Camelot Portfolios Talking Points

Bankruptcy in Retail

In the 1990’s retail stores were one of the most popular destination for shoppers. Retailers like Sears, Kmart, Marshall Field’s glittered suburban and rural landscapes. Fast forward to today, discount retail chains are going the way of the dodo bird. Even specialty clothing stores like Aeropostale, Abercrombie and Fitch, American Apparel have filed for bankruptcy.  While these specialty stores were able to restructure their companies through the courts. The once mighty discount clothing store may not have a chance to restructure.

In the past 10 years, retail bankruptcies have become quite routine. The 2008 recession did claim a number of the retailers, but the technological normalcy of switching to e-commerce continues to cut into the brick and mortar model. As of March 2017, there have been 9 bankruptcies. So far, 3 of them resulted in full liquidation (Gustafson).

In a recent study, certain retail stores have a higher probability depending on their focus. Department stores, electronic, and apparel stores probability of default is above 1.5 percent (Bloomberg). While elastic goods stores feel the pinch, non-elastic good’s stores have a lower probability of default below .6 percent (Bloomberg).

Looking at the broad focus of why brick and mortar retailers are vulnerable, the focus lies within the financial deck these companies operate in. Adjusting for lease obligations, pre-tax margins operating margins are less than 7 percent, and unadjusted net margins are less than 3.5 percent (Damodaran). This is 200-300 bps compression in margins comparing this to the total market less financials (Damodaran).

Whether or not this trend continues is yet to be seen, but it is in the best interest of the surviving companies to adapt their retail model quickly. Unfortunately, ease and adaptation to change has been slow historically for this industry (Gustafson).

IPO market

One of the most honored traditions on Wall Street is ringing the New York Stock Exchange bell. Many companies who IPO during that trading day get the chance to ring the bell. Over the past 36 years (1980-2016), there have been 8,249 companies that went public (Warrington College of Business). In the past couple of years though, there has been a slowdown in initial public offerings. In 2016, there were 76 IPO’s, which is less than a depressed market state in 2010 with 91 IPO’s (Warrington College of Business). While the IPO market may not be as coveted as it has been historically, other data points to less of a price bump when the company goes public. The late 1990’s saw astronomical first day returns averaging 60 to 70 percent (Warrington College of Business). As of 2015 the average first day return was around 11 percent (Warrington College of Business).

Other interesting statistics within the IPO space relate to the technology sector. Since 1980, roughly 37% of the all offering are in the technology industry (Warrington College of Business). Median market value over the past 10 years has hovered around 700 million in market value after the first day (Warrington College of Business).

There has been an uptick in IPO’s in 2017 compared to this time last year. As of today, 58 IPO’s have taken place between the NYSE and NASDAQ (IPO Scoop).  Eight companies are on the dock for IPO’s in the month of June (IPO Scoop). The most noteworthy proposed IPO in the coming months is Blue Apron, who delivered 159 million meals across the United States since 2012 (IPO Scoop).

References

Bloomberg. Retailers are going bankrupt at a record pace. 2017. 2017.

Damodaran, Arwath. Margins By Sector. January 2017. 2017.

Gustafson, Krystina. Retail bankruptcies march toward post-recession high. March 2017. 2017.

IPO Scoop. Last 100 IPOs. 2017. 2017.

Warrington College of Business. IPO Data. 2017. 2017.