Wolf Richter
wolfstreet.com,
www.amazon.com/author/wolfrichter
At least, they didn’t blame China.
Thursday afterhours, the Container Store, former LBO queen and IPO
hero with 77 stores around the country, reported third quarter
“earnings” – in quotes because those “earnings” were a loss.
Consolidated net sales for the quarter ending November 30
rose
3.3% to $197.2 million. But cost of sales rose 5.3%. CEO Kip Tindell
blamed their new “$75 free-shipping service.” It’s “driving sales” and
is “absolutely a good thing, but of course it’s a headwind to gross
margin,” he said. That’s how Amazon leaves its mark.
Selling, general, and administrative expenses jumped 8.6%.
“Disappointing,” Tindell called it. CFO Jodi Taylor blamed the
“complexity of our transformational TCS Closets initiative,” plus higher
payroll, healthcare, and storage expenses. Stuff happens in real life.
Stock-based compensation, pre-opening costs, and depreciation and
amortization also rose. So income from operations plunged 87% to $1.8
million. And after $4.2 million in interest expense and a tax benefit of
$694,000, there was a net loss of $1.7 million. It brought the net loss
for the nine months to $4.3 million.
The company had lost money in fiscal 2013 and 2014 and had made a
little in fiscal 2015. All hopes are resting on fiscal 2016 as the big
profit year. But the company had some more news:
It cut its sales projections for fiscal 2016 at the midpoint by about
2% to $785-$795 million. It slashed its earnings projections from 30-38
cents a share to 10-13 cents. It projected that sales at established
stores – stores open at least 16 months,
plus online sales – would fall 1% to 1.6% for the year, and 3% to 5% for the fourth quarter.
All heck broke loose. Before the announcement, shares had closed at a
new low of $7.06. In afterhours trading, they got pummeled. And on
today, shares crashed 41% to close at $4.21.
As so many debacles, this one too has a private equity angle.
The Container Store, founded in 1978, was acquired by PE firm Leonard
Green in July 2007, at the peak of the LBO frenzy. In November 2013,
the “IPO window” – that brief period when anything can be sold at
ludicrous prices and then get pumped up even higher as exuberance and
hype rule – was wide open. And it was time to unload. The IPO price was
set at $18 per share. Overnight, Wall Street machinations doubled the
price behind closed doors. The first trade took place at $36 per share.
The company became the hero of Wall Street.
So forget the losses it had been cranking out.
The stock then soared to $47.07 in two months. But early 2014, the
hot air began hissing out. Today it’s down 88% from when it first
started trading and down 91% from its peak two months after its IPO.
This is how IPOs function as wealth-transfer machines.
Tindell tried to do the best he could. During the earnings call (via
Seeking Alpha),
he talked about “a choppy retail environment and softer than planned
November,” his euphemism for the Thanksgiving shopping debacle.
And the rest of the shopping season? “The start to the fourth quarter
has also been more challenging, which we have reflected in our revised
outlook,” he said – his euphemism for the Christmas shopping debacle.
After going through how they’ve been spending more than planned, and
how “disappointing” those expenses were, Tindell then pointed to the
future, not the immediate quarter whose projections he’d slashed, but
the more distant future, when the “greatest impact” of their efforts
would be felt, namely “in 2016 and beyond.” In brick-and-mortar retail
these days, the good times are always in the distant future.
The Container Store isn’t the only one. Other brick-and-mortar
retailers are struggling, particularly those that have been bought out
by PE firms that piled debt on these companies and paid themselves fat
fees and special dividends. Now these retailers have trouble borrowing
more money at reasonable costs. They’re junk-rated, and at the lower end
of the spectrum, credit is drying up. Risks that everyone refused to
see are suddenly getting priced in. They’re suffocating on interest
costs. Some already ran out of liquidity last year and defaulted, and
more will in 2016.
They’re facing a very tough retail environment. American consumers
are strung-out. But for brick-and-mortar retailers, the problems are
worse: sales have been shifting to the internet. And then there are the
Millennials, the Holy Grail for retailers.
Millennials make up the largest age demographic, and their earnings
power is increasing. But they’re smart and have ideas of their own and
refuse to be roped in massively with the usual tricks and devices.
Instead they’re inexplicably frugal when it comes to things like
clothes. But they love to blow their money on experiences, such as
restaurants and going places, and on their electronic lives, their
smartphones, gadgets, broadband bills, and Netflix accounts. And they do
much of their shopping online.
More and more brick-and-mortar retailers are now admitting that they
haven’t figured out how to get the attention of these folks.
That’s the reality brick-and-mortar retailers face. PE firm Leonard
Green was able to exit from the Container Store in time – a disaster for
those who wittingly or unwittingly (in their retirement nest eggs)
ended up with these misbegotten shares.
But many of the retailers are still owned by PE firms, such as Neiman
Marcus, Albertsons, J. Crew Group, 99 Cents Only Stores, Bon-Ton
Stores, Claire Stores, and a slew of others. Exits were planned and IPOs
were lined up, but the stock market got the jitters, and
the IPO window closed on them. For these over-indebted, junk-rated brick-and-mortar retailers, it’s going to get much tougher. Read…
Defaults and Restructuring Next for Retailers
By John Vibes
