👜Retail May Get Marie Kondo'd👜

👠Marie Kondo is Coming to a First Day Declaration Near You (Long Thrift Shopping)👠

2019 has already been a rough year for retail. Beauty Brands LLC, a Kansas City-based brick-and-mortar retailer with 58 stores in 12 states filed for chapter 11 bankruptcy in the first week of January. Then, last week, both Shopko (367 stores) and Gymboree (~900 stores) filed for chapter 11 bankruptcy — the former hoping to avoid a full liquidation and the latter giving up hope and heading straight into liquidation (it blew its first chance in bankruptcy). And, of course, there’s still Charlotte Russe, Things Remembered, Payless and others to keep an eye on.

All of this has everyone on high alert. Take this piece from The Wall Street Journal. Pertaining to J.C. Penney ($JCP) and Sears Holding Corporation ($SHLDQ), the WSJ notes:

J.C. Penney Co.’s sales are falling, its stores are stuck in malls and the turnaround strategy keeps changing. Now, three months after the embattled retailer hired a new chief executive, a handful of senior positions remain vacant.

The series of events is prompting analysts and other industry experts to question whether Penney can avoid the fate of fellow department-store operator Sears Holdings Corp., which filed for bankruptcy and barely staved off liquidation.

The Plano, Texas-based chain was once the go-to apparel retailer for middle-class families. It and Sears had once dominated American retailing but lost their customers, first to discounters like Walmart , then to fast-fashion retailers and off-price chains like T.J. Maxx. The shift to online shopping hastened their decline.

First, the Sears Holding Corporation ($SHLDQ) drama continues as the company heads towards a contested sale hearing in the beginning of February. To say that it “staved off liquidation” is, at this juncture, factually incorrect. While the company’s prospects have improved along with Mr. Lampert’s purchase offer, it is not a certainty that the company will be able to avoid liquidation. At least not until the Official Committee of Unsecured Creditors’ objection is overruled and the bankruptcy court judge blesses the Lampert deal. The sale hearing is slated for February 4.

Second, we were relieved to FINALLY see an article about retail that didn’t pin the blame solely at the feet of Amazon Inc. ($AMZN). As we’ve been arguing since our inception, the narrative is far more nuanced than just the “Amazon Effect.” To point, Vitaliy Katsenelson recently wrote in Barron’s:

Retail stocks have been annihilated recently, even though retail sales finished 2018 strong. The fundamentals of the retail business look horrible: Sales are stagnating, and profitability is getting worse with every passing quarter.

Jeff Bezos and Amazon.com get most of the blame, but this is only part of the story. Today, online sales represent only 8.5% of total retail sales. Amazon, at about $100 billion in sales, accounts only for 1.6% of total U.S. retail sales, which at the end of 2018 were around $6 trillion. In truth, the confluence of a half-dozen unrelated developments is responsible for weak retail sales.

He goes on to cite a shift in consumer spending to more expensive phones, more expensive phone bills, more expensive student loan bills and more expensive health care costs as contributors to retail’s general malaise (PETITION Note: yes, it appears that lots of things are getting more expensive. Don’t tell the FED.). More money spent there means less discretionary income for the likes of J.C. Penney. Likewise, he highlights the change in consumer habits. He writes:

We may not care about clothes as much as we may have 10 or 20 years ago. After all, our high-tech billionaires wear hoodies and flip-flops to work. Lack of fashion sense did not hinder their success, so why should the rest of us care about the dress code?

And:

Consumer habits have slowly changed, including the advent of rental clothes from companies like Rent the Runway and LeTote.

We’ve previously written extensively about the rental and resale wave. We wrote:

Indeed, per ThredUp, a second-hand apparel website, 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 retail 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.”

Lots of good charts here to bolster the point.

That wave just got a significant shot of steroids.

Earlier this month Netflix Inc. ($NFLX) debuted “Tidying Up with Marie Kondo,” a show that springs off of Ms. Kondo’s hit 2014 book, “The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing.” The news since is not too encouraging for retailers.

