In this episode of Industry Focus: Consumer Goods, Emily Flippen and Motley Fool contributor Dan Kline discuss the third round of retail bankruptcies amid the ongoing pandemic. Some of these retailers were already on the "to watch" list for businesses likely to declare Chapter 11. They also talk about how today's environment compares to the Great Recession of 2008-2009 and whether consumer spending has changed as a result of these bankruptcies.

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This video was recorded on July 28, 2020.

Emily Flippen: Welcome to Industry Focus. It is Tuesday, July 28. I'm Emily Flippen, and today, I'm joined by Dan Kline to discuss the newest round of retail bankruptcies for, unfortunately, the third time since this pandemic began. But more importantly, we're going to ask the question of where consumer spending has shifted, because if it's not toward these retailers, clearly, it has moved somewhere else.

Dan, thank you so much for joining.

Dan Kline: Emily, I'm going to try to be upbeat here, but this is super depressing, because literally when we did this last time, we sat down and said, "Well, like, we know there's going to be a few other bankruptcies, but we probably won't have to address this again. Like, we can do some good news shows, some upbeat shows." Fools, those shows are coming. Two weeks from now we're going to talk about my trip to Vegas and all the exciting things. So it's not all bad news.

And I will point out, most of these retailers, you will see the headline "COVID-related bankruptcies." These are COVID-hastened bankruptcies, for the most part. Now, I hope two or three months from now, we're not talking about actual COVID-related bankruptcies. Like, look if Kohl's or Macy's or some of these middling brands that are now more at risk because they've had to spend some of their runway on surviving the pandemic, those would be. The retailers we're talking about now, they were in a lot of trouble. They had a lot of debt. This is just happening faster because of the pandemic. But it's still not happy news, it's still a lot of people losing their jobs, a lot of stores closing.

Flippen: So before we roll into today's show, I kind of want to give a teaser to that show that we're going to be taping a couple of weeks from now about your trip to Vegas. Can you give us some details about why you're going, what you're going to do when you're there?

Kline: Yeah, so I want to experience what flying is like, especially on Southwest, because Southwest is not selling middle seats, so my son and I will have a row to ourselves. They are enforcing masks. It's a five-hour-plus flight, so there is some sort of beverage service, I'm curious to see what that looks like. I'd like to see, in general, what the airport is doing. So a little bit of it is market research.

But the reality is, the second part of it is, I got offered a comp room at Mandalay Bay. [laughs] Mandalay Bay, there's not a lot of places in Vegas you take a 16-year-old, but my poor son has been largely stuck in the house. And Mandalay Bay has a lazy river, a wave pool, and a giant pool area. It's 108 degrees or something like that in Vegas. And they're only selling a limited capacity, so the hotel is going to be like, 25%, 30% full. We'll rent a cabana, which is not overly expensive, which normally it is, and we're just going to hang out outside. I feel like that's a pretty virus-safe environment. And then we'll eat dinner in the restaurant, and when he goes to sleep, I'll gamble; and I'm happy to gamble. But I do kind of want to see what you can do safely.

And I found in the recent months that the places that have more on the line have been the safest places. In general, you know, when I went to Disney Springs, which is a shopping area, they had amazing safety protocols, where the mall, not so much, because nobody is looking at individual malls and tracing back infection from there. I feel like that's going to be the case at Mandalay Bay, which is a major property. I feel like that's going to be the case in airports. I also feel like if it's not the case, well, we'll order a lot of room service and we'll be really careful and we'll get a good show out of it, and my son will have at least gotten to, sort of, see what Las Vegas is. A place I normally, probably would not take him.

So yeah, really excited about that trip, and you know, hoping it still happens. Because I'm getting used to disappointment here during pandemic times with cancellations and closures and who knows what.

Flippen: [laughs] Well darn, Dan, can I be your son? Sounds like a dream right now.

Kline: Emily, having a father who likes to travel married to a wife who doesn't is a good deal. My son gets to go on a lot of cruises and trips and other things that, you know, normally the kid would be left home. [laughs] So but, no, I think it would probably be a little bit odd if I adopted you.

Flippen: [laughs] I might be a little too old for that at this point.

Kline: I think that's possibly the case.

