Yahoo Finance 3 big reasons retail brands die in America
The retail graveyard is littered with headstones of one-time favorite places to shop.
Who didn’t enjoy buying AA batteries for a new Sony Walkman in the late 1980s at RadioShack?
RadioShack effectively died in 2015 after years of irrelevance. Blockbuster was a great place to rent a $5 movie for a stay-at-home date night. Then came ‘Netflix and chill’ and the death of Blockbuster in 2010.
Sears was Amazon before there was Amazon. But today, the U.S. is full of vacant Sears stores after its 2018 bankruptcy at the hands of the modern-day Amazon.
And now a new crop of former heavyweight retailers are about to be wheeled into the graveyard after the coronavirus pandemic shuttered stores nationwide for months. In doing so, the flawed businesses of once iconic retailers J.Crew, Neiman Marcus, J.C. Penney, and Lord & Taylor have been exposed via high profile bankruptcy filings.
More busts are inevitable, according to analysts.
“I think that there probably are more bankruptcies,” veteran retail analyst Simeon Siegel of BMO Capital Markets told Yahoo Finance.
All of the ailing aforementioned household name retailers over the past 20 years raise these questions: Why do retail brands die in the first place? Why do icons of our childhood one day go from being on top of the retail world to being buried 6 feet under and relegated — to an — in memoriam Wikipedia page?
Yahoo Finance looks at three reasons why.
No. 1: Horrific management
Having great management in retail is essential to consistently winning. And no one in retail exemplified horrific management better than hedge fund manager Edward S. Lampert, better known in many Wall Street circles simply as ‘Eddie.’
Lampert merged Sears and Kmart in an $11 billion deal in 2004. He stuck himself atop the merged company as CEO despite having no true retail management experience. Lampert closed Sears and Kmart stores across the United States in a failed bid to boost profits and pad his own big fat wallet.
He let open stores fall completely apart. He showed no real interest in going head-to-head for business with faster adapting retail rivals Walmart (WMT), Target (TGT), and, of course, the mighty Amazon (AMZN).
After years of eye-popping losses, Sears filed for bankruptcy in fall 2018. At one point, the combined company had more than 3,500 stores in operation. Now they are but a memory.
Sears isn’t the only sad tale of inept management ruining a retailer. RadioShack, Circuit City, and Linens N’ Things offer up similar stories to Sears. In all cases, horrific management fails to anticipate the future of shopping and doesn’t understand the present — which is not a good place to be in the world of retail.
No. 2: Too much debt
Retailers love to live on debt. Inventory is financed on credit. Store leases are a form of debt. Bank debt is used to open new stores and refurbish existing stores. This debt becomes next to impossible for a retailer to manage when the economy turns south or a brand falls out of favor with shoppers for whatever reason.
The now-bankrupt department store Neiman Marcus offers up a prime example of how deadly debt could be.
Neiman Marcus was bought out by private equity players TPG and Warburg Pincus in 2005 for $5.1 billion. That added a ton of debt on Neiman’s already tarnished books. Then, it was sold in 2013 to private equity firm Ares Management and the Canada Pension Plan Investment Board for $6 billion.
You guessed it — more debt was added to the company’s books.
But the way people shopped for clothes changed dramatically after that 2005 deal. Unfortunately for Neiman Marcus, because of its excess debt, it was unable to invest aggressively to transform with the times. Sales and profits went up in smoke. The company filed for bankruptcy in May 2020.
Another good example of the burden of debt is apparel retailer J.Crew, which also filed for bankruptcy in May 2020. J.Crew was bought by private equity firms TPG Capital and Leonard Green in 2011 for $3 billion. The buyout saddled J.Crew with way too much debt. The company cut corners on product quality, lost once loyal shoppers, and couldn’t handle its debt because of vanishing sales and profits with people no longer going to malls that often.
Bottom line is that unless you are Walmart or Target that sells essential goods such as food that keeps cash constantly flowing into the business, retail is too fickle for a company to be saddled with excessive debt.
No. 3: The changing world
Before there was Amazon and Walmart.com, there were department stores. These were the places that, for decades, outfitted children with back-to-school clothing and gifts for the holidays.
But then came the rapid advancement of technology in the 2000s (thank you, Apple), and with it, the ability to buy goods and services in the palm of your hands.
To try and survive in this new world order, the department stores have closed underperforming stores and skimped on in-store experiences. Where has the customer service gone at Macy’s, right? But that has only pushed more people to shop online, which hasn’t been good for the debt-laden department stores. They have walked right into a black vortex of too little sales and profits and too much debt.
On top of the evolution of the internet, fashion preferences simply change over time. Whereas J.Crew was once popular for selling Michelle Obama’s favorite sweaters, a year or two later, consumers are on to another cool brand. That sucks for a J.Crew, who expands too quickly to capitalize on its fame and is now stuck with too many store leases and bank debt.
Then the brand dies, and the retail graveyard gets a little bit more crowded.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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