“You only find out who is swimming naked when the tide goes out,” Warren Buffett famously wrote in the 2001 Berkshire Hathaway annual report.
Right now we’re starting to see some bashful bathers.
One huge consequence of the coronavirus is a culling of the economy. A slew of weak companies could perish, particularly in sectors like airlines, cruise ships, hotels, restaurants and retail. Any business predicated on congregating is suspect.
With all the grim economic news though, maybe none is grimmer than for retailers—especially department stores and apparel. Yesterday the U.S. Commerce Department reported that retail sales tanked 16.4% for the month of April. As for clothing retailers the news was almost unimaginably bleak: Sales plunged 78.8%. (That’s not a typo.)
How do you survive that? For a good many, you don’t. Yesterday evening J.C. Penney, founded by one James Cash Penney in Kemmerer, Wyoming 118 years ago, filed for bankruptcy.
Let’s face it, unlike those other aforementioned businesses, retail was in an apocalypse before the pandemic. Ergo the damage there will be particularly acute.
The two pre-existing conditions in retail are blindingly obvious to any American (except it seems to retail executives.) We have too many stores and too much Internet. Of course those two trends are really one and the same.
This isn’t new anymore. Amazon was founded 26 years ago. And yet sick retailers live on for years, even decades. (You can make the case that Sears peaked in 1969.)
Why is that?
“It takes a long time to kill a retailer,” says Dana Telsey, veteran retail analyst at the Telsey Advisory Group. “In retail you can never say never.”
The problem in part has been Wall Street enablers who hover around the retail ICU ready to provide mo’ money to any old wheezing enterprise. That plus the cache of owning a consumer-facing business—even Kmart—and you can see why zombie stores stagger on and on.
Now though the money spigots will be drying up and a reckoning could be at hand. The at-risk category includes Macy’s, Nordstrom, and the Gap. (Yahoo Finance’s Brian Sozzi has written much about the travails of these companies.)
Let’s focus on the damage at hand though. J.C. Penney has been a dead man walking for years. “There’s nothing differentiated about what they have in the store, how they serve the customer, where they’re located, the products they sell. They don’t stand for anything,” says Herbert J. Kleinberger, professor of retail strategy at University of Pennsylvania’s Wharton School. “They’ve been slow to transform the business to a younger customer and to invest in technology and real estate — they’re not in great shopping centers. All that’s going in the wrong direction and the balance sheet is not strong.”
Penney is hardly a surprise and as part of continuum of failed generic, poorly-run everything stores, less instructive. It’s a company that’s been bound for Chapter 11 for years. And yes, COVID-19 pushed it over the edge.
Two brands that still have some equity
Let’s instead focus on two other high-profile retailers that filed for bankruptcy this month, Neiman Marcus and J. Crew. Yes, both have tortured recent histories marked by mismanagement, but both are also iconic and emblematic of significant trends in retailing and even our cultural and economic history.
Like many of you perhaps I feel personal connections to both stores—that’s what powerful brands do. Growing up, we used to call Neiman Marcus “Neimies” or “Needless Markup.” I remember my parents showing me the store’s famous Christmas Book, a catalog really, with its way-over-the-top fantasy gifts like matching vicuna coats, a private quarterback camp with Joe Montana, a $1.5 million Cobalt Valkyrie-X private plane, and a Noah’s Ark replete with pairs of live animals. Wikipedia reports that a late 1960s Christmas Book featured portraits of Wyatt Cooper, his wife Gloria Vanderbilt and children Carter and Anderson Cooper. (Yes, that Anderson Cooper.) At one point, reportedly Neiman’s Christmas catalog was the most stolen item from Americans’ mailboxes.
Neiman Marcus was always about poshness and luxury taken to an extreme. The company was born in Dallas in 1907 and rose along with the Texas oil boom, after all. At its core Neiman was where rich Texans shopped to show-off their new found wealth. J.R. Ewing would have shopped there. (See Bryan Burrough’s “The Big Rich.”)
Of course Neiman spread beyond its Texas roots to dozens of stores across America. At one point it had a controlling stake in Kate Spade, and bought Bergdorf Goodman (which it still owns.) But growth slowed and the company began to be passed on from one owner to another like a hand-me-down sweater; going public, going private as well as being traded by private equity firms including the Texas Pacific Group (TPG.)
As an aside, fittingly for the buyer of Neiman, TPG’s Chairman David Bonderman had the Rolling Stones play his 60th birthday party. (I remember Mick telling me how pricey that might be.) And while Paul McCartney performed at Bonderman’s 70th, there’s no word yet on who’s doing his 80th in two years. (Keep an eye out for your invitation.)
