Retail companies most in need of a turnaround
Chain stores Bed Bath & Beyond (BBBYQ) and Party City (PRTYQ) have been the latest casualties in the retail landscape to file for bankruptcy or undergo consolidation. Ahead of retail earnings this week, which retailers managed a stock turnaround and which retailers are in the most need of a turnaround?
"It's those retailers that are careful with their money in the years leading up to whatever downturn are the ones that have a better chance of turning things around," Pulse Ratings CEO Dennis Cantalupo tells Yahoo Finance Live. "Ones who are not engaging in aggressive share repurchases, the ones who put their money in the bank and reinvest it back into the business, those retailers that go through leveraged buyout... who over-expand are going to have a harder time with a turnaround."
Cantalupo details the positive trajectory for Academy Sports (ASO) carrying over from pandemic spending trends, while highlighting how brands like Big Lots (BIG) and Michaels are in the most need for a turnaround.
Click here to see more from the Yahoo Finance series "Retail Evolution: The New Era."
Video Transcript
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AKIKO FUJITA: We'll names such as Party City and Bed Bath & Beyond have fallen into the growing list of bankruptcy filings pointing to the challenging retail landscape. Retailers continue to face several headwinds, including wage growth, inflation, and a cautious consumer.
But while some retailers may be headed for a much needed turnaround, others have managed to flip the script. As part of Yahoo Finance's week-long special, Retail Evolution, The New Era, we'll be digging deeper into the world of retail turnarounds. Here to break it all down for us, we have Pulse Ratings CEO Dennis Cantalupo.
Dennis, good to talk to you today. You say that the key here is maintaining a healthy balance sheet and liquidity. I mean, it seems easy enough, but that hasn't been the case in the retail space. What kind of turnaround are we talking about?
- Yeah. So very often-- and like you said, this seems simple, but it's what happens in the years leading up to a down cycle. Retail is very cyclical, and you're going to go through your ups and downs. It's those retailers that are careful with their money in the years leading up to whatever downturn you're looking at are the ones have a better chance of turning things around.
And when I say the ones who are not engaging in aggressive share repurchases, the ones who if you're having a good couple of years, you don't just go ahead and give all that money back to the shareholders. You put it in the bank or you reinvest it back into your business. Those retailers that go through a leveraged buyout that makes a lot more difficult, that reduces your financial cushion. Those who may be overexpand are going to have a harder time with the turnaround.
So you want to give yourself as much of a financial cushion as possible. Things aren't always going to be great. Like during the pandemic, there were a few retailers that did very well from pandemic tailwinds. Some of those retailers bought back shares right away.
And we just encouraged retailers from a credit perspective, just to hold on to some of that cash when you have it because it's not always going to be as good, and you could use that money in the future. And a great example of that, I think, is what we saw at Bed Bath & Beyond.
Bed Bath & Beyond for the period of between 2011 and 2021, they bought back almost $9 billion in shares. The business going back that far generated over $5 billion in free cash flow. So they were still generating quite a bit of cash flow, but because they were more aggressive in their share repurchases than they were in reinvesting that money back into their business, it really reduced their runway for a turnaround, and ultimately, they ran out of money and ultimately liquidated. So had they reinvested that-- a good portion of that $9 billion back into the business, we believe they'd be here today and probably in years to come.
SEANA SMITH: Dennis, who are some companies that got it right that maybe you had been a little bit concerned about heading into the pandemic or in the midst of the pandemic that were able to navigate, which has certainly been a challenging environment pretty well?
DENNIS CANTALUPO: Sure. There's a couple of retailers that come to mind. Both had been the subject of leveraged buyouts, which is always a credit concern. One of them is Academy Sports which heading into the pandemic, the balance sheet was fairly leveraged. We had them as a D credit rating, and they had high leverage. Same store sales were kind of sluggish.
The margins were in the mid EBITDA margin, mid single digits. When the pandemic hit, the consumer behavior changed quite a bit, right. Those people who were social distancing, a lot of them picked up new sports and activities, going outside. So a lot of the sporting goods category did very well during the pandemic. And Academy rode that momentum into an IPO. The balance sheet is a lot healthier today than it was then. We have them as a B credit rating now.
So they took advantage of favorable turn of events, but they're also executing better-- better merchandising. In their case, we saw that Walmart and Dick's Sporting Goods exited certain hunting and firearms categories. Academy was able to take advantage of that. So I would say it's twofold. One, they took advantage of a good opportunity, and they executed well during that time. So you need a little bit of luck sometimes, and certainly, the pandemic was a tragic event, but it did serve as a tailwind to a few retailers.
AKIKO FUJITA: So that's a positive in some of those retailers. But as you point out, there are still plenty of retailers that have compromised credit profiles. What are the names that you're particularly watching that you see could be at risk?
DENNIS CANTALUPO: The ones that come to mind, we have Big Lots, Jo-Ann Stores, Rite Aid, Kirkland's, AMC, which I think was mentioned on the previous segment. These retailers for whatever number of reasons-- in the case of Big Lots we're seeing significant same store sales erosion. We expect that to continue when they release second quarter results in the next couple of weeks.
They have negative EBITDA over the last 12 months. Liquidity had become a growing concern, but the company was able to close on a sale leaseback transaction which generated $210 million or so in net proceeds after they paid down some mortgage debt. So that's-- in our opinion, that gives them some time to kind of right the ship.
We believe that in the back half of the year there's an opportunity for margins to stabilize at Big Lots. They were pretty promotional at the end of last year. And then hopefully, the operations stabilize and they turn the corner in 2024, but the sales contraction is a concern.
One of the things that I think that's really impacted not only Big Lots but a lot of retailers who sell discretionary items to any market, the category, into that middle to lower income demographic. Those shoppers have been really squeezed by inflation. They pulled back on discretionary spending, so those retailers in particular have felt the brunt of the pullback, and they're going to have to figure out a way to get through it.
In the case of Big Lots, they were able to monetize some assets. That bought them some time. But they pulled that lever. Now they may not have as many levers to pull in the future, so they're going to have to start reversing the cash burn. Hopefully, we'll start seeing EBITDA turn positive and then stabilize our liquidity.
SEANA SMITH: Dennis is there anything else maybe more broadly speaking that we can gather from some of your list here? Because you just mentioned Jo-Ann Stores, one of the companies that you're worried about or it's on your radar in terms of potential troubles here going forward in the public markets.
In the private market you also pointed out Michaels. Does this tell us anything just about the specialized retailer and what that landscape could look like going forward given all of these massive challenges?
DENNIS CANTALUPO: Yeah, I don't want to paint them all in one broad stroke. In the case of Michaels, they went through a leveraged buyout. During the pandemic they levered up. They were sold probably at a premium. Their operations did very well in the early parts of the pandemic because a lot of people were doing more arts and crafts at home. They were making homemade masks.
And since then, operations have deteriorated and their bonds are now trading below par which is a reflection of the bond market's general concern of the company's leverage and their ability to grow out of that debt.
SEANA SMITH: All right. Dennis Cantalupo, thanks so much for breaking all of that down here for us.
