🛋Restoration Hardware B.R.I.N.G.S. IT (Long Shade)🛋

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There was so much that happened last week that we didn’t get a chance to report on RH’s stellar earnings report. We often report on sh*tty retail and so we’d be remiss not to highlight it: after all, RH crushed the home furnishing space this past quarter and fiscal year. It had record revenue, solid margins and strong go-forward guidance — despite headwinds such as tariffs (the costs of which the retailer unabashedly states will be passed on to the consumer). There were a number of interesting bits in the company’s earnings release.

In the midst of delineating successful initiatives, the company highlights:

Moving from a promotional to a membership model, elevating our brand and streamlining our business while developing a more intimate relationship with our customers.

That’s right. RH has one of the more shameful membership models out there: become a member and instantly benefit from meaningfully discounted prices. Then, forget that you became a member after your furnishing needs are satiated and continue to pay annual recurring membership fees to the retailer anyway. This annual membership isn’t like a media subscription or golf club dues: the chances of you purchasing furniture from RH every year are probably pretty low. As are the chances of you remembering to cancel your membership. Which, clearly, RH is banking on. One retailer’s promotion is another retailer’s flipped-upside-down membership model.

Second:

Opening architecturally inspiring and immersive physical experiences that render our products and services more unique and valuable, while doubling our retail revenues and earnings in every market.


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💥Mary Meeker’s “State-of-the-Internet” Slide Presentation💥

Another year, another banner “State-of-the-Internet” presentation from Mary Meeker. There are some bits that we thought would be of particular interest to the restructuring community.

  • For all we hear about Amazon and e-commerce destroying retail, e-commerce growth is slowing. It constitutes 15% of retail versus 14% a year ago.

  • There is a stark shift in time spent on various forms of media and, by extension, the use of ad budgets. This chart ought to frighten the sh*t out of print and radio content producers. Time spent on print and radio is down BIG. Even more disconcerting for print? All of the other mediums appear to have reached an equilibrium between time spent and ad spend but print, however, still enjoys a disproportionate amount of ad dollars. Said another way, print media outlets may still have some pain heading their way.

We’ve made recent mention of rising customer acquisition costs and how that might derail many retailers’ business plans. To reduce CAC, many streaming services (e.g., Zoom, Spotify) use free tiers at the top of their funnel to get potential customers in the door and familiar with their products and then focus primarily on making those potential customers happy instead of otherwise deploying effort to market wholesale (PETITION Note: similarly, this is what we do). That said, CACs are indeed increasing. Ms. Meeker has a chart for this:


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💩Coal Country is Busy. Noooo…not Mining. Filing. For Bankruptcy (Short #MAGA!)💩

Pour one out for the fine folks of eastern Kentucky and western Virginia. They can’t seem to catch a break.

Earlier this week, Cambrian Holding Company Inc. (and its affiliate debtors) joined a long line of coal producers/processors (e.g., Cloud Peak EnergyWestmoreland CoalMission Coal) who have recently filed for bankruptcy. The company employees approximately 660 people, none of whom are members of a labor union (in contrast to bigger, more controversial, coal filings, i.e., Westmoreland) and most of whom must be fretting over their futures. They must really be getting tired of all of the post-election “winning” that’s going on in coal country.

The company’s problems appear to start in 2015, at the time the company acquired TECO Coal LLC and assumed $40mm of workers’ compensation and black lung liabilities that TECO had previously self-insured. The company sought to leverage its broader scale to increase production but it failed to raise the working capital it needed to live up to its obligations and sustain production at levels necessary to service the company’s balance sheet. Post-acquisition, the company doubled revenues, but it couldn’t sustain that progress and nevertheless recorded net losses from 2015 through 2018. In turn, the company triggered financial covenant and other defaults under its ABL Revolver and Term Loan.

In other words, the company has been in a state of emergency ever since the acquisition. Almost immediately, the company “undertook various efforts to return to a positive cashflow,” which, as you might expect, meant idling or closing certain mining operations, stretching the usable life of equipment, and laying off employees.* Its efforts proved fruitless. Per the company:

Notwithstanding these efforts, the Debtors have been unable to overcome the pressures placed on their profit margins from steadily declining coal prices (along with burdensome regulations and the accompanying decline in demand for coal), all of which have contributed to the Debtors’ substantial negative cashflow and inability to consummate a value-enhancing transaction.

So, what now? The company, with assistance from Jefferies LLC, will attempt to find a buyer willing to catch a falling knife: the plan is to “commence an expeditious sale and marketing process” of the company’s assets (call us crazy, but shouldn’t it be the other way around?). To fund this process, the company has a DIP commitment from affiliates of pre-petition lenders for $15mm.**

*Interestingly, it was in March 2016 when Hilary Clinton infamously stated, “Because we're going to put a lot of coal miners and coal companies out of business.” At the time, Cambrian was already struggling, laying off people in an attempt to generate positive cashflow. That message really must’ve struck a chord down in coal country. WHOOPS.

**The Term Lenders swiftly objected to the terms of the DIP and the use of cash collateral.

⛽️Even the Permian Isn’t Infallible (Long Heaps of Oil & Gas Distress)⛽️

 

Even at 95 years old, you can’t get one past Charlie Munger. #Legend.

The Permian Basin in West Texas is where it’s at in the world of oil and gas exploration and production. Per Wikipedia:

As of 2018, the Permian Basin has produced more than 33 billion barrels of oil, along with 118 trillion cubic feet of natural gas. This production accounts for 20% of US crude oil production and 7% of US dry natural gas production. While the production was thought to have peaked in the early 1970s, new technologies for oil extraction, such as hydraulic fracturing and horizontal drilling have increased production dramatically. Estimates from the Energy Information Administration have predicted that proven reserves in the Permian Basin still hold 5 billion barrels of oil and approximately 19 trillion cubic feet of natural gas.