Naturally the dealmakers loaded Neiman with debt, over $4 billion in fact. Maybe they thought a luxury retailer would be immune to the rise of online shopping. Not the case. “Luxury started going through other channels all of a sudden,” Kleinberger said. “A lot of competition for products Neiman was selling exclusively up to that point [went online.] There has been a resale surge where we’re seeing luxury goods now online resold as vintage in great condition—that’s hurt Neiman more recently.”
Sucharita Kodali, a retail analyst at Forrester Research, also points out that “...a lot of [Neiman’s] products were purchased by foreign tourists—which was challenged by a stronger dollar recently.” A dearth of overseas buyers has become that much worse with global travel now essentially shut down.
Beyond that though, is it really a coincidence Neiman Marcus—a highly visible symbol of opulent Texas—has folded its tent at the same time the oil and gas business has gone completely in the tank? Probably not, although like Big Oil, Neiman may be down but not out. Some say Saks’ owner Hudson’s Bay Company could be a buyer.
J. Crew, on the other hand is a different but an equally all-American story. The company, which began as Popular Merchandise in 1947, blossomed in the golden age of catalogs (think Land’s End, L.L. Bean and Talbots.) Eventually branching into brick and mortar in 1989—the company’s first store opened in New York’s South Street Seaport when it was a thing—J. Crew defined an all-American, preppy, aspirational chic, falling between Ralph Lauren on the high-end and the Gap/Banana Republic below. When I was a young reporter in New York City—decades ago—J. Crew was what many of us wore.
Founder Arthur Cinader, (pronounced SIN-uh-der), would write the copy, such as this whimsical intro “A Tradition of Artful Simplicity,” from the spring 1989 catalog, noted in his New York Times obituary: “For Kennebunk to Nantucket, Narragansett Bay to Amagansett, and points South and West, here’s a J. Crew vision of sober but resonant color, rugged, sensuous fabric, and dedication to meaningful detail.”
I’m not exactly sure what that means, but I like it!
J. Crew was even immortalized in high culture, here in this Roz Chast cartoon spoofing T.S. Elliot’s, ‘The Love Song of J. Alfred Prufrock.’ (“I shall wear white flannel trousers back-ordered until May 19th and walk upon the beach.”)
Take that Walmart!
There were other moments too. Michelle Obama wore J. Crew...often. So did Kate Middleton. (See Dress like a Duchess.) But trouble came to J. Crew too as the company aged. Cinader and his daughter Emily who ran the company for years, were not surprisingly, exacting and reportedly difficult characters. Arthur sold out to Texas Pacific in 1997, which makes TPG a party to both retailing debacles in this story.
In 2003, J. Crew hired retailing wizard Mickey Drexler, the man who built the Gap and a long-time Apple board member. He had some success but ultimately stepped aside in 2017. That year Drexler says he approached Amazon about buying J. Crew, but there was no deal to be had. In the end, J. Crew hamstrung with over $1 billion in debt, couldn’t keep pace with the three-headed, fast-fashion hydra of Uniqlo, H&M and Zara.
I had mostly forgotten about J. Crew, though I almost crossed paths with the company not long ago. In 2018, we were told our offices were being moved to a building downtown, 770 Broadway, where J.Crew was headquartered. But by the time we relocated J.Crew had left, replaced by Facebook. Sign of the times.
Is it really a coincidence that J. Crew, an embodiment of Baby-Boomer suburban and urban culture is going bankrupt when some wonder if that way of life has peaked? Maybe that’s pushing it a bit, but maybe not.
Where do Neiman Marcus and J. Crew go from here? (I won’t venture a guess about J.C. Penney.) Management of both insist they will not file Chapter 7 (liquidation) and emerge from Chapter 11 as going concerns. That could be difficult. “2020 is a lost year and 2021 will be a reset year,” says Telsey, (whose grandmother, it turns out, worked at Bergdorf.) “There is a mismatch of inventory—they will be opening in a different season. Unemployment continues to increase. There are continued expenses but not attached revenues.”
But remember as Telsey herself said, it’s tough to kill a retailer. And Nicole DeHoratius, a professor who specializes in retail management at the University of Chicago Booth School of Business actually thinks J Crew and Neiman have at least one advantage. “There’s still equity in those brands,” she says. “It’s going to be really hard in this environment for a new company to get visibility. A company that has those brand names can utilize that reputation.”
Adds Christina Boni, lead analyst for Neiman Marcus at Moody’s: “Neiman is a formidable brand. It has a very loyal customer base and formidable locations,” she says. “It just has a capital structure that does't work to operate the business.”
Ah the capital structure. Maybe a call to TPG is in order. This time though Mr. Bonderman et al. might want to wear bathing suits.
This article was featured in a Saturday edition of the Morning Brief on May 16, 2020. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer.