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Why These Companies Are in Trouble

By Daniel B. Kline – Jun 24, 2020 at 8:10PM

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Retail and consumer goods businesses have been fairly shielded from COVID fallout, so what makes these companies an exception?

In this episode of Industry Focus: Consumer Goods, Emily Flippen and Motley Fool contributor Dan Kline look at some retail and consumer goods companies staring at bankruptcy and discuss their prospects and what they can do to turn their businesses around. They give a breakdown of these businesses and examine what might push them toward bankruptcy or how they can turn around their business, plus much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June 23, 2020.

Emily Flippen: Welcome to Industry Focus. It's Tuesday, June 23, and today I'm joined by Dan Kline to discuss what companies may become the newest victims of the next wave of retail bankruptcies. Dan, as always, thanks for joining.

Dan Kline: Thanks for having me. An upbeat topic, and I'm not going to call most of these companies victims. Victims are when someone else does it to you, in this case, this -- I don't know what the right word would be, but at least some of the pain, in most of these cases, is self-inflicted. You can't have a leveraged buyout or make bad inventory decisions for year after year after year and then blame the pandemic or slowing mall traffic, which by the way, there wasn't slowing mall traffic to any significant extent before the pandemic, slightly down off all-time highs.

So, most of these companies, and there's one on the list that's absurd but we'll get there, most of these companies are at least partly due to their own problems in this position.

Flippen: Yeah. I like how you clarified that. The pandemic has impacted a lot of people, plenty of people are victims of COVID-19, it's fair to say these retailers are not necessarily the biggest victims we're seeing as a result of this pandemic. And, in fact, I think it was last month we took a look at some of the more robust businesses that could be threatened if this pandemic became protracted. And these were the businesses that would genuinely be victims of the pandemic. They were not declining as a result of their own action, but instead, as a result of this pandemic. And that was way more theoretical, I think it's fair to say, we liked all of the business on that list.

But honestly, as the weeks have passed, it feels more and more like some of these bankruptcies are becoming a real possibility. So, 14 retailers in 2020 have already filed for bankruptcy, and that includes the big names that we've talked about, like J.C. Penney and Aldo, but they're being joined by tons of smaller businesses, like Tuesday Morning, and, most recently, Neiman Marcus. So, despite the rise in bankruptcy, I think it's fair to say that we might not be done with the retail bankruptcies for 2020 just yet.

And what we're going to talk about today is actually a list that The National Law Review put out, a list of 20 retailers that they think consumers should watch for bankruptcy filing in the second half of 2020. So, Dan, you and I are going to be breaking down some of these companies, talking about if we agree or disagree, plus what it might take for some of those companies to be forced into bankruptcy.

But before we get into the list, you pinged me a story this morning, we just had an update that yet another retailer will be joining that list of 14 companies and really biting the dust here in bankruptcy. So, what can you tell us about that?

Kline: Yeah, so it's the parent company of New York & Company, RTW (NYSE: RTW). They changed their name for some reason to RTW as a branding move, which would basically be like me changing my name from Dan to 453769, like, it makes absolutely no sense. So, their plan is to file for bankruptcy. They may make a deal with their creditors without a bankruptcy and close either some or all of their stores to focus on digital.

Emily, is New York & Company a website you've ever visited? It might be a store my wife pops in at the mall, I don't think so. But if you haven't invested in digital and becoming a digital brand, your biggest strategic advantage is that someone at the mall might walk by you. I'm not sure how your internet works, but you don't walk by websites. So, this to me seems like -- it's like the big lie, like, no, no, no, no we're just taking a break, we'll get back [laughs] together in a few weeks. Like, this is like, when you say you're going pure digital when you weren't a digital brand. Like, if you told me that The Children's Place is going pure digital, I would say, OK, people are seeking that out if they buy some good SCO listings. It's a very specific product category. I'm not entirely sure what New York & Company sells. I think it's women's apparel, but this to me, if you're going to just leave the mall, you've disappeared.

And how about working on omnichannel and figuring out which stores work and which don't, build up a presence, build up a clientele, and then double down on digital and move more of your business to digital. You're really going to be a digital start-up with a ton of debt that just came out of bankrupt? [laughs] That seems like a terrible idea.

Flippen: [laughs] Yeah, you talk about too little, too late there. Now, I might not be New York & Company's target demographic, but it's fair to say, I have never stepped foot in one. I have never even considered stepping foot in one. It has never been a necessary retail outlet, at least for myself as a shopper.

