCP) said it lost $62 million in its second quarter. That’s more than a year ago. The retailer also said that same store sales — a measure of how well stores open at least a year are doing — fell more than 1% during the quarter.

JCPenney is the latest department store chain to announce dismal results. Macy’s (M), Kohl’s (KSS) and Dillard’s (DDS) all reported a decline in same store sales on Thursday as they struggle to compete against Amazon (AMZN, Tech30) and Walmart (WMT).

The massive shift in the retail landscape has led many chains to shut down underperforming stores.
JCPenney is one of them, announcing earlier this year it would be closing 138 stores. JCPenney wound up delaying the closings by a month though after consumers rushed to many of the stores to take advantage of the massive liquidation sales.

Ellison also said during the analyst call that JCPenney expects many retailers to ramp up promotions and discounts to try and lure shoppers into their stores. The CEO warned these sales may be even more aggressive than “what we’ve traditionally seen.”

Don’t Blame Amazon

Amazon is not to blame, but Amazon sure does not help either.

Retail is massively overbuilt. That’s the big problem. And it’s not just the box retailers. The fast food restaurants are all cannibalizing each other’s sales too.

To continue reading: State of Retail: JCPenny Plunges, Now a “Penny” Stock; Amazon to Blame?

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The ‘Retail Apocalypse’ Is Officially Descending upon America, by Carey Wedler

Posted on March 24, 2017 | 1 comment

The hits just keep on coming on the retail front. From Carey Wedler at theantimedia.org:

Consumerism has long been a defining element of American society, but retail giants are now shutting down thousands of their locations amid a long-anticipated “retail apocalypse,” as Business Insider describes it.

The outlet reports that over the next couple months, more than 3,500 stores are expected to close:

“Department stores like JCPenney, Macy’s, Sears, and Kmart are among the companies shutting down stores, along with middle-of-the-mall chains like Crocs, BCBG, Abercrombie & Fitch, and Guess.”

Some stores, like Bebe and The Limited, are closing all of their locations to focus more on online sales. Other larger chains, like JC Penney, are “aggressively paring down their store counts to unload unprofitable locations and try to staunch losses,” Business Insider notes. Sears and K-Mart are following a similar trajectory moving forward.

Sears is shutting down 150 Sears and Kmart locations, about 10% of their shops. JCPenney is shutting down 138 stores, about 14% of their total locations.

These closures are the consequence of several different factors. First, the United States has more shopping mall square footage per person than other parts of the world. In America, retailers reserve 23.5 square feet per person; in Canada and Australia, the countries with the second- and third-most space have 16.4 and 11.1, respectively.

Another reason retail brick and mortars are failing is the growth of e-commerce. Between 2010 and 2013, visits to shopping malls declined 50%, according to data from real estate research firm Cushman and Wakefield. Meanwhile, online sales from huge online outposts, like Amazon, have exploded.

To continue reading: The ‘Retail Apocalypse’ Is Officially Descending upon America

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The Bloodletting among Retailers Simply Doesn’t Let Up, by Wolf Richter

Posted on March 6, 2017 | Leave a comment

There are more bankruptcies and financial stress in retail land, including upscale icon Neiman Marcus. From Wolf Richter at wolfstreet.com:

A very busy day in Brick-and-Mortar Fiasco Land.

Neiman Marcus, the Texas-based luxury retailer with 42 stores around the country and two Bergdorf Goodman stores in Manhattan, is in no immediate risk of bankruptcy, the sources told Reuters on Friday, though it has hired investment bank Lazard Ltd to help restructuring its nearly $5 billion in debt.

When this news emerged, Neiman Marcus unsecured bonds due in 2021 plunged 7% to 54 cents on the dollar, according to Thomson Reuters, and its $3 billion term loan fell 5% to 77 cents on the dollar.

Earlier this year, Neiman Marcus scrapped its IPO entirely, after having delayed it in 2015 when its difficulties could no longer be swept under the rug. In December that year, it reported its first quarterly sales decline since 2009, with same-store sales dropping 5.6%. There was plenty of red ink. And layoffs commenced.