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And it may be even more prolific than originally thought. Norwegian research firm Rystad Energy recently issued a report indicating that Permian projected output was already above 4.5mm barrels a day in May with volumes exceeding 5mm barrels in June. This staggering level of production is pushing total U.S. oil production to approximately 12.5mm barrels per day in May. That means the Permian now accounts for 36% of US crude oil production — a significant increase over 2018. Normalized across 365 days, that would be a 1.64 billion barrel run rate. This is despite (a) rigs coming offline in the Permian and (b) natural gas flaring and venting reaching all-time highs in Q1 ‘19 due to a lack of pipelines. Come again? That’s right. The Permian is producing in quantities larger than pipelines can accommodate. Per Reuters:

Producers burned or vented 661 million cubic feet per day (mmcfd) in the Permian Basin of West Texas and eastern New Mexico, the field that has driven the U.S. to record oil production, according to a new report from Rystad Energy.

The Permian’s first-quarter flaring and venting level more than doubles the production of the U.S. Gulf of Mexico’s most productive gas facility, Royal Dutch Shell’s Mars-Ursa complex, which produces about 260 to 270 mmcfd of gas.

The Permian isn’t alone in this, however. The Bakken shale field in North Dakota is also flaring at a high level. More from Reuters:

Together, the two oil fields on a yearly basis are burning and venting more than the gas demand in countries that include Hungary, Israel, Azerbaijan, Colombia and Romania, according to the report.

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All of which brings us to Legacy Reserves Inc. ($LGCY). Despite the midstream challenges, one could be forgiven for thinking that any operators engaged in E&P in the Permian might be insulated from commodity price declines and other macro headwinds. That position, however, would be wrong.

Legacy is a publicly-traded energy company engaged in the acquisition, development, production of oil and nat gas properties; its primary operations are in the Permian Basin (its largest operating region, historically), East Texas, and in the Rocky Mountain and Mid-Continent regions. While some of these basins may produce gobs of oil and gas, acquisition and production is nevertheless a HIGHLY capital intensive endeavor. And, here, like with many other E&P companies that have recently made their way into the bankruptcy bin, “significant capital” translates to “significant debt.”

Per the Company:

Like similar companies in this industry, the Company’s oil and natural gas operations, including their exploration, drilling, and production operations, are capital-intensive activities that require access to significant amounts of capital.  An oil price environment that has not recovered from the downturn seen in mid-2014 and the Company’s limited access to new capital have adversely affected the Company’s business. The Company further had liquidity constraints through borrowing base redeterminations under the Prepetition RBL Credit Agreement, as well as an inability to refinance or extend the maturity of the Prepetition RBL Credit Agreement beyond May 31, 2019.

This is the company’s capital structure:

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The company made two acquisitions in mid-2015 costing over $540mm. These acquisitions proved to be ill-timed given the longer-than-expected downturn in oil and gas. Per the Company:

In hindsight, despite the GP Board’s and management’s favorable view of the potential future opportunities afforded by these acquisitions and the high-caliber employees hired by the Company in connection therewith, these two acquisitions consumed disproportionately large amounts of the Company’s liquidity during a difficult industry period.

WHOOPS. It’s a good thing there were no public investors in this thing who were in it for the high yield and favorable tax treatment.*

Yet, the company was able to avoid a prior bankruptcy when various other E&P companies were falling like flies. Why was that? Insert the “drillco” structure here: the company entered into a development agreement with private equity firm TPG Special Situations Partners to drill, baby, drill (as opposed to acquire). What’s a drillco structure? Quite simply, the PE firm provided capital in return for a wellbore interest in the wells that it capitalized. Once TPG clears a specified IRR in relation to any specific well, any remaining proceeds revert to the operator. This structure — along with efforts to delever through out of court exchanges of debt — provided the company with much-needed runway during a rough macro patch.

It didn’t last, however. Liquidity continued to be a pervasive problem and it became abundantly clear that the company required a holistic solution to its balance sheet. That’s what this filing will achieve: this chapter 11 case is a financial restructuring backed by a Restructuring Support Agreement agreed to by nearly the entirety of the capital structure — down through the unsecured notes. Per the Company:

The Global RSA contemplates $256.3 million in backstopped equity commitments, $500.0 million in committed exit financing from the existing RBL Lenders, the equitization of approximately $815.8 million of prepetition debt, and payment in full of the Debtors’ general unsecured creditors.

Said another way, the Permian holds far too much promise for parties in interest to walk away from it without maintaining optionality for the future.

*Investors got burned multiple times along the way here. How did management do? Here is one view (view thread: it’s precious):

😬

☄️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 Bloombergwe’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: DTC Disrupting DTC (Short the Notion of Long-Lasting Iconic Brands)

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First, as we've harped on time and time again, enough with the "iconic" nonsense. Charlotte Russe is NOT an iconic brand. Read "Shoe Dog" by Phil Knight and then you'll get a sense of a truly iconic brand. 

But speaking of brands, here is a feature by Noah Brier and Colin Nagy about Tracksmith, an upstart fitness apparel brand geared towards serious-but-still-amateur runners. They take the general view that other players in the space have watered down running apparel with the hope of appealing more broadly to the masses; these folks are more old school, a bit snobby about running, and unapologetic about it. 

We found this bit particularly interesting (check links — 100% spot on):

With the gold rush of direct-to-consumer brands, you get the sense that everyone is trying to quickly slap something together using the same agencies, the same colors, and the same paid Instagram strategy. But building strong core muscles and doing something that can stand for a long period of time requires taking some deliberately contrarian positions.