But what I thought was really interesting about this bankruptcy filing is, actually, because part of the reason why they're declaring bankruptcy is because they're defaulting on their debt. And this is a common trend that we see among bankruptcy filings. It's really hard to declare bankruptcy, to be put in that financial position, without significant amounts of debt. But RTW doesn't actually have any long-term debt. It's all leases. It's all the leases that they have from this huge retail footprint, and they just couldn't make their payments.

So, I think, even though some of these companies that we're going to talk about on this list are dying because of hefty interest payments, it's fair to say that we need to keep an eye out on a lot of retailers, even the ones that may not have a debt but have huge footprints.

Kline: This is one of those scenarios where, if you're a successful company, you're going to have some people come back and buy some things quickly and then you might have a slow six months as we're all locked down and not having normal consumption. But the malls have shown an incredible willingness to negotiate with companies that were successful before this. So, Simon is suing Gap because The Gap has been willy-nilly closing stores and doesn't want to pay its rent. They are going to be much more lenient with a company that could say, hey, look, here are our financials before this under normal operating period, our debt is not too heavy, we're making plenty of money, we fully expect that to return, can we push some of our payments down the line? You're going to have to see your mall operators, your strip mall operators, be very, very lenient. That's going to be somewhat easy for a Simon Property Group or a Taubman or another big scale -- it's not going to be as easy for your guy who owns one strip mall, because that might be his whole income structure. But in general, good companies will survive this. Because if you own property, you're not going to want to put Best Buy out of business just because they missed a month's rent payment.

Flippen: Yeah. And it's fair to say that in the next 20, 30 minutes or so, we're not going to have time to talk about all 20 retailers [laughs] on this list. I bet, in fact, if we try to, a lot of our listeners wouldn't even recognize the names of some of these companies because that's how irrelevant, honestly, their businesses have become. But when you looked at this list, what companies stood out to you, and maybe we can just talk about the top five or six?

Kline: Yeah. I mean, the one I just mentioned is the one that [laughs] stood out to me. There is zero possibility Best Buy is going out of business. And I bring this up because Best Buy was in very bad shape, whatever it was, eight, 10 years ago. And then they brought in new management, they had a turnaround plan, and they've actually passed through their turnaround plan to the point that Hubert Joly, who was that CEO, has stepped up and is now executive chairman. There's a new CEO in; I always forget the name, I apologize. But it's a relatively recent thing.

So, that's a company that said, not only have we finished our turnaround that went well, we're actually in a new stage of growth. So, the fact that coronavirus caused them to lose about 30% of their sales, one, I think that's a miracle. They were operating digitally and with curbside pickup. You can now go into most Best Buys. And I went to Best Buy over the weekend, thinking like, oh, there's going to be a lot of clearance sales. Like, there's going to be -- there were not. I bought a Samsung Watch at a discount, I don't particularly like it. I'm not sure it was a smart purchase. I got new bands for it, so I've doubled-down on my bad purchase, because the new bands make me like it more. But that said, most of their merchandise doesn't really age out that quickly. If there's not a new Apple Mac then the old Apple Mac is still viable. And it's probably still viable at a lesser price. And it looked pretty healthy. They were doing -- the appliance section was booming, because a lot of people want new freezers when they've been stuck inside the house or have had things that were damaged that they needed to repair.

So, if you look at the financials of Best Buy, the only real risk here is that there's a massive economic slowdown and people stop buying electronics, because if they came through the pandemic with roughly 70% of their sales, and they're now open, Best Buy is just fine operating at 80%, 85%, whatever the number is, for a few months. My guess is, in the first month it might be a quicker recovery, because there was probably some pretty significant pent-up demand. Not a lot of people are going to buy a laptop without seeing it. Like, that feels like, you only do that in an emergency.

Based on the lines outside the Apple store, there is a lot of fixing stuff demand. So, I'm guessing the Geek Squad is going to be pretty busy. So, the fact that they're on this list, it just seems like it's misplaced, it's like someone who was reading a showrooming article a decade ago that thought Amazon was going to put them out of business, that hasn't recognized, they're a service business, at least partly, that wasn't allowed to go into people's houses. Geek Squad couldn't do all the Geek Squad stuff. All of their consulting businesses couldn't operate. For a while, their stores were open by appointment-only for consultations. I'm not making an appointment to go to Best Buy, this is a company that has very strong financials, and was very profitable before this. And even if it's a protracted shutdown or their business isn't back 100%, they're a Starbucks, this is like a company that's gone from being a brand in trouble to being a foundational brand.

