More dismal news coming out of the retailers

Tuesday brought more bad news for America’s biggest retailers.

Macy’s reported that margin loss was accelerating as the troubled department store continues with deep discounting of merchandise to stem eroding sales.

I have been documenting much of the hurt going on with the struggling consumers staying home instead of going to the mall.

Shares of Macy’s fell 8.2% in Tuesday’s trading as the company said it could see a 40% in margin levels as it battles with high inventory coming out of the 2016 holiday season.

Most retailers were down big on the Macy’s news. JCPenny was down 4%, Kohl’s fell 5.8% and Nordstrom was off 3.6%.

Many big box stores saw weak holiday sales forcing deep discounting, which squeeze already reduced margins and come right down to the bottom line.

In other retail retaliation, Sears came out after the bell on Tuesday to say it was closing an additional 72 stores this year. Earlier this year CEO Eddie Lampert announced he was closing about 180 Sears and K-Mart stores along with some Sears Auto Centers.

These new announced closures bring the number of Sears’ store to around 1,200, down from 2,080 fin 2012. Sears shares were off more than 1% in Wednesday pre-market trading.

So what can retailers do to stem the outgoing tide?

“We don’t need the massive parking lots that we had in the 1970s,” Doug Sessler, the head of Macy’s real estate division, told analysts during the company’s investor day on Tuesday, my New York Post colleague reported.

This is a huge departure for these big box stores. They have acres of parking lots, which sit idle for many months, and the Macy’s and others are looking to create strip malls and standalone properties to bring in rental revenue.

It appears the new model, which I doubt has legs since it’s doubling down on the thought that brick and mortar can still work. Macy’s says they are looking for restaurants and other businesses like medical facilities to take up the space.

Macy’s is already selling space inside its stores to different brands in order to bring in revenue. So now they will compete with the mall operators, who are looking at open storefronts inside the mall, to attract tenants.

 

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Tale of two retailers: Amazon, Sears

Here’s the other side of the demise of the shopping mall, Amazon’s shares may rise to $1,000 a share on Friday.

The web-based retailer’s shares are up 32.5% year-to-date with a market cap of $480B, while brick and mortar retail chains file for more bankruptcies so far in 2017, more than any other year.

Since its 1997 IPO CEO Jeff Bezos has seen his shares rise roughly 57,400%, which has made him the second richest person in America and is poised to pass Microsoft co-founder Bill Gates to become number 1 on the list.

Ironically, Bezos’ next retail act is opening stores. Amazon is launching book stores — after decimating the industry — and is taking on the grocery store business by opening smaller food stores to take on Wal-Mart.

On the brick and mortar retailers, Sears reported a quarterly profit for the first time in over 2 years, while CEO Eddie Lampert battles to keep the once-proud American retailer struggles to remain viable.

Sear’s share “spiked” Thursday up 13% to close at $8.48 with a market cap of $870M.

If you look into Sears’ “earnings” however, the profit was not derived from selling more clothing to customers, but Lampert selling its Craftsman brand and beginning a program to slash $1.25 billion in costs.

That’s not how you grow a business.

Forget Amazon, private equity is decimating US retail

Many reports put the demise of large US retailers lay blame at Amazon, because it makes for a nice, simple narrative.

Takes very little reporting and you can get enough quotes from analysts to back up the premise. However, there’s another villan, which takes a bit more reporting and can be backed up by the old adage of “follow the money.”

Private equity firms, which are the money men for the 1 percenters as well as large pensions and insurance companies, have been feasting on retailer debt for the last three years.

In simple terms a PE firm will do a Levered Buy Out of a firm or what is called “taking it private.” When it does this to a publicly trade company it buys out the shareholders at a premium to the stock price.

The firm puts little of its own money into the buyout, since it will load the company with debt to finance the stock purchase and in turn own the debt, which it will get paid for servicing.

An extreme example of this in retail is Eddie Lampert’s ESL PE firm. Lampert owned K-Mart and then bought Sears in 2005 for roughly $5B. Today Sears is worth maybe $1B but Lampert has made a nice profit from selling off or licensing most of Sears brands as well as the fees he gets from Sears and K-Mart.

Most PE firms hold positions for 5 years or less. If there is anything salvageable after that they may spin the company back to the public markets in an IPO or if there is little left sell it to a bottom feeding PE firm, which will “strip the copper out of the firm” and put it in bankruptcy.

Most of the time all these firms are making big money despite what the balance sheet looks like.