Flippen: I want to get into it, but you kind of distracted me here at the conversation about the way that you were talking about a lot of, you know, retailers or other places that are really highly dependent upon keeping things safe and sanitary to stay in business, how they've been handling this crisis. I recently, actually, bought a membership to Planet Fitness because we found out that here at The Fool, we will not be heading back into the offices until at least 2021. So I thought to myself, I can't continue to not work out with my life. So I bought a Planet Fitness membership.

And I do my best to go, and I keep hand sanitizer for disinfecting the machines, but I'll tell you what, I am shocked by how proactive the employees are. And a shout-out to the Planet Fitness in Greenbelt, Maryland. But the employees there walk around, disinfect the machines every 30 minutes or so, are very diligent about people keeping their masks on, and have hand sanitizer widely available. So it does seem like the more proactive businesses are doing their best to make their environments a safe and enjoyable environment to be in even during this pandemic.

Kline: There's a lot of scrutiny on Planet Fitness, and, Emily, oddly enough, I too have joined Planet Fitness. I live in a building that has a gym, but our gym is closed through August 1, and I'm not overly confident that it's going to open and that even when it opens, they're randomly closing some machines for social distancing instead of just limiting people. There's never anybody there, so it makes no sense. I work out with a personal trainer two or three times a week at his studio, but you can't go in just as a member and work out. And at our Orlando house, Planet Fitness is kind of the only option. It's not that close, but I also feel like I needed more options, and the price of it and the ability to drop the membership when you no longer need it, that was pretty enticing for me.

So I do think there are some businesses -- and that's a struggling company, they were hit really hard. They had to stop collecting dues during the pandemic. They may actually see some gains only if they do a really good job at impressing existing members. So they say, hey, yeah, I go and it feels really safe. And that's what Disney, that's what the big casino companies, that's what hopefully the airlines are doing.

Flippen: We're going to have to do a deep dive into Planet Fitness at some point in the future and how they've handled this crisis, because we did a deep dive into Tractor Supply Company with neither of us having walked into a Tractor Supply Company before. So the fact that both of us have been in a Planet Fitness says maybe we can provide some insight there, [laughs] where we did in Tractor Supply.

Kline: Hey, we need an idea for next week, so [laughs] it sounds like, Fools, we are generating show ideas on the show, and that's a happier idea than where we're about to head.

Flippen: Yeah, so let's roll right into it, because I've procrastinated now about seven minutes [laughs] enough here. So the last time we talked about retail bankruptcies, it was just under a month ago. I believe it was on June 23. And I remember saying that I hoped we could avoid touching on this again. And clearly, that is not happening.

But let's first start with one of the retailers that has now declared bankruptcy that we discussed last month, it was No. 1 on our to "to watch" list, and that's Ascena Retail. What can you tell us about that?

Kline: So this is the parent company of Ann Taylor, LOFT, Lane Bryant, Lou & Grey stores; which I've never heard of. And most of those stores are actually going to survive this. Those are their brands that are doing well. The problem is they also own something called Catherines, which is going to be sold off for parts. It's basically being sold to a digital retailer and it's closing. And they're going to see closures over a lot of their lesser brands.

Lane Bryant and LOFT are theoretically Ann Taylor strong-ish brands. They have a clientele; they were obviously hurt by overall trends. Ann Taylor is generally pretty nice work clothes. My wife tends to shop at LOFT for things to wear to the office. Emily, we're not going to the office, and when we go to the office, we're not a very dressy office as it is, but do you kind of feel like we're going to become a pajamas office, and other dressy offices are going to become a little bit more like us? That trend works against Ann Taylor.

Lane Bryant, which is a plus-size store, what works against them because more stores are becoming inclusive. If you can buy a broader range of sizes at other places, you don't necessarily need a specialty retailer. And, you know, as a gentleman who could lose a few pounds, I don't particularly want to go into Big and Tall Guy to buy my shirts, because not that Lane Bryant does it very, very well, not as much as the men's group where they're more or less like, hey! You know, it is a little bold in the name of these men's stores. But that said, you want to just shop where everyone shops. That hurts Lane Bryant a little bit. But they had $1.2 billion in debt heading into this. This was a heavily leveraged company. They're going to still operate. This is a Chapter 11; this is a chance to reorganize.