Flippen: Yeah, I saw this on the list and I had to do a double take, because I was like, what? Best Buy, in my mind, had been a winner during this pandemic, but lo-and-behold, it's here on The National Law Review list as well as the list put out by The Street that had it on their "to watch" list.

And I like your point about feeling like this was written by somebody who hasn't been updated on the business structure for the past, you know, five to 10 years, because Best Buy really has invested a ton of time and money into their omnichannel and services experience. And they were profitable in the last quarter. Even during this pandemic they were cash generating, and I actually think this could benefit their business, because more people are driven to their online e-commerce channels during the pandemic. Once they have somebody purchase something online, I mean, that first barrier of just getting them signed up, getting their credit card info online, that's the hardest one. So, I agree, I think Best Buy is probably the most ridiculous stock to have on this list.

But another company that I was actually a little surprised to see on the list, and I don't want to front-run this, because I really want to get your genuine take before I give you mind, Dan. But it was GameStop.

Kline: So, GameStop is at real risk of going out of business, despite the fact that they've done a pretty good job. So, this is one, I've actually done shows with Nick Sciple in Jim Gillies across the podcast network, the live network. We've done some shows that were just the three of us on Slack, frankly. It's a company we talk about a lot.

They're intentionally getting smaller to be more profitable. Their risk is that during this period, more people download games that would have bought them in the store. There's no massive benefit to buying a game in a store, because when you get at home, you put it in your PS4 or your Xbox One, then have to spend hours downloading updates and content anyway. So, it's not like you're fast tracking it by getting it in the store, but we have a new wave of consoles coming. Even though GameStop is in not the greatest cash position, they've made the right moves to, sort of, thin themselves out. They're going to get out of some leases because of the pandemic as some malls close. They also tend to have very short-term leases, so that gives them a lot of ability -- they have way too many stores.

They have to eventually figure out what their stores are going to be, but they have, let's call it, more than a year to do that, because the next generation console sales, people are going to buy them wherever they can get them. So, frankly, if I was any store and I could get my hands on some consoles, I'd be selling some consoles. Not a high margin business, but people, when they buy a console, they're going to pick up a game or two, those are higher margin. They're going to buy those dumb service contracts that are terrible ideas for consumers to purchase, but people buy them anyway and are incredible margin for GameStop. I'm worried about GameStop as a long-term business, I am not worried about GameStop as a coronavirus pandemic going out of business soon company.

Flippen: Yeah, you took the words out of my mouth, honestly. I have a really hard time believing that GameStop, in the second half of 2020, declares bankruptcy or even looks into declaring bankruptcy simply because of the inevitable boon that will happen in the fourth quarter with the release of these new consoles during the holiday season.

Now, GameStop has always been a lumpy business, and it has not saved them up into this point. So, long-term, it's anybody's guess if decreasing their footprint, getting out of some of these leases helps them. But as they stand right now, they have a very near-term tailwind sitting in front of them in the fourth quarter, and they have no long-term debt, it's all leased, which is substantial, we already talked about that company RTW going out of business because of defaulting on their lease obligations. So, it's not to say GameStop is risk-free in that regard, but I just don't see them pursuing a bankruptcy when there's something very, very real near-term that's going to help keep them afloat at least, to your point, for another year or so.

Kline: Yeah, but they have to get it right, because this might be the last generation of purchased consoles. I think it's very likely we move into a perpetual lease where you're always -- you're paying Microsoft or Sony a certain amount a month, and you always have the latest console. And that gives them more predictable revenues. And that cuts GameStop out of it. I don't know what GameStop should do, I think maybe it's more gameplay in the stores, doubling-down on virtual reality, but that seems to be really risky, because our mall has one of those stores, it's a place called The Holodeck and it never looks that busy. And I feel like it's one of those places that the mall isn't charging that much rent to because it doesn't compete with anything else and it fills up a spot. So, GameStop needs to make some changes, but I wouldn't worry about them right now.

Flippen: And there's at least two other companies on this list that are very closely tied to mall performance, at least in my mind. And one of those may not be what you expect. It's AMC Movies, which is on their list of "to watch" companies for bankruptcy. And AMC actually has a lot [laughs] of movie theaters in malls, right, that drives foot traffic. So, how do you view their prospects for bankruptcy in the second half of this year?

Kline: So, they're going to go bankrupt unless someone decides they shouldn't, because we're not allowed to go to the movies even when we're opening and we are allowed to go to the movies. They've literally come out and said, hey, our future hinges on if we can drive more people to go to the movies during the day, during the week. Because if you only have 30% capacity, or even 50% capacity, it can't all be Friday, Saturday night, Sunday during the day, it has to be, hey, we're all working these weird schedules, let's take the kids to see Mulan Wednesday at 1:00. I go to the movies sometimes Wednesday at 1:00. In a normal reality, I live about three-quarters of a mile from a movie theater, that was an AMC, by the way. That was very intentional, part of why I wanted to live there. So, sometimes I'd see a blockbuster a second time during the day just to kill a couple of hours, because obviously, I don't work a traditional schedule, with Fool Live I work a more traditional schedule now.

But that said, there's not going to be a lot of movies to show. Disney says Mulan is coming out, but it's not necessarily going to come out purely on screens. AMC isn't going to show Universal releases, because they said they're going to do some digital releases as well. And even movies like SpongeBob SquarePants. Emily, I know you're excited to see that one, you probably already have tickets to see in a theater.

Flippen: [laughs] I've been on the edge of my seat.

Kline: Yes. That's coming out digital, it's going to skip theaters altogether. I think we've seen with Trolls World Tour that these, sort of like, marginally profitable in the theaters children's movies, not the, like, mega Pixar movies, but like the ones that were going to do 60 million, 70 million. They're actually better off releasing it digitally or especially if it's Comcast that gets both sides of it, because they're the cable company in some cases. They're going to be better off making less money on a digital release, because they'll actually be more profitable.

So, movie theaters face a lot of negative headwinds. They have to figure something out. One of the things I saw is Garth Brooks is going to do a concert at a drive-in where you can pay $100. It's only a few hundred cars, but he's going to broadcast that to another 300 drive-ins. Well, there's no reason AMC can't do things like that. Put on a concert in a parking lot of a stadium and then sell tickets to it at a much higher than movie prices. They're going to have to get very creative. The good news for them is, there's a lot of artists who need to make a living. There's a lot of people out there who -- they might be very rich, but they're used to spending a lot of money, or like mid-tier artists that, you know, they make a nice living, but if you're, I don't know, Weezer, you probably can't afford to take three years off the road, you know, you need to be out there grinding out some concerts, paying those bills.

So, I think you're going to see -- you might see standup comedy that way, though, it's a little difficult to do standup comedy without an audience responding; and it's hard to respond at a drive-in. So, AMC is in real trouble, because their overall model, showing movies, is not allowed. And can you imagine, Emily, do you really want someone behind you at the movies eating popcorn? Right now, that just feels to me like, ugh! It's very creepy.

Flippen: [laughs] I think we disagree there. I actually feel like a movie theater experience where there's only 30% capacity and nobody is around me, it's quiet, I get to eat a big thing, popcorn, see that to me, right now sounds very appealing. But granted we're taping this at lunch time and I haven't eaten yet, so.

Kline: [laughs] Well, just as the last word here, Emily. You know, I'm headed to Universal Studios, I'm going to try to get Disney reservations as soon as they can. I trust places with the money to do this well, I don't trust AMC to do social distancing properly. And I think that's the concern, if you told me Disney had a movie theater and they were managing capacity and they're going to know who's in my family group and they're going to do a waiter-only service to minimize contact and they're going to clean; I don't trust that AMC is going to clean properly, I don't trust that AMC is going to distance people properly. Because when you're strapped for cash, it's really hard to add on a bunch of expense to how you do your business. I'd be fine if AMC came out and said we're going to charge a $2 per ticket COVID charge to pay for misting and UV sensors and cleaning personnel. I'd feel a lot better than if this company that's out of cash says, oh, no, no, that's good, [laughs] we're clean. Like, your floors were sticky before this.

Flippen: [laughs] I have a follow-up question for you about AMC, but I'm going to put a pin in it, because I want to talk about one company to provide context for my question on AMC. And it's CEC Entertainment. I'm going to venture a guess that 90% of people listening right now have no idea who CEC Entertainment is or what they do.

Kline: I would think that's probably true, because I'm not sure I would have known the company by that three days ago, and I've probably done podcasts on them before.

Flippen: Yes. And for anybody who's now scratching their head or furiously googling, CEC Entertainment is the parent company of Chuck E. Cheese. Yes, Chuck E. Cheese, the same Chuck E. Cheese that has been trying to sell pizza [laughs] under a different name on Uber Eats to try to save their business. This is No. 1, in my opinion, on the list of companies looking at a bankruptcy in the second half of 2020.

Kline: So, as a parent who's been to a Chuck E. Cheese in the last decade, and I would say, it was probably close to eight or nine years ago, this is a fun experience for like a three-year-old through a six-year-old. And kids might not notice that the pizza is terrible, but every adult would. And I'm talking, like, Ellio's bad level of pizza. Sorry, folks at Ellio's, [laughs] I don't want to insult you, but frozen pizza is generally not particularly good.