The retailer bonds backed by private-equity are yielding four times as much as their peers without PE money, which provides a better return for the funds.
Now the problem is when retailers can’t service this growing debt levels since revenues are not keeping up with bond payments.
Through the retailers defaulting on the debt, these PE firms sit in the catbird seat. They can put the company in bankruptcy and take control of the company or they can force a sale.
Bankruptcy allows these PE firms to cash out and get paid first after liquidation with the selloff of stores and products.

What does a retailer look like that has been infiltrated by private equity firms?

A brand will show up in your neighborhood, that you have never heard of prior. It will take out plenty of advertising to get its name out. The product looks good and the pricing is pretty good as well. The company may offer decent financing terms unless you are late with a payment.
But once you buy the product you will be disappointed with the quality, since the principal reason this company became a PE candidate was because it found a cheaper way to do what traditional retailers are selling at a lower price point.
An excellent example of the above in the New York metro area would be Bob’s Furniture stores.

Below is a list of PE firms that have profited handsomely from the retail debt binge bankruptcy cycle in the past year or so.

  • Apollo Global Management: Claire’s
  • Sycamore Partners: Aeropostale
  • Sterling Investment Partners: Fairway
  • Leonard Green & Partners: Sports Authority
  • Standard General: American Apparel

Other big names in the industry are: Ares Management, Starboard and Jana Partners

More bad news for consumers and retailers

The bleak state of retail has just seen another canary in the coal mine fall to the bottom of the cage.

While store closures and bankruptcies are moving in a record pace, now we are seeing for the first time in last five years credit card defaults are climbing as well.

Default rates on US credit cardholders have risen 13% from last year’s levels, as bank issuers have recently stepped up their reserves on their balance sheets to deal with the tapped out consumer, according to the S&P/Experian Bankcard Default Index.

The consumer credit card default rate, which has risen over the last five months,  is back to 2013 levels. And it’s not just credit cards, auto loan and mortgage defaults or impairments are also climbing to years high levels.

The US consumer, who has not seen a significant raise in wages for almost a decade, is losing the war of attrition. And as the Fed eyes further rate rises the interest on credit purchases will rise as well leaving larger balances and further defaults.

On the pending retail bankruptcies apparel executives see a great shake out.

“There are just too many stores, especially those that sell clothing, Urban Outfitters Chief Executive Officer Richard Hayne said.

“This created a bubble, and like housing, that bubble has now burst,” said Hayne. “We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”

According to S&P Global Market Intelligence report, there are 10  retailers that are  at high risk of defaulting this year Here are those companies ranked in order of likelihood.

  • Sears Holdings
  • DGSE Companies
  • Appliance Recycling Centers of America
  • The Bon-Ton Stores
  • Bebe Stores
  • Destination XL Group
  • Perfumania Holdings
  • Fenix Parts
  • Tailored Brands
  • Sears Hometown and Outlet Stores

Send lawyers, guns & money to ailing retailers

As we wait for the double: Dutch election/Fed rate decision, I wanted to look at one sector that has suffered since the Trump election.

Gun sales and FBI background checks have fallen hard since the election as the fear of confiscation and regulation on sales has disappeared.

On Monday, Remington announced 120 people would be laid off from its upstate New York plant due to the sales drop off.

The plant in Ilion, N.Y., a village of 6,000 people located about 60 miles east of Syracuse, has been a Remington company town since the mid 19th century.

While Remington is a private company, two publicly trade firearm firms have seen their stock get hit since the election.

American Outdoor Brands, formerly Smith & Wesson has seen its share fall more than 30% and Sturm Ruger has sold off 18%.
So as the threat of further gun-control laws went by the wayside, sales which soared during the Obama administration have fallen off 15%, according to gun industry analyst report.

“We do believe that having a Republican in the White House…negatively impacts gun sales in that it effectively eliminates any threat of new gun regulation for the foreseeable future,”  James Hardiman, managing director of equities research for Wedbush Securities told the Wall Street Journal.

In other retail news we see Neiman Marcus has put out another catalog, except this one does have $100,000 mink-line gun holster, but the company itself for sale.

The once luxury department store catering to the Texas oil barons and famous for its outlandish Christmas catalog has hired bankers to find a buyer for its owner Ares Capital. Neiman was planning on and IPO in late 2016, but scrapped the idea as sales fell.

Nieman is just the latest department store to run into trouble as revenues fall and huge debt comes due. Much of the problem lies in the fact that these retailers — Neiman, Macy’s, Sears, JCPenney and others were bought by private equity firms that used debt to buy them and to get them through the economic downturn and now are facing costs that cannot be met.

This is leading to record number of bankruptcies and defaults on loans in the industry. We see this in smaller retailers as well.