Per NPR, “Thrift Stores Say They’re Swamped With Donations After ‘Tidying Up with Marie Kondo’” (audio and audio transcript). Indeed, thrift stores like Goodwill are seeing an uptick in donations across the country (and Canada). The Wall Street Journal published a full feature predicated upon “throw a lot of sh*t out.”

Of course, all of this decluttering is an opportunity. Anna Silman writes in The Cut:

Well, congrats to all the people who have committed to the KonMari life and ridded themselves of the burden of their unwanted possessions, and who now have to waste 15 minutes a day folding their underwear into tiny rectangles. But also, good for us! Imagine how many bad choices people are liable to make in a feverish post New Year’s Kondo-inspired purge? Mistakes will be made. Purgers are going to see that lavish fur cape they never wore and deem it impractical; come Game of Thrones finale cosplay time, they’re going to rue their hastiness. Conscientious closet cleaners will dispose of the low-rise jeans they haven’t worn since the mid-aughts, but the joke’s on them, because low-rise jeans are coming back, bitches!

So, my fellow anti-Kondoers, if you’re in a post-holiday shopping mood, get thee to thy nearest second-hand clothing store Beacon’s (or Goodwill, or Buffalo Exchange, or Crossroads, or the internet) and get started on building your 2019 wardrobe. And if you arrive at your nearest resale outlet and see a long line, don’t worry: Those people are there to sell. Those aren’t your people. Forget them. Focus on the racks — those sweet, newly stocked, overflowing racks, where so much joy awaits.

It’s just like the old adage: One woman’s trash is another woman’s treasure, especially because most of it was never trash to begin with.

Likewise, Lia Beck writes in Bustle, “…get out there and find some things that spark joy for you.”

And reseller 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 from Perella Weinberg Partners, Sandbridge Capital and Great Hill Partners, 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.” 🤔

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:

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:

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.

Takeaways: Jamie Clarke, Live Out There

An Entrepreneur Seeks to Turn the Tables on Disruption

Source: Live Out There

Sometimes the disrupted need to become the disrupter.

If anyone can rebound from disruption, dust himself off, and get back on his feet ready for battle, we suppose it’s a man who has summited Mount Everest. Twice. And plans to again - wearing gear he designed and manufactured himself. Enter adventurer and serial entrepreneur, Jamie Clarke, the founder and CEO of a new direct-to-consumer (DTC) outdoor-wear brand, Live Out There.

Source: Live Out There

Several weeks ago Jamie received a deluge of press coverage after the launch of Live Out There (LOT). Most of the coverage – here (Fast Company), here (GearJunkie), and here (WWD), for example - was thematically similar, touting LOT’s (i) proposed radically-transparent production, (ii) get-people-off-their-phones-and-off-their-asses-into-the-outdoors mission, and (iii) DTC-powered lower price point. We’ll come back to all of that. There’s more to this story. To Jamie’s story. That is, Jamie, for better or for worse, is a manifestation of the retail apocalypse. His experience encapsulates many of the themes pervasive in retail today.

For 14 years prior to launching LOT, Jamie owned and operated the Out There Adventure Center, an 8000 square-foot brick-and-mortar retail location in downtown Calgary. The business featured apparel and equipment for the outdoor set; it was also an early attempt at the current retail-fad-of-the-moment: experiential retail. The Center had a warehouse in back with a theater space, a travel agent kiosk and hosted events; his business sought to engender community before “community” became a trite buzzword shamelessly used by everyone. Including us. 

All of this, however, simply wasn't enough to counteract today’s vicious retail reality. We discussed the notion of community, the #retailapocalypse, retail survival and more with Jamie. What follows are the highlights, edited for length and clarity. 

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PETITION: What’s interesting…is the experiential aspect of what you were trying to do. That’s the big deal right now and now everyone’s talking about experiential retail….

Jamie: We were in part, perhaps, ahead of our time or maybe that’s a convenient excuse to cover up that we didn’t execute property. I think maybe it’s a combination of both. That said, hosting events and having a travel agent among other things was a powerful way to really challenge the notion of retail. You’re not just here to buy things, you’re here to gain access to experiences.

PETITION: Give us some specifics…that contributed to the downfall of this brick and mortar location.