At the time, CEO Karen Katz blamed the oil and gas bust in which wealthy shoppers in Texas were tangled up. She also blamed the “strong dollar” that prevented foreign tourists from splurging at its stores in the gateway cities Honolulu, San Francisco, Las Vegas, New York, Washington, and Miami.

As so many times in the brick-and-mortar retail fiasco, there’s a private-equity firm behind it: In 2005, Neiman Marcus was subject of a leveraged buyout. It’s now owned by Ares Capital and the Canadian Pension Plan Investment Board. Their hopes of an elegant exit via an IPO have been scrapped.

But the Neiman Marcus restructuring news wasn’t enough for just a regular brick-and-mortar Friday.

“People with knowledge of the matter” told Bloomberg on Friday that appliances and electronics retailer HHGregg – which had announced on Thursday that it would close 88 of its 220 stores, shutter three distribution centers, and shed 1,500 jobs – is preparing to file for Chapter 11 bankruptcy.

It too needs to restructure its debt. Inventory will be sold off over the next few weeks, and the stores will be shuttered by mid-April.

To continue reading: The Bloodletting among Retailers Simply Doesn’t Let Up

 

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This is Why No One Should Bail Out the “Smart Money” Stuck in Brick-and-Mortar Retailers: Let them Shed their Own Tears, by Wolf Richter

Posted on May 3, 2016 | Leave a comment

Private equity often boils down to legalized theft. Here’s Wolf Richter with a crime report from retailing, on wolfstreet.com:

The toxic Safeway-Albertsons combo is waiting in the wings.

Late yesterday, Fairway Group Holdings, parent of Fairway Market – an “iconic New York food retailer,” as it calls itself, that had started out as a “veggie stand” in 1933 and now lists 18 stores on its website – crumpled under a pile of debt and filed for a prepackaged Chapter 11 bankruptcy. Almost exactly three years after its IPO!

Bankruptcy rumors have been swirling for a while. The company announced in February that it would need to raise capital in order to keep its doors open. April 15, Bloomberg reported that the company was negotiating a debt restructuring with its creditors, and that a deal was near for a prepackaged Chapter 11 filing.

When the company did file yesterday, it stated that it wanted to “eliminate” $140 million senior secured debt. In return, these creditors would get common equity and $84 million of new debt of the reorganized company.

All of the currently outstanding shares will be cancelled. Screw those who’d bought them. They should have known better. That was the message.

It was no surprise, except perhaps for the penny-stock jockeys dabbling in its shares: today, FWM plunged 62%, from 21 cents a share to 8 cents a share. They’ll plunge 100% from here to zero.

As in so many cases when investors get wiped out, there’s a private-equity angle to it.

In 2007, private equity firm Sterling Investment Partners purchased an 80% stake in the privately held company, loaded it up with debt, stripped out assets, and pushed it into a big expansion drive to make it look pretty for an IPO down the road.

This was one of many retailers taken over by PE firms. Among the bigger ones:

Safeway and Albertsons, now under one PE hat, postponed its IPO, pending better market conditions; Neiman Marcus scrapped its IPO; Sports Authority just went bankrupt; Aeropostale is preparing for bankruptcy; Vestis Retail Group, owner of Eastern Mountain Sports, Bob’s Stores, and Sport Chalet just went bankrupt; Pacific Sunwear of California just went bankrupt; The Container Store IPOed in 2013 at $18 a share, first trade at $36, now at $6.60; J. Crew Group, 99 Cents Only Stores, Bon-Ton Stores, Claire Stores, and many more.

In April 2013, when Fairway had 12 stores, it was time for Sterling Investment Partners to exit. So they dumped the shares via an IPO into the laps of the unsuspecting public and conniving institutional investors with the usual Wall Street hoopla.

To continue reading: This is Why No One Should Bail Out the “Smart Money” Stuck in Brick-and-Mortar Retailers: Let them Shed their Own Tears

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