Via Wolf Street

Winners in this crisis: Ecommerce – for retailers that don’t sell men’s office & formal wear – and for sure, lawyers.

By Wolf Richter for WOLF STREET.

Tailored Brands, a holding company for men’s apparel stores, including Men’s Wearhouse and JoS. A. Bank, is considering filing for bankruptcy, according to sources cited by Bloomberg on June 8. Bankruptcy would allow the company to shut weaker locations while keeping other stores operating, the sources said.

The company confirmed in an SEC filing on June 10 that it may have to file for bankruptcy:

“If the effects of the COVID-19 pandemic are protracted and we are unable to increase liquidity and/or effectively address our debt position, we may be forced to scale back or terminate operations and/or seek protection under applicable bankruptcy laws. This could result in a complete loss of shareholder value,” it said.

But its problems started years ago, including the misbegotten $1.8 billion acquisition of JoS. A. Bank in 2014, whose revenues promptly went into a death spiral. Overall revenues fell every year since 2016.

In an update on June 10, Tailored Brands said that total revenues in the first quarter (ended May 2) collapsed by 60% year-over-year, with even ecommerce sales plunging 32%.

The company started re-opening its stores on May 7, and had 634 stores open by June 5. So how well are these reopened stores doing?

In the week ended June 5, for stores open at least the entire week, average comparable sales at Men’s Wearhouse were down 65%, at Jos. A. Bank 78%, and at K&G 40%.

That total ecommerce sales, including rental services, plunged 32% in the second quarter through June 5th – when retail has largely switched to ecommerce, and everyone else’s ecommerce sales are booming – is a sign that work-from-home has crushed demand for clothes worn to the office; and that the postponements of events such as weddings have crushed the demand for renting formal wear.

Children’s Palace announced on June 11 that it would close “300 additional store locations” – 200 of them in the current fiscal year, and 100 in the next. This would amount to about one-third of its 920 or so locations in the US and Canada. “This initiative will greatly reduce our reliance on our brick-and-mortar channel,” it said.

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“We are targeting our mall-based, brick-and-mortar portfolio to represent less than 25% of our revenue entering fiscal 2022,” it said.

In the same breath, the company announced that total revenues had plunged 38% in the quarter, as many of its stores were closed due to the pandemic, with brick-and-mortar revenues collapsing while ecommerce revenues soaring by 300%. Ecommerce won big.

Signet Jewelers said in an update on June 9 that by the end of its fiscal year, it will close “at least” 300 stores in North America – of which “at least” 150 stores won’t reopen at all, and “at least an additional 150 stores” will re-open but will close by the end of the fiscal year. And it plans to accelerate the shift to ecommerce.

The company has about 3,200 stores under six brands: Kay Jewelers, Zales, Jared, H.Samuel, Ernest Jones, Peoples, and Piercing Pagoda. It also has JamesAllen.com. It said there are currently “over 1,100 stores open.”

Macy’s said in a June 9 update that net sales in its second quarter plunged 45%, generating an operating loss of nearly $1 billion. Sales at stores that had been reopened were about half of where they’d been before the pandemic, CEO Jeff Gennette said at a virtual conference. The company expects to have re-opened 400 stores by now. The good thing is it was able to raise $4.5 billion from investors, which to burn over the coming quarters.

About 4,000 store closures have already been announced this year through June 5, according to Coresight Research. Among the biggest names that are closing stores while in bankruptcy are JCPenney, Pier 1 Imports, J.Crew, Neiman Marcus, and Stage Stores.

Other retailers are delaying filing for bankruptcy protection until they can reopen their stores for liquidation sales. Lord & Taylor, the iconic department store, has already announced that it would liquidate in this manner. Other companies are still trying to dodge a bankruptcy filing by closing large numbers of stores, including L Brands, which owns among other brands, Victoria’s Secret.

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Between 20,000 and 25,000 stores, mostly in malls, are expected to be closed permanently in the year 2020, according to Coresight Research. This is up from its prior estimate of 15,000 store closures for the year.

The year 2019 – the Good Times – had already been an infamous record year: nearly 10,000 stores were closed. But the pandemic of 2020, is going to compress two or three years of brick-and-mortar meltdown into one year.

Department stores and clothing stores are on top of the list. Department stores typically serve as anchor of a mall, and when that anchor shuts down, foot traffic therefore dwindles further, and store closings than cascade through the mall.

CBL Property Group, a mall REIT with over 100 malls in 26 states, many of them in less affluent areas, issued a “going concern” warning on June 5. It said in its 10-K filing with the SEC that it had “substantial doubt about our ability to continue as a going concern within one year,” as it failed to make an interest payment on June 1, and it said that it “will fail to meet another covenant” in Q3 2020, and another in Q4 2020, and another in Q1 2021. And it only collected 27% of its rents for April by the end of May. This REIT is toast.

Simon Property Group, the largest mall-REIT in the US, announced on June 10, that it had terminated its $3.6 billion merger with another mall-REIT, Taubman Centers, and that it has filed suit against the company. The deal had been announced with great fanfare on February 9, a month before the lockdowns in the US.

SPG cited two reasons, that the pandemic “has had a uniquely material and disproportionate effect on Taubman compared with other participants in the retail real estate industry,” and that “Taubman has failed to take steps to mitigate the impact of the pandemic as others in the industry have, including by not making essential cuts in operating expenses and capital expenditures.”

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Taubman Centers in turn called the termination of the deal agreement “invalid and without merit.” So this is going to be a legal battle.

It seems this deal became ugly for SPG, in terms of price and costs. But there is nothing in this business that price cannot solve. So it could be a negotiating tactic to push Taubman into accepting a much lower price.

Or it could be the realization that the mall business is a lot more seriously screwed now than it was in February, at which point it had already been hit hard by years of brick-and-mortar meltdown. A year earlier already, long before the pandemic, SPG CEO David Simon lamented just how painful the process of hundreds of tenants conking out on him had become.

SPG’s lawyers have been busy. In early June, SPG – in whose malls are 412 Gap, Banana Republic, and Old Navy Stores – filed suit against Gap over unpaid rent and other charges, alleging that Gap has withheld rent for April, May and June. This follows Gap’s announcement in late April that it had stopped paying rent on its closed stores.

There are some clear winners in this crisis, including ecommerce – for retailers that have succeeded in building a vibrant presence over the years and that don’t sell office clothing and formal wear – and for sure, lawyers.

What’s so insidious about the Fed’s bailouts of investors in hedge funds, mortgage-REITS, stocks, bonds, leveraged loans, and other often risky assets? The destruction of capitalism (transcript of my podcast). Read... America Convulses in Pain, Fed Bails Out the Wealthy

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