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Fmr. Toys ‘R’ Us CEO on why retailers may be in for a bad Christmas

July retail sales number rose 1.2% in spite of COVID-19. Jerry Storch, Former Toys ‘R’ Us CEO, joins The Final Round panel to discuss where the sector stands and what's next for retailers.

Video Transcript

SEANA SMITH: Retail sales out today. The rebound slowing a bit in the month of July, up just 1.2%. So for more on this, we have Jerry Storch. He's the former CEO of Toys 'R' Us. Also the former CEO of Hudson's Bay. And Jerry, great to have you back on the program. Let's talk about that number we got today. The piece slowing a little bit. But my question to you is, should we still be encouraged that we are seeing a rise, despite the fact that coronavirus cases continuing to climb across the US and that extra $600 a week in unemployment benefits ran out at the end of the month of July?

JERRY STORCH: Heck, yes. I mean, by my way of thinking, it didn't slow down. Everyone always quotes these numbers month over month as if they mean anything. What happened in July versus June. I don't even know if that's seasonally adjusted and all these calculations. As a retailer, what I look at is something that you can't fiddle with, which is how did we do in July versus last year in July. And guess what. Sales were up 2.7%, which is very, very healthy. In other words, consumers spent more in July during the pandemic than they did a year ago when there was no pandemic.

If you look at core retail, it was up 5.8%. They spent it in different places, there're certainly winners and losers, but I don't see that it slowed down at all, quite frankly. In June people said, oh, it's going to slow down because at the end of the month they started having more cases pop up in certain states. In July they said, oh, it's going to slow down because now there's even more closed, and because the checks are running out. So far, so good that hasn't happened.

SEANA SMITH: But Jerry, how big of a downside risk do you think it is that the additional checks, the additional $600 a week did expire at the end of the month? I mean, how much pressure do you think we could see in the near term because of that?

JERRY STORCH: Well, they'll be some pressure focused in some places. It won't be broad-based, and it really depends on how long it takes for there to be some kind of replacement income. I know something will happen, I just don't know when. Nobody knows, right? So you can't really tell. But meanwhile, when you look at what's going on at retail as a whole, e-commerce was up 25% yet again. Home Depot and Lowe's, the building services folks, they were up 15%. This is year over year numbers. Think about that. Year over year up 15%. More money spent at Home Depot and Lowe's.

Grocery up 11%, of course, which corresponds with a 19% reduction in restaurant. And the other losers, by the way, of course, were apparel and department stores, which are an absolute basket case. They were before we got into this pandemic and this just accelerated it. Now they're just bleeding left and right. But the reality is, the consumer right now is kind of OK. They've improved their balance sheet. They've saved a lot during this period. All that money wasn't spent. And so I think we can go a little while like this. So I'm not quite as negative as some of the people I've heard.

BRIAN CHEUNG: Jerry, it's Brian Cheung here. You mentioned the basket case of department stores. I'm wondering if we can unpack that a little further. I've been specifically interested in a story about malls, hearing about this barbell approach, where kind of those middle tier malls might have a difficulty with a lot of those large tenants kind of going under. You think about Lord and Taylor, for example. So I'm wondering from your vantage point, what is the future of the mall? And can you respond I guess to these rumors that maybe it's Amazon that's going to be taking some of these anchor tenant spaces?

JERRY STORCH: So first, start with the proposition. We have two to three times the retail square footage that we need in the US. Two to three times! And I'm saying, compare it to Canada, compare it to Europe. I'm not making that number up out of thin air. It's just way too much. Meanwhile, the area that's growing in even faster than we thought it would, which is bringing all this forward, accelerating this pace of change. Who's losing out? It is the malls, because it's department stores and apparel stores. They're losing out. Apparel is suffering mightily.

None of this is new again. None of this is new. So the question is, how fast will happen and where will it happen? This idea, by the way, that the experientially high end malls are going to do better and the middle market malls are going to do going to do worse, that was what happened before the pandemic. I think it's a lot of changes taking place right now. High income people have more access to the internet. They spend more on the internet. It's not clear to me at all that the higher end malls that try to be more experiential even make any sense anymore when you look at today's world.