They had a lot of chances to fix their business. As far as I can tell, here's what they've done. They've improved safety. Well, that's good, I don't want someone kidnapping my kid. I also don't want a random adult, who doesn't have a kid, [laughs] showing up at Chuck E. Cheese; that's creepy. But they haven't improved their entertainment offering. The video games are about the same as they were when I was a kid. The hamster maze is not particularly different.

Flippen: The hamster maze?

Kline: Well, I don't know what they call it, but have you been to Chuck E. Cheese?

Flippen: I clearly haven't.

Kline: They have, like, an indoor playground where kids climb through those tunnels and it looks like a giant hamster maze, and there's usually a ball pit somewhere in it. So, not the cleanest thing under the best of circumstances, with a bunch of kids, half in diaper age, half at that age where you're sort of not in diapers. That seems like a kind of not clean prospect in the first place.

But that said, Chuck E. Cheese is a good business Saturday and Sunday afternoons, that's the only time, and maybe school vacations during the week, if like, teams are doing parties. What business is Chuck E. Cheese doing on Wednesday afternoon? There might be the occasional mom whose kid is home, who's just at wits end, who takes them home, or dad who doesn't know what to do, and I've probably done that myself. But when you have a business that can't serve adults only, that basically is tied to when kids are available, that's really, really tricky. I've often joked that they should have an adult menu under Charles E. Cheese with better food and they bring out better video games at night and find a way to give their business some optionality.

They had the opportunity to do a Domino's-like campaign, to say, hey, due to the pandemic, we're moving to delivery-only, but we've totally revamped our pizza. We brought in a famed pizza chef -- I have no idea who's a famed pizza chef -- we brought in a famed pizza chef, he's done our recipes, everything is better. We're still going to offer a kid's pizza menu with the old pizzas. I don't think that would have worked, but they could have tried it. Instead, they added a little bit more cheese and named it after someone in the Chuck E. Cheese band. And I know I have many of the albums of the Chuck E. Cheese band, but I did not know the individual band members' names. I assume Chuck E. Cheese is in the band, I can't even tell you that for sure.

Flippen: [laughs] And part of the reason why this relates to AMC, and I wanted to talk about Chuck E. Cheese before getting to that question on AMC, is because there seems to be some debt providers, kind of, like vultures circling over [laughs] CEC Entertainment at this point, potentially willing to swoop in and issue them debt, on really favorable -- to them -- terms. So, if someone is willing to bail out, essentially, Chuck E. Cheese, which has been a failing business model for a [laughs] very long time now, do you think there's any hope that AMC doesn't declare bankruptcy, that debt holders or debt providers come in instead and finance their operations until people are back to full capacity?

Kline: So, I'll answer this in two parts. With Chuck E. Cheese, I think most of the interest is people my age who have fond memories [laughs] of Chuck E. Cheese and believe that the brand has value and you can revitalize it. And I do believe you can, if you combined Chuck E. Cheese with Gymboree and made it something for little kids who aren't school age during the day, and something that got, sort of, older as the day and the weekend went along, that's a massive investment, but it's possible. And the brand might have some equity.

Why is there no Chuck E. Cheese cartoon or other licensing or other things you could do? Feels like Genius Brands or somebody full of nameless properties could use the Chuck E. Cheese family. Also, the McDonald-land family; I really feel like Grimace could have a cartoon or two. But with AMC, I think you're going to need a change in the law that prevents studios from owning movie theaters. I am pretty sure that while this is a rough time to ask Disney and Comcast to invest, the numbers are relatively low; and if you could have some sort of legal framework where they have to operate in a way that's fair to them.

But, look, when the new Star Wars comes out, it's going to be on 6 screens in a 14-screen theater anyway. When the new Fast & Furious comes out, it's going to be on the same amount of screens, but if you could find a way to govern it, there is a benefit to having theaters be open. As much as it's fine to watch most movies at home -- Christopher Nolan who has Tenet coming out at the end of July has basically said, I make movies to be watched on the screen. And the big screen matters. And I'm shooting using IMAX cameras, and I don't want you watching it on your phone as your first experience.