It's true. The ease with which one can start a business today with virtually no infrastructure (PETITION Note: yes, we get that this comment is mildly meta), has created a deluge of purported “brands” all seeking to leech hard-earned dollars out of your pockets as you have a fleeting moment of insecurity-inducing scroll-based FOMO upon the umpteenth picture of your ex-boyfriend with his goddess new girlfriend tanning on a yacht off the coast of Costa Rica clanking bottles with f*cking Jennifer Lawrence as you dive into the misplaced hope that retail therapy will help you feel better(!) about how you're "living the dream" -- but, like, not, really -- because your existence is literally accounted for in six minute increments while you're red-lining changes to the memo that you submitted when it was due two weeks ago and the partner only just now got around to reviewing it despite it being oh-such-an-emergency when it forced you to miss your bestie's birthday party, all the while wondering “what’s the f*cking point” considering you have no clue how you’re possibly going to compete to make partner against that trust-fund broheim who rowed crew at Princeton, with whom the Department Head (who is on his fifth wife) isn’t #MeToo-afraid to go out to drinks and dinner with, who needn’t worry, five years from now, about going through IVF while also working bone-crushing hours or, if successful, ducking off into a dark dank closet to pump while on a conference call leaning up against a bucket and mop set with a stronger personality than the junior partner who is still single, still living in his one bedroom West Village apartment he had in law school, and has an empathy quotient on par with a bowling ball, all while it's 75 degrees outside, there's not a cloud in the sky, and there are people far worse-paid-but-far-happier enjoying their life out in Madison Square Park. Damn Instagram feeds with those damn shiny photos of DTC brands. There goes $4,279. 🖕🖕🖕🖕🖕🖕

But we digress.

Back to DTC...

The first wave of DTC were disruptive and interesting. The Caspers and Warbys of the world. The second wave were perhaps a bit more opportunistic, chasing the gold rush of capital and seemingly less interested in the intangible magic that makes a long-standing and iconic brand. (See: the inherent contradiction with things like Brandless.) But perhaps a third wave of these types of brands can balance a heartbeat with the spirit that goes into a category disruptor.

And as more and more of these zombie, grown-in-a-lab DTC brands pile up (and subsequently drive up the CPMs of social advertising even more), those companies that actually have a vision will be the ones around to be handed down.

We have no crystal ball and cannot predict what will be handed down but the "drive up the CPMs of social advertising even more" bit is on point and potentially devastating to all of those retailers out there whose stated strategy is to deploy more resources to social marketing. The cover charge for that is getting far more onerous as Facebook Inc. ($FB) limits supply amidst fervent demand. Indeed, the over-saturation of social is leading to a dramatic shift in customer-acquistion-strategies, with DTCs spentding $3.8b on TV ads last year — an increase of 60% over 2017. It's gotten so hard to stick out……..


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🚗Auto is Effed (Short the Supply Chain)🚗

AlixPartners LLP cautions, “Auto Suppliers Have a Critical Window to Take Action Before the Slowdown.” The preface:

It may be spring in North America, but for the automotive industry, winter is coming. The industry is on the cusp of a potential cyclical slowdown, which is compounded by changes in technology and evolving consumer preferences. For automotive players—particularly suppliers—it’s critical to start examining worst-case scenarios in their planning and taking decisive action today to ensure that they can ride out the storm.

Storm? What makes Alix think one is imminent? For starters, we’re due. We’re due for a recession and when it comes, it’ll hit the cyclical auto industry hard. Second, technology. You’re either dumb or living in a cave if you haven’t noticed that every OEM is focused on what Alix dubs the “C.A.S.E.” ecosystem — connected, autonomous, shared mobility and electric cars. IHS Markit recently projected that fully electric vehicles will account for 7.6% of US vehicle sales in 2026. Per Axios:

"By 2023, IHS Markit forecasts 43 brands will offer at least one EV option — this will include nearly all existing brands as well as new brands entering the market — compared to 14 brands offering EVs in 2018.”

As we’ve discussed previously, that will have a devastating effect on the supply chain as parts critical to the combustion engine are no longer necessary. EVs require a fraction of the parts that combustion engine-based vehicles do. And, then, finally, Alix predicts this:

Overall, leverage among suppliers is still low compared to the financial crisis, but 2018 saw an increase, with a few large suppliers piling debt on top of weaker EBITDA. Several have already seen credit downgrades, earnings misses, or revisions to their earnings projections for 2019. The coming volume declines may leave some vulnerable suppliers unable to cover their debt—leading either to balance-sheet restructurings or more chapter 11 filings. Strong demand covers up a lot of issues, but in the current market, even a small drop in demand will have a dramatic impact on a capital intensive sector like automotive.

Coming volume declines? What is Alix referring to?


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President Trump Kills More Guns (Long Unintended Consequences).

Callback to four previous PETITION pieces:

The first one — which was a tongue-in-cheek mock First Day Declaration we wrote in advance of Remington Outdoor Company’s chapter 11 bankruptcy — is, if we do say so ourselves, AN ABSOLUTE MUST READ. The same basic narrative could apply to the recent chapter 11 bankruptcy filing of Sportco Holdings Inc., a marketer and distributor of products and accessories for hunting, which filed for bankruptcy on Monday, June 10, 2019. Sportco’s customer base consists of 20k independent retailers covering all 50 states. But back to the “MUST READ.” There are some choice bits there:

Murica!! F*#& Yeah!! 

Remington (f/k/a Freedom Group) is "Freedom Built, American Made." Because nothing says freedom like blowing sh*t up. Cue Lynyrd Skynyrd's "Free Bird." Hell, we may even sing it in court now that Toys R Ushas made that a thing. 

Our company traces its current travails to 2007 when Cerberus Capital Management LP bought Remington for $370mm (cash + assumption of debt) and immediately "loaded" the North Carolina-based company with even more debt. As of today, the company has $950mm of said debt on its balance sheet, including a $150mm asset-backed loan due June '19, a $550mm term loan B due April '19, and 7.875% $250mm 3rd lien notes due '20. Suffice it to say, the capital structure is pretty "jammed." Nothing says America like guns...and leverage

Indeed, this is true of Sportco too. Sportco “sports” $23mm in prepetition ABL obligations and $249.8mm in the form of a term loan. Not too shabby on the debt side, you gun nuts!


