⚡️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.

Religionless Millennials + Private Equity = Short David’s Bridal Inc.

Another Private Equity Backed Retailer is in Trouble

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Per the Pew Institute:

In the past 10 years, the share of U.S. adults living without a spouse or partner has climbed to 42%, up from 39% in 2007, when the Census Bureau began collecting detailed data on cohabitation.

Two important demographic trends have influenced this phenomenon. The share of adults who are married has fallen, while the share living with a romantic partner has grown. However, the increase in cohabitation has not been large enough to offset the decline in marriage, giving way to the rise in the number of “unpartnered” Americans.

Maybe the rise in co-habitation among romantic partners and the decline in marriage has something to do with the decline of importance of religion. Note this chart:

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That said, the decline seems to have more to do with millennial attitudes towards religion AND the institution of marriage than anything else.

What does this have to do with any of you? Well, it seems that attitudes towards marriage are creating some retail distress. In June, Alfred Angelo filed for chapter 7 bankruptcy — much to the chagrin of countless brides-to-be who were left uncertain as to the delivery status of their ordered gowns. Take cover…insert peak Bridezilla.

David’s Bridal Inc. swooped in and tried to save the day. Because HOT DAMN retail is cold today. Customer acquisition needs to come from somewhere. And David’s Bridal needs all the help it can get.

The Conshohocken Pennyslvania-based retailer is the largest American bridal-store chain, specializing in wedding dresses, prom gowns, and other formal wear. The company has approximately 300 stores nationally (and declining). It also has approximately $1 billion of debt hanging over its balance sheet like an albatross. Upon information and belief (because the company is private), the capital structure includes a $125 million revolving credit facility, an approximately $500 million term loan due October 2019, and $270 million of unsecured notes due October 2020. The notes are trading at roughly half of par value, reflecting distress and a negative outlook on the possibility of full payment. Justifiably so. With EBITDA at roughly $19 million a quarter, the company appears 9.5x+ leveraged. And you thought YOUR wedding dress was expensive.

Why so much debt you ask? Well, c’mon now. Surely you’ve been reading us long enough to know the answer: private equity, of course. The company was taken private in a 2012 leveraged buyout by Clayton, Dubilier & Rice. (Petition Note: Callback to that Law360 article where private equity lawyers and bankers alleged that PE firms take too much flack…HAHAHA).

In light of recent trends and the debt, Moody’s recently downgraded David’s Bridal to “negative,” noting:

"‘In our view, this is a reflection of the intense competition in the sector and casualization of both gowns and bridesmaids dresses," Raya Sokolyanska, a Moody's analyst, wrote in a note to investors.”

Competition? You’ve got that right. H&M is all over this space too — grasping at straws to salvage its own languishing prospects.

Consequently, Reuters reported that the company is in talks with Evercore Group LLC ($EVR) to help it address its balance sheet. If hired, we think it would be hilarious if Evercore included this Marketwatch article entitled, “5 brides share their financial wedding regrets” in its pitch to lenders. Choice bit,

“Clare Redway, a marketing director based in Brooklyn who married in June 2016 said she wishes she spent more on the wedding dress, or at least found a more unique one. ‘I just got mine on sale at David’s Bridal,’ she said.”

That ought to stir up some concessions.

Enough Already With the “Amazon Effect”

Resale and Micro-Brands Are a Big Piece of the Retail Disruption Story

Let’s start with this SHAMELESS Law360 piece (paywall) which doubles as a promotional puff piece on behalf of the private equity industry. Therein a number of conflicted professionals go on record to say that private equity has taken far too much flack for the demise of retail. The piece is pure comedy…

To read the rest of this a$$-kicking commentary, you need to be a Member

Busted Narratives: Fast Fashion Falters (Short H&M)

We’re old enough to remember when fast fashion was allegedly decimating retail and every apparel retailer under the sun was rejiggering its supply chain to fight fire with fire. Well, yesterday, fast fashion retailer Hennes & Mauritz HB — better known in the U.S. as H&M —reported earnings and to say that they were dogsh*t would be an understatement. Here is the stock as of yesterday:

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Man that chart is ugly: that’s a 50% drop in the last year. This takes the company all the way down to 2005 levels. What is going on?

For starters, operating profit fell 62% in the three months through February from 3.2 billion SEK to 1.3 billion SEK. And more problematic: the company has $4.3 billion of unsold inventory. This is the stock-in-trade picture as of yesterday:

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Y’zikes. Analysts are freaking out.

In the words of Karl-John Persson, the company’s CEO:

“While the assortment is appreciated by our customers, we have not improved fast enough. In addition to this, we made some mistakes in the assortment mix in the second half of 2017 that affected the top line. And now, we're working hard to ensure improvements, including fashion improvements and to improve value for money further as well as, of course, and also to have the right balance and assortment mix with the right products in the right -- at the right time, in the right amount to the right channels.”

Clearly. So, after dropping this steaming pile of bad news, Persson does what all good retail CEOs do these days: drop buzzwords and hot catch phrases like they’re hot. In trying to assuage analyst concerns after this buzzsaw of an earnings report, Persson goes all in with '“new store concepts", “optimize the store portfolio,” “image recognition,” “personalized product feeds,” “automated warehouses,” “advanced analytics and artificial intelligence,” “cloud, APIs and microservices,” and “RFID and 3D.” Did you catch all of that? Don’t know about you, but we’re impressed. These guys really threw the whole kitchen sink at us with this pixie cloud of meaninglessness. Take note: if you’re a restructuring advisor or performance improvement specialist seeking a company-side retail mandate, you have our permission to cut and paste this paragraph into your deck. Perhaps you can win over an executive team too-embarrassed to ask you what the hell any of it actually means as a practical matter.