People want to go out and browse and spend time at restaurants all that. And I don't know how long it's going to last and neither do you. So that's really a question in terms of whether that barbell is going to exist or not. Finally, your question about Amazon. Look, Amazon has 200 million square feet of distribution capacity in the US, 200 million. And they're adding another 100 million in identified locations, not just made up stuff. That's 300 million square feet of distribution.

So yeah, they'll take anything they can get. If they can get a few department stores, that's great. But don't fool anyone. The few anchors in the malls, the few JC Penney's or Sears, they'll happen, but they aren't going to make up for the amount of space that Amazon really needs. So look, the space will shift from malls to distribution space. It's obvious, it's relentless, it was going on before, it's just quickens its pace.

RICK NEWMAN: Hey, Jerry, Rick Newman here. I want to ask you a little bit more about Amazon. Whether their growing dominance gives you any heartburn or whether you see it differently? I mean, we could be transforming into something where brands, all these individual brands still matter, but every brand doesn't have to have a storefront. And so what every brand needs is good distribution, which could be Amazon, as long as Amazon plays fairly. What do you think about all that?

JERRY STORCH: Let's peel that back a little bit. First of all, there are some brands that are so powerful, these massive vertical brands, someone like a Nike or Chanel, they can set their own rules. So if they don't want to be on Amazon, they don't have to be on Amazon. If they don't want to be in a mall, they don't have to. They want to control their own distribution with their own stores, they're going to have their own stores, they'll have their [INAUDIBLE]. Nobody cares. Their product is so amazing that they're going to decide how it's going to be.

And you see these companies morphing that way. You saw Nike, right, pulling out of Amazon and focusing very heavily on their own retail and their own e-commerce. So these brands can control their destiny. But if you aren't that good, and most brands aren't that good in the sense of being that compelling, that dominant with the consumer, that amazing, then you know what? You better pick sides. This is like the Cold War with Russia and the US. Maybe you can toss China in there.

But you better align with somebody, whether that's Amazon or Walmart, because pretty soon, if you're not, you're not even going to be visible. No one's going to find you. Half of all product searches begin and end on Amazon. That's the real, by the way, antitrust question, is that you have a time between the search and the product purchasing. So if you're not on Amazon, you're invisible to half of the buying audience.

Now you might choose, I'll ally with Walmart, who by the way, online is probably 1/10 of Amazon's size in the US. You might ally with Walmart and go, well, they're the only guy who has a chance to give me a present. But you better make some friends fast and be in one place or the other. So it can be OK, by the way, to your point, to be on Amazon or to be on Walmart and to help them help you, if you will. But going alone is not going to be an option for most players.

AKIKO FUJITA: Jerry, I want to get back to that conversation about the demise of the malls. We saw Simon Property Group and Authentic Brands not only buying Brooks Brothers, but now Lucky Brands as well. I'm curious what you think of the strategy. I guess a skeptic would say, here's a big mall owner who's trying to buy up tenants so they can pay rent. I mean, what do you think the strategy is?

JERRY STORCH: Well, I think they're getting them really, really cheap, so that's the strategy. And David has said that he is buying them basically for the inventory value. So he's getting an incredible deal. In some cases, he's certainly cementing his mall's position. As you know, there are co-tenancy clauses with many of these anchors. They go out of business, the small shops can renegotiate. A lot of the small shops are dying to renegotiate right now during the pandemic. Everybody wants to contract their retail square footage.

As I said at the beginning, there's way too much. So everyone's looking now, what stores can I close? The problem is, they have leases. So there's no way to break them, because JC Penney goes out and there's a co-tenancy clause, they're going to do it. So there's a little bit of everything here. I think it is true that they're doing this in order to preserve their rent roles in order to make it look like they're occupied, which I think is where you're headed really with your question.

But I think it's also true that they see tremendous value in buying these companies that used to be billions and billions of dollars of equity capitalization for a few hundred million dollars, with no debt, because they're buying them out a bankruptcy. So I think, look, they get Lucky and they're getting Forever 21 and they got Brooks Brothers and maybe JC Penney for almost nothing.