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😷Scumbaggery, Litigation and Decreased Liquidity Force Opioid Manufacturer into Bankruptcy (Long Soap on a Rope)😷

Within a week of entering into a massive settlement with the United States Department of JusticeInsys Therapeutics Inc. ($INSY) and six affiliates filed for bankruptcy in the District of Delaware.* The company is a specialty pharmaceutical company that commercializes drugs and drug delivery systems for targeted therapies (read: it manufactures opioids); it has two marked products. These products, if prescribed and used in the right way, aren’t in and of themselves evil (though former management is another story). In fact, one drug, Subsys, is used for cancer patients and is delivered in the (non-invasive) form of an under-the-tongue spray. The company’s other main drug, Syndros, is used to treat loss of appetite and anorexia associated with weight loss in people with AIDS as well as nausea and vomiting caused by anti-cancer medicine. Not one to miss out on all the latest fads, the company also apparently has cannabinoid-based formulations in its pipeline. Because, like, to the extent the company wants to pursue a sale, nothing will get investor juices flowing like cannabinoid! Will its marketing get done via Snapchat and its sales conducted via the blockchain? Maybe it ought to package its formulations with non-meat meat. Lit!!

All in, the company owns 94 worldwide patents and 62 patent applications with expiration dates ranging between 2022 and 2039. In other words, it does have some potentially valuable intellectual property.

The company’s synopsis of why it is now in bankruptcy court reflects the world of opioid producers today:

…the Debtors are facing extensive litigation relating to their SUBSYS® product (“Subsys”), which is a prescription opioid. As of the Petition Date, one or more of the Debtors have been named in approximately one thousand lawsuits, and the Debtors anticipate that additional lawsuits may be commenced in the future. Some of the litigation they are facing is common to all opioid manufacturers, while other claims are based on particular alleged activities of the Debtors’ former executives, many of whom either pleaded guilty to or were convicted after trial of federal criminal activity relating to such activities. The expenses and settlement costs resulting from such litigation have been substantial, consuming large portions of the Debtors’ revenue and liquidity.

At the same time, over the last few years, the Debtors’ revenues from Subsys have been declining rapidly as a result of the increased national scrutiny of prescription of opioids by healthcare professionals, the resulting high-profile political and legal actions taken against manufacturers and distributors of opioids, and the specific news relating to the former executives’ criminal activity. Moreover, although the Debtors have promising products in the pipeline, those products are not yet approved for production, require significant additional investment to bring to market, and are not expected to generate revenue in the near term. As a smaller company than some other opioid manufacturers, with over 90% of its current revenue coming from the sale of opioids, Insys could not withstand the concurrent negative impact of massive litigation costs and significant opioid revenue deterioration. These factors have caused a substantial cash drain on the company to the point where, despite the Debtors’ best efforts, they risk running out of cash in 2019. (emphasis added)

We quoted that bit at length because it captures the risk that a lot opioid manufacturers face today given what appears to be pervasive sales and prescription practices across the country, subsuming countless companies all seeking sales and profits often….


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Retail Roundup (Long Tourniquets, Long Headwinds).

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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Trickle-Down Healthcare Distress (Long Electronic Beds, Short Nana).

Nana’s Post-Acute Care, Powered by Private Equity.

There has been notable bankruptcy activity in the healthcare industry this year — from continuing care retirement communities to the acute care space. When end users capitulate and need to streamline operations and cut costs, who gets harmed farther down the chain? It’s a good question: after all, there’s always some trickle down effect.

Our internal search for answers to this question recently brought us to Charlotte-based Joerns Healthcare, a “premier supplier and service provider in post-acute care.” The company sells supportive care beds, transport systems, respiratory care solutions and more.

Now, all of that sounds well and good and even with operational and budgetary issues and rising healthcare costs, one could be forgiven for thinking that a business like this might be insulated to some degree — especially as baby boomers get older. Healthcare is not something people tend to skimp on. Yet, that simplistic thinking fails to take private equity into account. That’s right: your Nana’s post-acute care, powered by private equity.


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📺TV Content Distribution is in a State of Flux📺

Callback to the Fuse Media LLC chapter 11 bankruptcy filing in which we wrote:

Why is it in bankruptcy? In a word, disruptionDisruption of content suppliers (here, Fuse) and content distributors (the traditional pay-tv companies). Compounding the rapid changes in the media marketplace is the company’s over-levered balance sheet, an albatross that hindered the company’s ability to innovate in an age of “peak TV” characterized by endless original and innovative content.

The company illustrates all of this nicely:

“…the overall pay-TV industry is in a period of substantial transformation as the result of the introduction into the marketplace in recent years of high quality and relatively inexpensive and consumer friendly content alternatives (e.g., Netflix, Hulu and others). The ongoing marketplace changes have resulted in, and will continue to cause, a material decline in pay-tv subscribers and related affiliate fee revenue as a result of a declining number of new subscribers, "cord-cutting" (the cancellation of an existing pay-tv subscription), and "cord-shaving" (the downgrading of a pay-tv subscription from a higher priced package to a lower priced package). Each quarter the Company receives less revenue from its traditional pay-tv distribution partners as the result of the decline in subscribers receiving the Company's networks. And new sources of revenue for the Company, although developing and in progress, have not grown sufficiently to offset revenue declines in the legacy business. As a result of these trends, the refinancing of the Company's debt was not viable.”

The Information recently confirmed (paywall) what Fuse was saying and we all know is true from our own experience with the myriad subscription-related bills we’re all getting: pay-TV is, indeed, in the midst of some substantial transformation. They write:

Cable channels have long been the cash machine for the entertainment industry thanks to a quirk in their business model. Cable and satellite TV firms pay channels fees for each subscriber who has the channels available in their service package, regardless of whether anyone watches the channels. AT&T, owner of DirecTV, is trying to change that—with far-reaching implications for the TV industry’s profitability.

AT&T wants to pay channels based on how many people actually watch, rather than the number of subscribers who have access to the channels. The idea is driven by two major trends. Firstly, a growing number of consumers are canceling their expensive cable and satellite packages in favor of cheaper streaming services. Meanwhile, TV channels are charging distributors like DirecTV more for the right to carry them even as the channels’ audiences are shrinking….

Note:

What a model! Fewer and fewer end users but higher and higher costs nonetheless. More from The Information:

If AT&T can shift to paying for channels based on their audience size, it could reduce programming costs for its DirecTV and phone-based TV service U-verse and potentially lead other cable and satellite operators to follow suit, sparking a revolution in television. For years, cable and satellite services have complained that programming costs were too high. They can account for more than 60% of video-related revenue.

AT&T’s effort to get entertainment companies to agree to get paid for actual viewers of their shows is in its infancy and it faces long odds. “This is probably the greatest negotiating friction in all the businesses,” AT&T Communications CEO John Donovan told The Information last summer when asked about the company’s discussions around so-called engagement pricing.

These efforts — while currently a longshot — are worth monitoring. Content providers and distributors look headed for a collision.

⚡️Earnings Season Ushers in More Bad News for Retail⚡️

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 ($PRTY) is closing 45 storesTuesday Morning Corp. ($TUES) is closing a net 12 storesFred’s ($FRED) announced 104 more closures in addition to the 159 previously announced closures. Burberry Group Plc ($BURBY) is closing 38 storesTopshop 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 routeUrban 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.

Subscriptions ⬆️. Ownership ⬇️.

We’re old enough to remember when talking heads pontificated about how the “sharing economy” was going to end ownership. There was an AirBnB or Uber for everything: musical instruments, handyman tools, you name it. Let some other sucker spend the money for a static instrument that will be used once a year: you can be the smarter one by just renting those things from them. Extra benefit: not as much need for storage!

Only, most of those businesses failed. SHOCKINGLY, people realized that the lack of predictability and poor unit economics involved in such a as-demanded-on-demand model simply didn’t work. After tens if not hundreds of millions of lost venture capital flushed down the drain, you don’t hear much about X for X companies anymore.

Instead, all you hear about are subscriptions. Here is Amanda Mull taking stock of the rise of the subscription economy for The Atlantic:

Today, things that can routinely show up at your doorstep include: misshapen vegetables, personalized vitamin cocktails, dog toys, a vast wardrobe of clothing and accessories, and even a sofa. In a consumer market of disposable fast fashion and cheap assemble-at-home furniture, the idea of wasting less while getting to use nicer, higher-quality things for a monthly fee is a compelling sell.

(PETITION Note: this must be precisely what the private equity owners of Petsmart Inc. must be thinking as they pave the path towards a Chewy.com IPO).

Ms. Mull continues:

A subscription, at its base, is simply a schedule of recurring fees that gives consumers continual access to goods or services. A car lease is a subscription, but so is your gym membership and the way you use Microsoft Office. Subscription creep dates to at least 2007, when Amazon launched Subscribe & Save, a service that lets shoppers pre-authorize periodic charges for thousands of consumable goods, such as sandwich bags or face wash (or toilet paper), usually at a slight discount over individual purchases. Then, in 2010, came Birchbox, which provides women with miniature portions of beauty products on a monthly basis for $15. At its peak, the company was valued at more than $500 million.

Both Amazon’s and Birchbox’s models have been widely copied, and their success underscores the appeal of subscriptions to businesses and consumers alike, according to Utpal Dholakia, a marketing professor at Rice University. “The pain of payment and the friction of how a person is going to pay is totally gone,” he says. Consumers receive things they need or want without having to make any decisions, and that creates more stable and predictable revenue streams for the businesses they patronize.

Subscriptions, though, are not just relegated to, say, dog food, toilet paper, and your favorite a$$-kicking newsletter about disruption from the vantage point of the disrupted. In this time of greater job mobility, people relish more flexibility.

👄Retail Partnerships Blossom Everywhere (Long Limiting Lease Exposure)👄

SmileDirectClub Expands its Reach with CVS Health Corp. Partnership

In “Retail Partnerships Abound (Long Survival Instincts),” we noted how Birchbox had entered into a partnership with Walgreens Boots Alliance Inc. ($WBA) and CVS Health Corp ($CVS) with Glamsquad. We concluded:

People need drugs. People need food. So why not go where the customers are rather than try to generate independent traffic through your own brick-and-mortar location? Use someone else’s lease rather than incurring the liability. This all makes sense. And so there’s every reason to believe that this trend will continue — particularly where a company brings real brand cache to bear.

This week CVS announced another partnership: SmileDirectClub will be bringing its teeth-straightening services to hundreds of locations over the next two years. Per CNBC:

CVS is trying to keep up with its changing customers. People are shopping online more, especially on sites like Amazon, hurting CVS and other drugstores’ sales of everyday items like vitamins and toilet paper. CVS thinks focusing on health and beauty products and services will be a way to draw people in.

This is a trend that we very much expect to continue. Is it beyond question that, ultimately, we’ll start seeing “health courts” much like we see “food courts?” We can see it now: a murderers’ row of previously direct-to-consumer retailers like Warby Parker, Ro, Hims and SmileDirectClub all in one place so that you can cover your health and wellness needs all in one fell swoop.

🐶Petsmart Gets its Deal🐶

DON’T. MESS. WITH. DAISY. CHAPTER 5. (LONG ASSET STRIPPING AND COERCIVE CONSENT SOLICITATIONS).

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It's a beautiful day. You're walking down the street with your cute little puppy, Bacca, enjoying some much-needed serenity. The wind is blowing your hair back and the smell of flowers permeates the air. Life is good. You’re happy. Maybe you'll treat sweet lil' Bacca to some of that sweet organic sh*t today; after all, you're only a short walk to the local pet store. But then your phone rings.

"Bro. We need to make a decision."

"About what?" you ask, your chill vibes violently crushed by the voice of your excited junior analyst.

"PetSmart. They're doing an exchange. And it's coercive AF!"

Frikken Petsmart. You look down at Bacca and you swear you see a grimace on his cute little face as he stares back at you. You refocus your attention on your analyst, "Alright dude. Relax. What's the story?"

"Arnold & Porter Kaye Scholer is hosting an all hands term lender call soon. At issue is whether the group of term lenders will, in exchange for some enhanced economics, amend the credit docs governing the loan to post facto bless the company's absurd Chewy.com dividend." 

You reflect a bit on Petsmart as you continue your walk. Nearly exactly two years ago the company announced its whopper of a $3.35b Chewy.com transaction; it took on massive amounts of debt to fund the deal. It was the largest e-commerce acquisition ever — topping Walmart Inc’s acquisition of Jet.com. Venture capitalists instantaneously made a boatload of money (the pre-acquisition funding topped out at $451mm) but immediately the Petsmart capital structure looked wobbly after a two-part debt offering of (a) $1.35 billion of ‘25 8.875% senior secured notes and (b) $650 million of ‘25 5.875% unsecured notes. Rounding out the capital structure was a $750 million ABL, a $4.3 billion cov-lite first-lien term loan and $1.9 billion of cov-lite ‘23 senior unsecured notes. The company’s leverage ratio was approximately 8.5x.

You then reflect on June 2018. You recall reading this in PETITION:

WANT TO SEE WHAT YOU WISH YOU HAD READ MONTHS AGO? CLICK HERE AND REMEMBER MORE.

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

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?

TO READ THE REMAINDER OF THIS CONTENT, SUBSCRIBE HERE. YOUR INFORMATIONAL EDGE IS JUST ON THE OTHER SIDE OF THAT LINK.

💥Projection Poppycock: Casper vs. Mattress Firm💥

🛏 Casper Joins Long List of Unicorns & Prospective IPOs 🛏

News emerged this week that Casper — the direct-to-consumer mattress company that is now becoming less-and-less direct-to-consumer and more-and-more brick-and-mortar (solo, and at Costco and Target) — intends to join the frenzied rush of money-losing companies headed towards a public offering in the midst of once-inverted yield curves and fears of recession. The appetite for IPOs is so frenetic that Lyft’s IPO was over-subscribed after a mere two days of roadshow — this, notwithstanding the fact that the company (a) has blown through crazy piles of money and (b) is unsure of its business model and whether it will ever even earn a profit. It then priced above the high end of its initial range and then popped like a champagne cork once shares opened for trading.

Source: Yahoo Finance

Source: Yahoo Finance

Because, you know, whatevs: details shmetails. IPO!!*

The Information got its hands on some leaked Casper financials (paywall) and…spoiler alert! It, too, “continued to lose money” ($18mm in Q3). That said, in Q3 of 2018, the mattress maker reportedly had net revenue of $105.3mm (a 60% YOY increase) on $34.9mm of marketing spend (“only” a 12.9% increase), projecting net revenue of $373mm for fiscal year 2018 and $8mm of EBITDA for 2019. Per The Information, here is a summary of Casper’s financials:

Source: The Information

Source: The Information

Also:

Casper’s presentation also contained bullish forecasts for the future, with net revenue jumping to $1.655 billion and $2.135 billion in 2022 and 2023 respectively, and EBITDA of $33 million and $450 million during those years. (emphasis added)

For North America, which accounts for the vast majority of the company’s business, ecommerce represented over 68% of its third quarter gross revenue, while retail was just over 11%. (emphasis added)

The Information piece includes no data points about the number of stores that Casper ultimately expects to deploy for its growth push but CNN reported last year that Casper hopes to have 200 stores by 2021 (a figure reiterated by Fortune in the tweet below). News surfaced recently that Casper also just closed on a $100mm Series D financing provided by, among others, Target Corp ($TGT), the CEO of Canada Goose Holdings ($GOOS) and the former co-founder and chairman of Crate & Barrel. Total funding is up to $340mm. Per Fortune, “[t]he startup will use the capital to expand internationally and grow its physical retail stores.

In total, those are some bullish projections considering the competitive landscape:

The online mattress market has seen increasing competition in recent years from retailers including Amazon and Walmart. There are also other startups, such as Purple and Tuft & Needle, which was acquired by the mattress manufacturer Serta Simmons Bedding last year. A large mattress store chain, the Mattress Firm, filed for bankruptcy protection last year, which Casper noted in its presentation as a favorable event for the competitive landscape. (emphasis added)

Oy, Mattress Firm. SAVAGE BURN, BRO!! 🔥

Speaking of Mattress Firm, we have projections there too: thank you bankruptcy!! And this allows for a fascinating juxtaposition.

Source: Mattress Firm Disclosure Statement

Source: Mattress Firm Disclosure Statement

With a fraction of the brick-and-mortar presence, Casper projects to have net revenue that is merely $300mm less than Mattress Firm by 2023! How’s that for a commentary about disruption, e-commerce and brick-and-mortar retail? Note that Mattress Firm expects to have $630mm in fixed store expenses (for approximately 2500 stores)** while Casper would have approximately $127mm. Per The Information:

Casper said each new store in the U.S. typically involves $635,000 in capital expenditures and $70,000 in inventory, with an average payback of less than 24 months.

If we’re doing our math right, that means Casper has a significantly larger per-store capex spend than Mattress Firm. On the plus side, unless they’re total frikken morons (or trolls), Casper likely won’t have competing stores sitting literally across the highway from one another.*** So, there’s that.

CEO Philip Krim once said, “We’ve never been anti-retail — just anti-mattress retail.