So, I do think there will be movie theaters, there will likely be less, they will have to find new uses, they will have to find new investors. I think, in the event of a bankruptcy, they're not going to close AMC, because what would they do with that real estate? Does every mall that built a theater want to have to knock it down, because a theater -- a Sears can be a gym or a grocery store pretty easy, a movie theater, other than if the local college campus wanted to lease it out for, like, big-scale lectures, I don't know what you could possibly do with it. So, I do think this is going to be one where whether it's the mall operators or the studio owners or some consortium, they're going to figure out how to keep this afloat. This wasn't a great business pre-pandemic, but it's kind of a necessary business.

Flippen: And I want to save what I think is a really interesting conversation for last, and maybe move over to a company that I saw on the list that I feel like maybe only second to Chuck E. Cheese, [laughs] feels like a really sure thing for bankruptcy, and that's Ascena Retail Group, and it's the parent company of brands like Loft, Ann Taylor, Justice and a handful of others, Dress Barn. [laughs] So, this is pretty high up on the list of companies that are really teetering on the edge of bankruptcy or at least restructuring right now.

Kline: My wife is going to be mad for saying this, because she generally likes Loft, but this is a collection of brands you might wander through if you happen to see one at the mall or in Dress Barn's case a strip mall, there's nothing all that distinctive about them, you don't really know what they're for. And, look, this is a challenge for all small mall retailers, that's not easy to say, either you're trendy and in the moment, like, Vineyard Vines, and then when you're not trendy you have to figure out a way to exist, which I think Vineyard Vines has, but don't know, because they're not a publicly traded company. Or like an IZOD. We have a core audience of golfers and old men who -- and I'm wearing, maybe not today, but I have lots of IZOD shirts. So, I am faired enough to say in that old men group that buys IZOD shirts. But every now and then, for some reason, preppy will become popular and IZOD will be cool again, and they'll have a moment.

These stores need how to manage that cycle, but the Ascena brands don't even seem to have that cycle, they just seem to be like placeholders in the mall, like, stores that are there, that if you're going into every store you might visit or if my wife's looking for something specific, like a shirt, that might be on her list when she really needs something.

But if you don't offer real value, like, if I tell you, you know, one of those brands, a Loft is closing and a Warby Parker is going in, you'd be like, wow! I'm excited about Warby Parker. Or a Dress Barn is going out, but a ThirdLove is going in or a Casper mattress, those are brands and actually have a strong identity, that are growing their retail presence, they're not growing at the moment but they were growing before all this would happen. So, I think it's really hard for any of these brands to survive, because they just don't mean enough to anybody.

Flippen: Yeah, I'm really not in a position to be judging anybody's name with the last name Flippen, but to me, the name Dress Barn has to be the most unfortunate name for a clothing retailer ever. [laughs] And maybe this is a generational thing. I have never felt the need to go into a dress barn and buy anything, but I do think that if Ascena heads toward bankruptcy -- and it does look like they're headed that way, they have a huge debt load and a generally declining business -- it's possible that instead of declaring bankruptcy, maybe they go to some sort of restructuring or maybe they declare bankruptcy and sell-off some of their underperforming brands and keep the Loft and Ann Taylor brands and just scale them back to a size where the people who buy those products have access to it, but they're not in every mall in America.

Kline: At least those are a more distinctive, you know, business woman kind of brand. Dress Barn actually has a pretty clear audience; it's a little bit older than you. It's an unfortunate name, [laughs] in my opinion, but that said, you could rebrand that. It does serve, you know, it's like, it was sad when say, Payless ShoeSource went up, because Payless ShoeSource overbuilt, and they sort of -- I think they're at 5,600 stores or some crazy amount when they went out, which was too many.

But Payless filled a niche. If you needed cheap shoes, if you were going to the prom and you were going to wear shoes once, that was where you went. If you were a working person who needed a bunch of different shoes to go with different outfits, but didn't want to spend big money, and didn't want to hunt at Marshalls, Payless filled that niche really well.

And I think Dress Barn actually does do that, but the name, the locations; they always tend to be in strip malls you don't want to stop at. So, there's a lot that could be done, but this is one that needs a massive restructuring.

Flippen: And before we sign off here, in my opinion, I saved the best for last. This one is always an interesting conversation, and it does bring up a little bit of a heated debate at The Fool sometimes, and it's Bed Bath & Beyond. I feel like Bed Bath & Beyond has been on everybody's bankruptcy list for years now, but it never seems to bite the dust.

Kline: Well they just sold off the Christmas Tree stores, which I didn't know they owned. If I was them, I would have kept the Christmas Tree stores, which has a devoted following, if you're in New England or areas that have those stores, which are not really Christmas stores, I'm not really sure, they're catch-all stuff stores, maybe more like a HomeGoods than other things, but not exactly.