It's really chump change for companies the size of Simon. And if you could figure out a way to, and they're working with Authentic Brands, and Jamie Salter's a genius with licensing. So they can figure out a way to make some money on this, all the better if they can also keep some of the space occupied. I think it's both.

SEANA SMITH: Jerry, going off of that, just mentioning all the bankruptcies that we've seen in the sector. When are you expecting us to see a peak? Have we seen the peak? Or is that something that we haven't experienced yet and we're not going to see now for quite some time?

JERRY STORCH: There are going to be two waves. We're going through the first wave now, and it's not over. The first wave is companies that were already encumbered before we entered the pandemic. They were already challenged. They were, and principally again, I hate to say the same thing multiple times, but they were apparel stores and department stores. Again, there's been a huge shift of personal consumption out of clothing and into hard lines, electronics, other categories overall.

So these were troubled companies. If they were leveraged, they hit the pandemic and they couldn't make it out. And then they couldn't have a story that anyone believed to get refinancing. Some of them had a story, like a Nordstrom or somebody. Say, look, I'm Nordstrom, are you kidding me? And so they were able to get the money to get where they had to go.

So the ones that are going bankrupt now are the ones where the story's not good enough. And even though they could've limped along for five or 10 years, it's all getting compressed, bang, into one year. So that's what's happening now. They were going out anyway, it's just a question of when. You don't really think JC Penney was going around much longer one way or the other, right? So that's what happened.

Now there's a second wave coming, in this one's a little more shocking. These are companies that had a cushion. They had a cushion for bad times. They had a cushion for capital investment in their business. But they just used it up. So you take a case like Macy's. Everyone knows they have all this real estate value that could be borrowed against.

Starboard came after them, saying, borrow against your real estate, generate value! And Macy's said what? I don't want to do that. I'm going to lose my flexibility for the future. Retailers go bankrupt when they get leveraged. They're great cash flow machines when they're not leveraged, when everything doesn't have to go to interest payment. So Macy's got leveraged up during this.

It isn't, it doesn't make it any better that they had to do it or they did it in order to get through the pandemic. The fact is, the cushion's gone. They leveraged their real estate to get through this period. The same is true for Nordstrom, for Kohl's, for Gap, for multiple retailers all over the board. Some of these folks are going to have bad Christmases.

Because I don't know about you, but I'm not going to go into some crowded department store or apparel store where I can't socially distance to buy my stuff. I'm going to probably buy online, and I'm probably not I'm going to buy apparel. I'm probably going to buy someone, an Apple something, a computer, some headphones, I don't know what. It's something totally different. So the problem is, it's going to be a really tough Christmas.

So they are not going to hit their numbers this Christmas. They're not hitting them now. My god, 13% down year over year for department stores. So they're going to come out to the spring and they're not going to get their numbers that they promised to all these people when they took out the debt. Now, one year can they make it through? Maybe. If it happens a second year, god help them.

So we're going to see a second wave of bankruptcies that's going to be more shocking this way. The names are already known. Let's face it. Who's gone bankrupt so far that surprised you? Neiman Marcus is the only really great retailer name that's gone under, but we all know they were leveraged twice over with back to back LBOs. So it wasn't that their retail wasn't good, it's that they were up to their, they were above their heads in debt. So everyone else is a company that doesn't really need to exist.

But we get to next year and the year after, you going to come up with some really meaningful names who are going to be in trouble. That's the second wave. So we have a long way to go, long way to go, trust me. And it has just begun. It doesn't [INAUDIBLE] retail. By the way, I don't want to hear it, retail Armageddon. There's lots of winners. Target, Walmart, Costco, Dollar General, Home Depot, Lowe's, TJ Maxx, they're going to get all the money. Amazon, of course. And the consumer, spending doesn't have to shrink just because these guys go out of business. They go out of business because they're obsolete.

SEANA SMITH: Well, Jerry, I was going to say, that adds a lot to digest I think, but I think it's fair to say we're going to have you on quite a few times over the next year or two to break all of this down for us. And we'll get a glimpse inside some of these retailers as we have a number of the names out reporting next week. So Jerry Storch, always great to have you on the program. Thanks so much for taking the time to join us today.

JERRY STORCH: My pleasure.

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