Jamie: We had big competitors who could negotiate with suppliers deeper discounts on their volume purchases which meant they could go on sale and still maintain margin. So we were constantly under margin pressure because the bigger players had better margin. Two, the transformation of late which ultimately began pounding the nails into our brick and mortar coffin was that our suppliers became competitors. Great companies that I admire and with whom we had worked for years wanted to go direct to consumer.

Here, Jamie is referring to the Arcterx, Northface and Icebreakers of the world.

PETITION: Did they offer experiential retail?

Jamie: Not to the degree that we were striving but they merchandize their stores beautifully. They were doing retail well in that old sense of retail. They looked nice. They were well lit. All the rest.

PETITION: Did you have e-commerce at all?

Jamie: We launched e-commerce seven years ago. So we were in our eighth year. As a small operator we had a hard time scaling that experience.

PETITION: Did you also have the burden of an onerous lease that you could no longer justify from a revenue perspective?

Jamie: Have you suck in behind the scenes to read my lease agreement? Yes. The number one item that made our business untenable was that you had that market pressure. There are lots of levers as entrepreneurs. You know you can manage expense. You can shift promotion. You can change the way you staff the floor. You can even change the way you buy. But every month you run this monstrous nut for a chunk of rent. Its unavoidable and it ultimately rose as a percentage of revenue. And it was untenable for us.

And so Jamie shut the doors on June 9, 2017.

Jamie: I tell you it was heartbreaking. It was definitely devastating financially. Personally.

PETITION: Is there anyone in that space now?

Jamie: Empty. I think they’re going to struggle to fill it. The landlord wants a big national with a good covenant. You’re going to have another big brand go in there and the little guy is gone.

PETITION: So you closed the brick and mortar and you got rid of those partners. You're embracing your brand as your core competency. Now you're going direct to consumer. Talk to us about the decision making process on going DTC.

Jamie: The whole partner-slash-competitor issue escalated and that’s when we had to do a monstrous pivot and really challenge the industry and make that shift from being the disrupted to the disruptor. Do we want to continue being the victim? Do we want to continue being part of the problem here which is markup and middlemen or do we want to shift our business? Do we have the courage to be part of the solution even though doing that is filled with so much unknown? And it's entirely a shift in retail and we came to that conclusion in part by desperation because we had no other choice.

We've always known that outdoor is beyond reach for many many many people. We could see it when things go on sale how quickly our revenue would jump when we put a discount. And not just hungry people looking for deals. It was because a lot of people just couldn't afford it. And couple that with our investigation we began to realize that elevated price was the issue. For instance, a down hooded jacket on the market for $329. When we began to dig in there we found that those jackets are being built for say $80. What? An $80 jacket being sold for $329? What's going on here? And that's when we realized...we are the problem. We’re the middle. We're the retailer in the middle and that jacket gets sold to us for $150. We mark it up by $150 and then sell it for $329.

It's not working. It's failing the customer.  Failing people who are sitting on the couch not getting outside doing stuff. That's when we found the courage to say we know gear. We can make our own. We'll go direct to consumer. We'll take that markup out of the antiquated distribution model. And here's the kind of radical transparency that we're challenging industry with. We need to put more money into the materials so that the environment is protected. So that working conditions are improved. We need more money in the manufacturing process. Not negotiating with those manufacturers or the mill to grind them on price. We need to actually put more money into the making of those jackets so that people are paid well. So the air conditioning gets turned on. So the maternity leave is instated. All the things that are reasonable working conditions to improve manufacturing. We need to be more transparent, need to share what's going on. And that was the disruption piece. This may not work. We may go down in a barrel or ball of flames but we're going to go down swinging. This is what needs to be done.

We're proposing to pay more money for manufacturing of our product than our competitors. And in part that is a scale issue. They're just making tens of thousands of jackets and we're making hundreds. So through that alone we're paying more. Plus I'm trying to ensure that we put the best material in our product. The savings that we have on our price point is purely on the distribution side not on the manufacturing side. I got to make stuff equal to or better than the most in the market primarily because I get to use and I want to make sure it works.

PETITION: Who are your models for DTC?

Jamie: Everlane is a company in the states that is DTC and transparent. They're in the fashion industry. But we have marveled at what they were doing and the courage it took to do it and felt that that was something that we should do. There’s a company in the States called Kuju. They make high altitude hunting apparel. Clearly Contacts.

PETITION: What’s your reaction to the fact that Everlane just opened up brick and mortar store in New York City?

Jamie: For me our long-term vision will be to return to where we were 15 years ago: to create a physical space that is an experience of the brand.

PETITION: So, basically you’re going to go that direct to consumer digitally native vertical brand route like others have recently. Everlane is a great example. Away would be another good example. Warby Parker. Get the community. Get the brand recognition. Get the following. Build the brand, And then reengage in the brick and mortar for purposes of scaling further. That is that a fair synopsis of what you're thinking?

Jamie: Yes, yes exactly. I want to do what we couldn’t do originally. I want to do a smarter more efficient store, not in the old school way. We won’t carry inventory in the back. It would be more about the experience, more about a meeting place. Smaller stores. Strategically placed. And not just ‘ol New York’s a great place and need to show up there because it’s good PR.’ Use data and information. Where are our customers? Where does it make sense? It might make sense for us to be in Boulder more than downtown New York. It might make sense for us to be in Chicago or Kingston Ontario.

PETITION: Well it also sound like there’s also an aspirational element here. Our readership may be in conference rooms 15-18 hours a day. Aside from saying its a better product, you're saying 'this is attached to me. If it's good enough for me it's definitely good enough for you.' 

Jamie: Yes. It sounds ego-maniacal and I’m always concerned about that. But as a consumer I want to identify with the people of a company. The soul of the company. Not a spokesperson because those can be hired. I will never abandon that personal and intimate connection to what we make, why we make it, and how we make it, and for whom. And I believe that matters.

PETITION: Why haven't you gone the blog/Wirecutter route to review gear and used your mountaineering expertise to drive affiliate revenue?

Jamie. It’s on the list for sure, but we’re a small team scaling up slowly. Between outside workouts and time with family we are slammed 7 days per week right now. 

PETITION: Considering your experience as the disrupted, what advice would you have for other entrepreneurs in the consumer products space?

Jamie. Be clear on your unique offering. If you’re not offering different value—you’re dead. 

PETITION: Why not crowdfund LOT gear leveraging your own personal story to get pre-orders and drive demand?

Jamie. That’s in the works for an upcoming piece of gear.

PETITION: We've seen a tremendous amount of distress in retail obviously. But even more specific than that is the sporting goods segment of retail. Sports Authority. Eastern Outfitters. Ski Chalet. Bob's Stores. Michigan Sporting Goods. Gander Mountain. There have been a number of these retailers who have gone bankrupt and or liquidated maybe some of them have managed to maintain a little bit of a footprint here and there or maybe they maintain some sort of e-commerce business post-bankruptcy but a number of them have just disappeared. What's your thought on that state of affairs?

Jamie: Well there is a there is a retail revolution afoot and with the revolution comes blood and pain and death and those are some of the victims. My brick and mortar store was one of them. And that's not just the outdoor industry, that's retail as a whole. There's a transformation afoot. But the adventurer in me which beats the same heart as the entrepreneur believe those who can endure this storm will come out stronger and smarter and better and ultimately the customer will benefit. It's long overdue; it needed to happen. It needs to change. There is the digitization of the industry afoot for certain and retail has been slow to catch up. But that time is here and there will be pain. And so be it. That's where the growth comes.

You know to be lazy is to say 'oh well you know Amazon is destroying retail.' There's a lot more going on. A lot of very interesting story lines. And lots of opportunity....

What Comes Next? (Healthcare? More Oil & Gas? More Retail?)

Oil and gas exploration and production is SO 2016. Everyone is sick of 2017's #retailapocalypse. So, now what? 

The above notwithstanding, there are many who believe that oil restructurings will hit again if (when?) oil dips below $40/barrel again. Early reorganizations that didn't delever enough or didn't tackle bloated SG&A will need a solution - even if just to stay competitive with companies that did, in fact, file and clean themselves up (though, based on the recent trading levels of post-reorg equities, some of those guys aren't doing so hot either; notably, none of them have gotten the support of a large institutional sponsor behind them). And some Chapter 22s may start rolling in too. 