ANOTHER SAVAGE BURN, BRO!! 🔥🔥

He also said:

"Normally you open a store, have to build presence, then the store loses money and eventually pays back after many years," Krim said. "We have such a productive digital business that we’re profitable on day one of opening a store."

(PETITION Note: not sure how you’re “profitable on day one of opening a store” when the average payback is “less than 24 months” but who are we to call out competing narratives?)

Casper projects $450mm in EBITDA by 2023. In contrast, Mattress Firm projects merely $274mm. Casper has the benefit of landing brick-and-mortar space at a time when landlords are more forgiving with rents; it also has the hyped-up DTC narrative blowing at its back — a clear contrast to the old and stodgy market view of Mattress Firm (which, to be fair, also was able, over the course of its bankruptcy, to renegotiate a meaningful number of its leases with landlords). Said another way, Casper simply seems better positioned to omni-channel its way to success while incumbents like Mattress Firm continue to play catchup. 

Now, these are projections, right? So, query which kind of projection is more full of sh*t? Startup projections or bankrupted debtor projections? It’s a coin flip. In reality, the competitive posture of Casper vs. Mattress Firm four years from now is anyone’s guess. More likely than not, one or both of them are overly optimistic here. But if Casper is right about its projections, that could lead to a significant surprise for Mattress Firm. And given Mattress Firm’s previous strategies, would you want to put your money on Mattress Firm over Casper?

Continue to short strip mall landlords.

*****

Elsewhere in sleep disruption, S&P Global Ratings downgraded Serta Simmons Bedding LLC from B- to CCC+, stating:

…operating performance deteriorated in the fourth quarter of 2018 well below our expectations due to large volume declines with top customers and industry headwinds, leading to adjusted leverage increasing to near 11x as of Dec. 29, 2018.

😳


*Who stands to make money from such an IPO? Investors include Target Corp. ($TGT), Lerer Hippeau Ventures, IVP and New Enterprise Associates. Leonardo DiCaprio, Kyrie Irving and 50 Cent are also early backers.

**Mattress Firm had approximately 3250 stores on its chapter 11 bankruptcy petition date. According to certain bankruptcy materials, the company indicated that it would shed approximately 700 locations.

***Callback to “Mattress Firm Finally Rips the Band-Aid Off (Short Landlords),” wherein we wrote:

Thanks to an overly aggressive growth-by-acquisition strategy, you could essentially turn left and see a Mattress Firm, turn right, see a Mattress Firm, and turn around and see a Mattress Firm. 

And the company actually noted in its bankruptcy filing:

While these acquisitions have allowed Mattress Firm to enter major markets in which it previously did not have a significant presence, and to significantly expand its share of the retail market, they also left Mattress Firm with too many newly-rebranded stores in close proximity to existing Mattress Firm stores. The result has been a significant increase in Mattress Firm’s occupancy and related costs and a negative impact on the profitability of hundreds of its stores. There are many examples of a Mattress Firm store being located literally across the street from another Mattress Firm store.

⚡️Auto is the New Healthcare⚡️

Restructuring Professionals Salivate Over Supply Chain Disruption

In Sunday’s Members’-only briefing entitled “Auto Disruption ⬆️. Syncreon Group ⬇️,” we discussed, among many other topics (e.g., the macroeconomy, oil and gas distress, FTD Companies Inc., etc.), Syncreon Group BV as a proxy for upcoming auto distress. It seems that bankruptcy professionals have grown tired of saying that healthcare will be the hot area of distress and so focus is turning to auto. Here is Foley & Lardner LLP highlighting warning signs of supplier distress.

On Tuesday, auto industry consultants J.D. Power and LMC Automotive indicated that:

U.S. auto sales are expected to drop about 2.1 percent in March from a year earlier, partly due to bad weather, mixed economic data and lower tax refunds….

Mmmm hmmm.

Per Reuters:

Retail sales are expected to touch 1,195,000 units in March, a 3.4 percent decline from a year earlier, the consultancies said on Tuesday.

The first-quarter sales are off to its slowest start since 2013, according to the industry consultants, who estimate retail sales in the quarter to be about 2.94 million vehicles - a decline of 4.9 percent compared to the same period a year ago.

“This is the first time in six years that Q1 sales will fall short of 3 million units. While the volume story could be better, there is remarkable growth in transaction prices, with records being set monthly,” Thomas King, senior vice-president of the data and analytics division at J.D. Power, said.

Interestingly, the average transaction price increased over $1,000 YOY. It is unclear but that could be attributable to the move from lower cost sedans to higher-priced utility vehicles. If consumer confidence wanes — and there are some indications that it is increasingly shaky — this upward trend in pricing should be next to slow down.

💸Goldman Sachs Hops Aboard the Mall Short💸

Mall Shorts Gather Steam

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In last Wednesday’s “Thanos Snaps, Retail Disappears👿,” we included a LOOOOOONG list of retailers that are shutting down stores. Subsequently, J.Crew Group announced that it is closing a net 10 stores (20 J.Crew locations offset by 10 Madewell openings), Williams-Sonoma Inc. ($WSM) announced that it plans to close a net total of 30 stores, Hibbett Sports Inc. ($HIBB) announced approximately 95 stores will close this year, and Tommy Hilfiger closed its global flagship store on Fifth Avenue (Query: is New York City f*cked?) and its Collins Avenue store in Miami.

The point of the piece, however, wasn’t to wallow in retail carnage: rather, it was to make the point that there’s no way the malls — or at least certain malls — could continue business as usual.* With thousands of stores coming offline, we argued, there have to be malls that start feeling the pain and, eventually, run afoul of their lenders. We used $CBL as our poster child and closed by stating that Canyon Partners was shorting mall-focused CMBS via a CDS index, the Markit CMBX.BBB- (and lower indices).

