What separates the most successful retailers from those that go bankrupt? Since retail bankruptcies have risen in 2024, industry investors and business leaders should be acutely focused on whether their companies have what it takes to survive.
My analysis of recent bankruptcies reveals that each retailer goes bankrupt in its own way — but they share many common failure patterns.
For instance, when consumer needs change and more nimble rivals win market share, some retailers don’t adapt appropriately. More specifically, such retail laggards don’t provide consumers more for their money than do industry leaders. Therefore their revenues decline — sticking them with high costs and possibly rising debt as they burn through their dwindling cash.
One retailer — San Francisco-based shoe and apparel provider, Allbirds — strikes me as sharing many of these characteristics. Since going public over three years ago, Allbirds shares — 11.7% of which are sold short, according to the Wall Street Journal — have lost about 99% of their value, according to Google Finance.
Following a 1-for-20 reverse stock split on September 5, 2024 to bring the stock price above the $1 a share level required to comply with Nasdaq listing requirements, the company’s stock has fallen about 16%.
Although the company exceeded revenue and loss per share expectations, I see three reasons Allbirds’ stock price could decline:
- Declining third quarter revenue.
- Negative cash flow forecast.
- Declining revenue estimates.
Allbirds sees a bright future. “It is clear to us that now is the right time to begin reintroducing the Allbirds brand by telling great stories to both loyal customers and new audiences,” CEO Joe Vernachio told investors in a November conference call featured by Retail Dive. “We’re on a mission to reinforce our aspirational brand position and rebuild our cultural relevance.”
Vernachio’s efforts strike me as a valiant last-ditch effort to revive a brand which may well have saturated its core audience.
I have requested comment from Allbirds and will update this post should I receive a reply.
Why Retailers Are Closing Stores And Going Bankrupt
Retail store closures and bankruptcies are rising. Through November 2024, retailers closed 7,100 stores — up 69% since the year before; while 45 retailers filed for bankruptcy protection, 80% more than in 2023, according to a Coresight report featured in the Greenville News.
Why are retailers closing stores and going bankrupt? Analysts cite several reasons — most notably declining revenue in the face of failure to provide customers with competitively superior value and excellent shopping experiences coupled with high operating costs, according to a December 3 report from GlobalData analyst Neil Saunders.
With prices still rising after the Covid-19 pandemic caused inflation to spike, shoppers at high and low income levels are flocking to stores providing the best prices on commodities.
Retail winners include Dollar General and Dollar Tree which “both announced hundreds of new store openings in 2024,” CoreSight’s research found, as Family Dollar suffered “widespread closures,” reported CBS News.
Wealthy people are not embarrassed to pay less for commodities. Indeed drivers of “Porsches, Mercedes, and BMWs” were found shopping at discount grocer Aldi. “No matter how much you make, you don’t want to spend $4 on an avocado when you can get one for 59 cents,” Wall Street Journal personal finance reporter Rachel Wolfe said in a podcast.
Deep Dive Investigation Of Container Store Bankruptcy
This week another retailer went banktupt. On December 22, The Container Store, a storage and organizational goods retailer, filed for Chapter 11 bankruptcy, according to CNBC, with the intention of completing a reorganization plan within 35 days, noted the Wall Street Journal.
“The Container Store is here to stay,” said The Container Store CEO Satish Malhotra in a statement. “Our strategy is sound, and we believe the steps we are taking today will allow us to continue to advance our business, deepen customer relationships, expand our reach, and strengthen our capabilities.”
To gain more insight into what caused the company’s filing, here is a preliminary five-whys analysis:
- Why did Container Store file for bankruptcy? In November, Beyond — which owns Bed Bath & Beyond and Overstock — raised doubts about its plan to invest $40 million to keep Container Store operating, the Journal noted.
- Why did Beyond raise doubts about its $40 million investment? Beyond doubted Container Store could “meet a condition to secure new financing terms from lenders,” the Journal reported.
- Why was Container Store so dependent on Beyond’s $40 million investment? The company was running out of money as sales of its products fell, quarterly losses soared, and debt nearly quadrupled to about $232 million at the end of September, noted the Journal.
- Why did the Container Store’s revenue fall while its losses rose? In June, The Container Store reported losses of $16 million as comparable store sales dropped 12.5%, noted CNBC. In July 2024, Modern Retail reported the company hadn’t “posted a full-year profit” since 2021. Following the pandemic, demand dropped as high interest rates and prices crimped demand while rivals Walmart and Target offered lower prices than Container Store’s, according to BusinessInsider.
- Why did Container Store keep its prices higher than rivals? Malhotra, a 21 year veteran of Sephora, became CEO of Container Store in 2021. To reach $2 billion in 2027 revenue, he pushed the company’s upscale Closet Works line — priced as high as $1,000 per unit, noted Modern Retail.
This analysis echoes my five-whys analysis of Bed Bath & Beyond’s bankruptcy. There, a new CEO joined the company with a strategy that worked for him at Target. Sadly for BBBY, consumers looking for bargains on name-brand products like OXO kitchen gadgets refused to buy the private label merchandise the new CEO had ordered onto the store’s shelves instead.
Allbirds Mixed Q3 2024 Financial Performance And Prospects
Allbirds reported a drop in revenue and a big loss in the third quarter of 2024, according to Retail Dive. During the quarter, net revenue fell 25% to $43 million while the company reported a $21.2 million net loss.
During the quarter, the company burned through $11 million in cash and held $79 million in cash and equivalents at the end of Q3. During the quarter, inventory fell 28% as the company closed 15 stores during the first three quarters, Retail Dive noted.
For the full year, Allbirds forecasted declining revenue and significant adjusted earnings before interest, taxes, depreciation, and amortization loss. More specifically, the company estimated a 25% drop in revenue to $190 million (at the range midpoint) and an EBITDA loss of $73 million — a $24 million improvement from 2023, according to the Journal.
Allbirds — which is developing new products and recently launched the Tree Glider shoe and slip-on Lounger Lift — sees brighter days ahead. “We’re thrilled with the strong consumer response to these launches, which reinforces our confidence that our upcoming product, set for release in the second half of 2025, will drive future growth,” Vernachio told Retail Dive.
Is Allbirds Stock A Bargain Or Overpriced?
Vernachio could be good for the company. “We believe that Vernachio will be able to guide the company in a way that is focused on consumers and is dispassionate about internal beliefs and viewpoints,” Saunders said according to my March 2024 Forbes post.
In November, analysts were confused about Allbirds’ prospects. Here are two examples:
- Underlying business performance is unclear. “With everything going on in the model, between store closures and shifting to international distribution agreements, it is hard to read what the underlying business is really doing,” William Blair analysts led by Dylan Carden said in a November client note featured by Retail Dive. He expressed more confidence the company would post stronger results in late 2025 following Allbirds’ cost reduction initiatives.
- Allbirds cannot cut its way to success. “To bolster the bottom line, Allbirds needs to grow revenue and not just prune parts of its business that are not working effectively,” Saunders told RetailDive. He questioned whether enough consumers would care more about the company’s sustainable materials than they do about “design, style and fit,” he added.
Two analysts who offered 12-montb price targets see big upside in Allbirds stock. Their average target of $12 implies the potential for 69% appreciation in the company’s shares, noted TipRanks.
If that target is right, short sellers will be badly burned. But if Saunders is right, Allbirds stock may have further to fall.
Read the full article here