On the retail side, November is not too far away. If retailers can't bridge themselves to Q4/Q1 by this point, they're probably beyond repair. 

In the meantime, restructuring professionals are earnestly turning their attention to "healthcare" - a catch-all category that subsumes various subsegments like biotech, pharma, and medical services. Industry decks have been circulating around like wildfire to the point where we have a pool as to whether we'll read more banker/advisor decks in the next 12 months than we'll see meaningful bankruptcies in that time (who wants in?). Leading indicator of hype-flow: the panels are starting. Last Monday there was a New York City Bar panel on healthcare issues.

So far in 2017, there have been a number of healthcare-related bankruptcies spanning across the various subsegments including, among others, 21st Century Oncology, Adeptus Health Inc., Halt Medical Inc., Bostwick Laboratories Inc., Unilife Corporation, and California Proton Treatment Center. There have been a number of smaller deals too but those don't ramp up advisory fees, e.g., this one from this week. Healthcare services providers have also been hurt, e.g., Angelica Corporation. And there are tons of other sizable healthcare names on distressed watchlists - though it's unclear whether they'll ultimately file for bankruptcy, e.g., Pernix Therapeutics ($PTX), HCR Manorcare (Carlyle Group owned), and Concordia International Corp. ($CXRX).

Getting out ahead of all of this, some Kramer Levin Naftalis & Frankel LLP attorneys released a recent thought-piece issuing a "Code Red" for the healthcare industry. They delineate the various reasons why healthcare is the new hot thing - from uncertainty around the ACA/AHCA (even with this week's release of Trumpcare Senate-version) to reimbursement pressure from Medicare to the change to bundled payments (rather than "fee for service" payments) to unsustainable capital structures emanating out of debt-driven acquisitions. A "Code Red" ladies and gentlemen. Hold on to your butts. 

Now, there are unique considerations that apply to healthcare restructurings - one among them the likelihood of the appointment of a Patient Care Ombudsman - which just means that there'll be another contingent of estate-sponsored advisors soaking up fees. That prospect alone probably gets juices flowing. Professionals love tables with a lot of seats around them. 

But, most of the companies highlighted in decks don't have maturities until 2019 or 2020 and so this has to, in the near-term, be a liquidity/covenant story...? Maybe. And it's unclear how that story will unfold - particularly with so much regulatory overhang. We're wondering if all of the current focus on healthcare is more hype than substance and maybe is a bit premature...? What do you think?

On an aside, we read stuff like this and it makes us less inclined to make jokes and more inclined to beat someone's a$$. This is people's health we're talking about and so it's disconcerting to see physicians speaking openly and publicly about deficiencies that are sparked by the need to service debt.  

Want to tell us we're morons? Or praise us? Cool, either way: email us. 

We've Reached Peak #Retailapocalypse ($ARCC $MNI)

Who knew that another element of the retail story is international postal law and an app called Wish? This is bananas. Choice quote: "Services like this offer us a preview of a maximalist capitalist future, in which the near-entirety of current-day retail -- stores, humans and even storelike website -- have been identified as gatekeepers or sources of friction and accordingly obliterated." OBLITERATED. What the F? Meanwhile, you know you've reached peak #retailapocalypse when even the New Yorker is writing pieces about J.Crew's J-Crewiness, bad merchandizing, bad debt, and Matrix-esque mind-control efforts. This just goes to show how hard it is to avoid the retail story these days. Compounding matters, publicly-traded BDCs let us see how they view the retail landscape and, in this case, Ares Capital is writing down the value of their loan in Things Remembered Inc. For those with short memories, Things just did an out-of-court restructuring transaction. Clearly things haven't improved much. Finally, the tack-on affect of the brutal retail environment is showing up elsewhere: The McClatchy Company, for instance, reported a 7% drop in total revenue on account of a 22% decline in print advertising (not offset by a rise in digital advertising) with revenue losses from The Sports Authority and hhgregg Inc. cited. The company is 5.4x levered on $874mm of debt but has no near-term maturities and an untapped revolver. Still, the company is in full-on triage mode trying to expedite its digital transformation which, clearly, is a matter of life or death.