Apparently Goldman Sachs Inc. ($GS) is in on the action. Late last week, Goldman urgedclients join the "big short" bandwagon by going short CMBX AAA bonds (while hedging in a pair trade by going long five-year investment-grade corporate CDX).” ZeroHedgesummarizes the Goldman report as follows:

Citing the bank's recent review of potential areas of financial imbalance across the US corporate and household sectors, [the Goldman analyst] notes that stretched CRE valuations ranked near the top in terms of risk level; and while a large and immediate commercial property price downturn is not the bank's baseline forecast, "a scenario with falling commercial property prices in the next 1-2 years is one to which we would attach non-negligible probability" the analysts caution.

And, then, in customary hyperbolic form, Zerohedge concludes:

Why is this notable? Because regular readers will recall that the 2007/2008 financial crisis really kicked in only after Goldman's prop desk started aggressively shorting various RMBS tranches, both cash and synthetic, in late 2006 and into 2007 and 2008, with the trade eventually becoming the "big short" that was popularized in the Michael Lewis book.

Will Goldman's reco to short CMBX-6 AAA be the trigger that collapses the house of cards for the second time in a row? While traditionally lightning never strikes twice the same place, the centrally-planned market is now so broken that even conventional idioms have to be redone when it comes to the world's (still) most important trading desk. In any case, keep an eye on commercial real estate prices: while residential markets have already peaked with most MSAs sliding fast, commercial may just be the first domino to drop that unleashes a tsunami of disastrous consequences across the rest of the market.

It is far from certain that all of this noise about shorting CMBS is anything more than isolated trades. One thing that is certain? Zerohedge is better at drumming up fear than Jordan Peele.

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*****

Speaking of J.Crew, S&P took a dump all over it yesterday as it downgraded the issuer credit rating to CCC and simultaneously downgraded its “intellectual property notes” — ouch, that must sting some (short asset stripping?) — and its secured term loan facility. The ratings agency maintains a “negative outlook” on the company, saying that “operating results deteriorated considerably in the most recent quarter,” and “approaching maturities of the company’s very high debt burden could lead J.Crew to restructure its debt in the next 12 months.” S&P provides a damning assessment:

We think the company continues to face significant headwinds to turn around operations which haven’t meaningfully improved since the J Crew brand relaunch in 2018. These threats include fast fashion and online retail, as well as continued declines in mall traffic and greater price transparency across the apparel industry. We believe these trends are especially heightened for U.S. mid-priced apparel retail players as consumers shift apparel spending toward brands with a consistent customer message or more appealing prices, given the continued preference for value, freshness, and convenience.

Tell us how you really feel, S&P.

*****

Speaking of damning assessments, there was this flamethrower of a press release issued by Legion Partners Holdings LLC, Macellum Advisors GP LLC, and Ancora Advisors LLC regarding Bed Bath & Beyond Inc. ($BBBY). Burn, baby, burn.

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PETITION readers will recall our previous discussion of BBBY. In January in “Is Pier 1 on the Ropes? (Short “Iconic” Brands),” we included discussion of BBBY and declared:

Bed Bath & Beyond swam against the retail tide last week as the company’s stock showed huge gains after it said that it is ahead of its long-term plan and that it is successfully slowing down declines in operating profit and net earnings per share. Which is interesting because, putting forward guidance aside, the ACTUAL numbers weren’t all that great. In fact, the company’s trend of disappointing same-store sales continues unabated (negative 1.8%, worse than forecast). EPS and revenue numbers were slightly better and slightly worse, respectively, than expected. Which means that to drive the higher EPS, the company must be taking costs out of the business. We have no crystal ball and this is in now way meant to be construed as investment advice, but we’re not seeing justification for a massive stock price increase (up 15% from when we wrote about it and 30% from its December 24 low).

Suffice it to say, the aforementioned investors were far from impressed. The press release kicks off with:

Magnitude of value destruction necessitates wholesale board and leadership changes. CEO Steven Temares has overseen the destruction of more than $8 billion in market value over his 15-year tenure, with total shareholder returns of negative 58%. Since early 2015, the stock has lost over 80% of its value.

Certainly not mincing words there, that’s for sure.

It then follows with:

Failed retail execution and strategy. Apparent inability to prioritize a long list of poorly implemented initiatives and management’s lack of success in adapting its business model to a changing retail landscape, has resulted in stagnant sales and adjusted EBITDA margins declining from 18% in fiscal 2012 to 7% in the last 12-month period ending November 2018.

Deeply entrenched board lacking retail experience is an impediment to serving shareholder interests. Average director tenure is approximately 19 years and the lack of retail expertise and stale perspectives on the board have hindered proper oversight of the management team.

We mean…those are just cold. Hard. Facts. And they’re not wrong about the board: it strains credulity to think that the Head of the TIAA Institute, a pensioned partner at Proskauer Rose LLP, and an EVP for Verizon Communications Inc. know f*ck all about the travails afflicting retail these days (to be fair: it seems the founder and CEO of Red Antler, a reputable branding agency that has helped build the likes of Casper, Keeps, Boxed, Google, allbirds and Birchbox makes sense…if anything has value here…and, yes, we’re REALLY stretching here…its the, gulp, brand…like, maybe??…or, like, maybe not???).

Seriously, it’s not really difficult to argue with this (even if the investors take some liberties in defining companies like Restoration Hardware ($RH) as “retail peers”):

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Problematically, however, the three firms own merely 5% of the outstanding common stock so there’s not a ton that they can do to agitate for change. The market, though, doesn’t seem to give a sh*t: it just wants something…anything…to happen with this business.

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More significantly, investors simply cannot sit on the sidelines anymore and watch retail management teams flail in the wind. We discussed certain management teams that really seem to be skating to where the puck is going, see, e.g., $PLCE. But many others aren’t and those that aren’t act at their own peril. Here, at least, investors are putting management and the board of directors on notice.

Expect to see other investors act similarly in other cases.

*There are a number of malls, however, that do seem to be continuing business as usual. This piece makes the point that apocalypse is not as bad as the media makes out.