Bed Bath & Beyond, the problem is, they veered away from bed and bath and they doubled down on beyond. So, if you go to Bed Bath & Beyond, at least the ones near me, and there's two, they have a massive section of sample size items. So, if I know I'm going to be traveling a lot, I go to Bed Bath & Beyond and I buy a bunch of this. So, a huge retail section of their store is selling me shampoo for $0.89, that's not a great margin, it's not a great model, it's a dumb use of real estate. Now, at a Target, where they're selling lots of other things, that make sense, but Bed Bath & Beyond should be devoting more space to bedding, to sheets, to selling me an expensive coffee maker, not selling inexpensive coffee pods. They're selling, like, semi-expired candy is a big section of the front of [laughs] Bed Bath & Beyond. They really need to focus on what they do well.

And I know, and Emily, if you're buying sheets for your bed, are you going to buy sheets you didn't touch? I know that I'm not going to. I'm going to want to go to Bed Bath & Beyond, and admittedly my wife is probably doing this, but I want to go to Bed Bath & Beyond, I want to touch the sheets and go, OK, those sheets that are $29.99 at Target, these sheets that are $69.99, they feel better, they're going to last longer. This towel that I'm going to use to dry off every day, that is a nice quality towel and I feel good about that versus this towel I'm going to use at the beach, that I could care less about, that I'll buy at Target.

Bed Bath & Beyond could survive, but it needs to restructure, it needs to focus, it needs to do better with digital fulfillment on, hey, Emily, remember those sheets you bought, here they are, would you like some more, we can fulfill them really easily that way? And that's something that, frankly, no retailer does all that well. Because something like sheets, it's not batteries, it's not a commodity you're using up quickly, but you are going to periodically add new sheets or new towels or whatever, they can be tracking that. There's a lot of digital Bed Bath & Beyond can do.

I sort of feel like this store is necessary, I'm not entirely sure where you go for medium-priced decent quality bedding and towels and that stuff, if they were not to exist. And they sell weird things, like, they probably have the best selection of decorative toilet plungers that any place would have, whereas Target sells, like, the orange stick, you know, the wooden stick with the red orange cube. But if you want one that just quietly -- or a toilet brush -- if you want one that fits the decoration of your house, well, Bed Bath & Beyond sells that, and that's actually like a valuable niche. So, I sort of feel like someone will keep them alive, because they make sense, unlike say a Pier 1, which has gone bankrupt. Pier 1 sold, like, random household stuff, they didn't have a real niche. I don't know that there's another big player in bed and bath.

Flippen: Yeah, you might have a heart attack if you ever saw where I lived, because I couldn't tell you the first thing about the thread count of my sheets or my towel has been stained for years, I wash it and I assume it's OK, [laughs] but it's not the prettiest thing to look at.

That being said, Bed Bath & Beyond, I really like -- not as an investment -- I really like the experience as a consumer, it almost feels like a Five Below, but for adults, and way more expensive than $5. But when you walk through there, it's an experience in itself. And Bed Bath & Beyond has been doing a great job [laughs] at raising money, it means it's a really heavily indebted company, but they just recently raised more money. They now have somewhere near $1.6 billion in cash on their balance sheets. So, I have no idea what the future holds for this company, but I think it's fair to say that while the situation is not ideal, they're probably not headed into Chapter 11 bankruptcy this year.

Kline: I think it depends on how long the pandemic lasts and sort of what happens. They've been able to find money, at some point that runs out. But their stores are too big, that could allow them to do better digital fulfillment. They might consider store within a store, they've always been a big seller of Keurig, maybe they should actually have -- and I don't know, there's only one Keurig store, it's at the Burlington Mall in Burlington, Massachusetts. It's a wonderful store; it's really fun. They sell every one, and you can make your own packs. That feels to me like it would be a draw inside a Bed Bath & Beyond.

You have to get creative, look at what Best Buy did, there are Microsoft, there are Comcast, there are Apple stores, there are local cable providers inside Best Buy stores. Those companies are paying rent. So, you know, that is a good situation to be in. Even Walmart has music and arts and Subway and other brands under their roof, and those help pay some of the cost of those large facilities. So, I'd like to see some creativity out of Bed Bath & Beyond.

Look, I don't need to buy Hot Tamales at Bed Bath & Beyond, it's one of my favorite candies, but I can buy it at Five Below, which is literally next to Bed Bath & Beyond in my case. The management hasn't been great, but maybe new management could turn it around.