And, Emily, I also think this is a bankruptcy of opportunity, because right now, if you're the CEO of a company, if you're an executive, you can blame the pandemic on the bankruptcy, not mismanagement. And I don't know if it's the current CEO's mismanagement or previous CEO's mismanagement, but this is a good time to get a reset and a pass, and that's exactly what's happening here with Ascena.

Flippen: Yeah, and we can probably continue to expect situations like this to continue in the future, but what I thought was really interesting is that I came across a chart on CNBC, attached to this Ascena Retail story, that showed the number of retail bankruptcies over time. And it goes back all the way to 2007 to 2020 today. And what we're seeing is, despite all the news about bankruptcies, despite covering bankruptcies in this podcast three times this year, we're actually not seeing nearly as many retail bankruptcies as we did back in 2007-2008, during the Great Recession. And 2008, it peaked at 441 retail bankruptcies, which is just incredible.

For 2020, right now -- and these numbers might be a little outdated depending on when you're listening to this podcast -- but there are around 40 retail bankruptcies, which is nothing in comparison to over 400. So what do you make of the comparison between what we're seeing today in all the news around retail bankruptcies, but then ultimately, not being nearly as bad [laughs] as it was during the Great Recession?

Kline: So the 40 number is accurate. That's expected to hit about 47 to 49 by the end of the year. I think -- and Emily you asked me this question, and I did a lot of research -- and I think the answer, though I can't promise this, is that there's been a ton of retail rollup. So we just went through Ascena and they owned a whole bunch of brands, I want to say they also owned Dress Barn, which they shuttered earlier, but that might be somebody else who went bankrupt. If you own 10 to 12 brands and you go bankrupt, that's one bankruptcy. When Toys R Us went bankrupt, they owned two brands, but that was still one bankruptcy. When these companies that own stores throughout the mall, five or six different, it's kind of been reported a little bit differently. So I do think the numbers here are generally -- and the industry also changed.

In 2007-2008, we also had the internet rising, which wiped out an entire group of, sort of, like, mid-tier mom-and-pop businesses, businesses that were enough to be reported here, which I think was $10 million, but not so much that they made a major ripple. Look, I have a family business, my family business sells ladders and scaffolding, and it's largely a rental business. We've gotten a lot smaller in the past 20 years, but if we went away, it would technically count on this list, but it likely wouldn't be reported, because it's the mega-things being reported here. There's probably actually higher numbers that they're not seeing. Because, again, some family that owns eight furniture stores that closes isn't really making it, and it is these megacompanies that have rolled up a ton of brands.

So I don't want to make it sound like the news is less bleak because the numbers are lower; the news is pretty bleak. The number of stores closing is going to hit an astounding all-time high. And I will point out that before the pandemic, the number of stores opening was also [laughs] going to be at an all-time high, and it was going to vastly outpace that. That, of course, is not true, because a lot of places were going to open. You know, if you were a Warby Parker and you were going to open 200 stores this year, you're probably going to open 20 or 30 just due to the conditions, the climate... Look, construction has slowed down a lot of places due to social distancing.

So yes, it's only 40, but it's only 40 that represent, you know, it's over 10,000 stores at the moment, and I believe it's going to hit somewhere in the 20 thousands by the end of the year.

Flippen: That's really interesting. And I don't think my mind would have gone there immediately looking at this list, just thinking about the rollup that we have seen happen over the past decade or so. But I'd even take it a step further, when I saw this, I thought to myself, "Well, think about what the environment was like during the Great Recession. There was really no end in sight. I think there is a lot more fear in regard to the economic collapse that happened during the Great Recession versus what we're seeing today," which, for at least my perspective, has felt temporary.

I think we're always asking the question of when does this end? We're looking out over the next couple of quarters thinking, when we get a vaccine, things will be better. So maybe it's just the accessibility of capital that exists today to help keep some of these businesses funded, because there's an end date that I think many providers of capital may see today versus, in comparison, to the Great Recession where things were harder to get by, right, it was harder to get money during the Great Recession than it is today.

Kline: That's a really good point, because we don't know what the recovery is going to look like, but we do know that at some point, there will either be a vaccine, a successful treatment, or so many of us will have been infected that it will no longer matter. That is the Florida approach to things, [laughs] but actually cases are going down here, they've actually started to look better in the last couple of days. But that said, we know some percentage of people who are out of work are going back to work.