Flippen: Well, it, along with all the other companies that we talked about today will be really interesting to watch over the remainder of this year. And, you know, I hope that we don't have to do another episode about retail bankruptcies, but the way this is going, we may be back in another month or two doing another rundown of the companies that seem to be headed toward bankruptcy or have declared bankruptcy, but until then, let's hope that our best companies, like, Best Buy are safe.

Kline: Emily, you're being more optimistic than I am. I was about to say, "See you in three weeks, [laughs] when we've got more companies going bankrupt again." Not a fun topic. But I will point out that well-run companies are doing just fine. You can struggle as a company and pivot. It wasn't that long ago that it wasn't just Best Buy we were talking about as a damaged company that needed to pivot, it was Target. Target was in legitimate trouble, replaced its CEO, and is basically made every move right since then. If you put the right person in place; it's why, I believe, if JCPenney gets a bailout and gets the money to implement their, sort of, store of the future model, I think they have a chance. You don't have a chance as a shareholder, you're going to get wiped out, but that concept, if you make the stores more interactive and fun places to be, you know, a yoga studio that also sells yoga supplies, all of the different ways to make those stores a destination that Jill Soltau has talked about, but I don't hear a lot of those ideas coming out of the companies on this list.

I haven't heard a Chuck E. Cheese CEO saying, if I only had $1 billion, here's what I'd be doing. Instead, it's like, yeah, we're going to start cutting back on pepperoni on the pizza to save money. It's not a great business model.

Flippen: And a trend we're seeing often around these retail and consumer goods companies. Dan, thank you again for joining.

Kline: Thanks for having me.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to say hi, you can always shoot us an email at [email protected] or tweet us @MFIndustryFocus.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Austin Morgan for his work behind the screen today. For Dan Kline, I'm Emily Flippen. Thanks for listening and Fool on!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline owns shares of Apple, Microsoft, Starbucks, and Walt Disney. Emily Flippen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, Microsoft, Slack Technologies, Starbucks, and Walt Disney. The Motley Fool recommends Comcast, Domino's Pizza, Five Below, and Uber Technologies and recommends the following options: long January 2021 $60 calls on Walt Disney, long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, long January 2022 $115 calls on Five Below, short January 2022 $120 calls on Five Below, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$142.48 (-4.91%) $-7.36
Microsoft Corporation Stock Quote
Microsoft Corporation
$237.50 (-1.48%) $-3.57
The Walt Disney Company Stock Quote
The Walt Disney Company
$97.45 (-1.96%) $-1.95
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q, Inc. Stock Quote, Inc.
$114.80 (-2.72%) $-3.21
Walmart Stock Quote
$132.25 (-0.65%) $0.86
Sony Corporation Stock Quote
Sony Corporation
$65.07 (-2.87%) $-1.92
Target Corporation Stock Quote
Target Corporation
$151.79 (-2.62%) $-4.08
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
$65.08 (-3.50%) $-2.36
The Gap, Inc. Stock Quote
The Gap, Inc.
$8.39 (-4.00%) $0.35
Keurig Green Mountain, Inc. Stock Quote
Keurig Green Mountain, Inc.
Starbucks Corporation Stock Quote
Starbucks Corporation
$86.57 (-0.62%) $0.54
Comcast Corporation Stock Quote
Comcast Corporation
$30.43 (-2.34%) $0.73
The Children's Place, Inc. Stock Quote
The Children's Place, Inc.
$31.54 (-5.00%) $-1.66
Simon Property Group, Inc. Stock Quote
Simon Property Group, Inc.
$89.13 (-3.67%) $-3.40
GameStop Corp. Stock Quote
GameStop Corp.
$25.46 (-6.77%) $-1.85
Ascena Retail Group, Inc. Stock Quote
Ascena Retail Group, Inc.
Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
$316.35 (-1.50%) $-4.83
Five Below, Inc. Stock Quote
Five Below, Inc.
$138.40 (0.44%) $0.61
Bed Bath & Beyond Inc. Stock Quote
Bed Bath & Beyond Inc.
$6.19 (-4.18%) $0.27
Marshalls plc Stock Quote
Marshalls plc
$281.60 (-5.31%) $-15.80
Tuesday Morning Corporation Stock Quote
Tuesday Morning Corporation
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$7.10 (-7.43%) $0.57
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
$26.42 (-5.78%) $-1.62
Slack Technologies, Inc. Stock Quote
Slack Technologies, Inc.
Casper Sleep Inc. Stock Quote
Casper Sleep Inc.
Genius Brands International, Inc. Stock Quote
Genius Brands International, Inc.
$0.61 (-3.56%) $0.02

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