So if you look at something, like, say, the travel industry. The travel industry is really, really hurt, but you can say, well, is it going to be 50% volume at Christmas time, is it going to be 30%, is it going to be 80%? And we don't know the answer, so that creates uncertainty. We don't know if they'll get back to normal in two years, three years, five years, but it's not the same as when you have this, like, unknown economic recession and people -- there's sort of a lot more levers being pulled, there's a lot more optimism. And I think some of the workarounds have helped with people, sort of, believing in the market and believing in a recovery.

Weird things like the fact that the NHL and the NBA start playing this week in their bubble, well, that does put some people back to work. You know, people who work at regional sports networks. And you know, the guy who sells popcorn, he's not going back to work. But there is still some revenue being generated. And many of those people are being paid, even though they're not working. So we know. We've seen things get better.

At the peak, there were what, 40 million Americans unemployed. I may be getting that number slightly wrong. And those numbers have gotten dramatically better. What we don't know with retail is, did we have too many stores? I think the answer is yes. Is demand going to be the same? Absolutely not. We've seen major shifts in what people want. We don't know what's going to go back. Is there some day going to be a bounceback of, like, wearing a suit when you fly in a plane? Probably not, but there could be a bounceback of wearing a suit when you go to the office.

So there's a lot of questions to be answered. But this is not the same level of doom-and-gloom we had during the Great Recession, because there is eventually a day where we got to go back to the office and a day where I get to, you know, visit Alexandria again.

Flippen: Speaking of a bounceback and wearing suits, let's talk about another company that was on our list last month. This company hasn't filed yet. It's Tailored Brands, which owns Men's Wearhouse. But if memory serves, I speculated, I'm not sure if it was during the show that we do, Dan, on Motley Fool Live called The Rundown or if it was on this podcast, but I speculated that Ascena Retail would last longer than Tailored Brands, because of just the fundamental shift in clothing that has happened for men's formal wear. But alas, Tailored Brands has not yet declared bankruptcy, although they did announce plans to lay off 20% of their corporate workforce and shut 500 stores. Do you think that's enough to save the company?

Kline: No. [laughs] So here's the problem. They own Men's Wearhouse, they own JoS. A. Bank, and they own K&W [K&G Men's Company, Inc.] (sic) I think is the name of it, which is not a particularly successful clothing brand. Their main property Men's Wearhouse, and JoS. A. Bank to a lesser extent, they sell suits and dress pants and ties and dress shirts. Emily, do you feel like a lot of people are buying new suits right now? Like, even if there's a funeral, you can't go. We're having eight-person funerals. If I'm going to Zoom in on a funeral, I'm not putting a suit on. Or if I am, I'm putting an old one on, I'm not going to go spend $500 on a suit.

I don't know what you do. Men's Wearhouse, their entire business was taking something that's kind of a difficult purchase for men, you know, and they made it easy. You walked in and you got very much concierge-level service, where they looked at what would fit well with you, what would go, and ask you what your style was, what color you were looking for, what was the occasion you were wearing it for. And if I said, "Well, I'm going to a summer party and I love black suits." They'd like, "Well, you know, maybe a little more color would be good, maybe a lighter material." They had a really good experience, but they have an experience selling something that people don't want to buy.

They can't pivot to athleisure. You're not going to Men's Wearhouse to buy sweatpants. This seems like there's a fundamental societal shift. And I don't believe the need for suits is going to go away. I think there's always going to be weddings and bar mitzvahs and other occasions where we wear a suit. But you only need one or two for that.

I think even in the business world, you know, my brother is a big-time sales executive, he doesn't wear a suit to work every day. I think he's going to wear a suit to work less often. I think we might realize, kind of, how stupid it is to wear a suit. It's heavy, it's hot. Like, there's no scenario in Florida where I want to wear a suit. This company was in a lot of trouble, and I don't know how you get reorganized. How do you go to a bank and say give us some money because here's what we're going to do with our business? Like, I don't know, put in bounce houses, like, virtual reality headset games, like, I don't know what you could possibly do other than a massive pivot.

Flippen: That's a really good point. And speaking of pivoting sales. You mentioned that, or at least I mentioned, you mentioned to me privately, I mentioned at the beginning of the show, that we wanted to answer the question of where a lot of these sales have shifted. If people aren't buying clothing from the JoS. A. Banks -- although it's a bad example, because it's suits -- but if people aren't going to Ascena Retail to buy clothing, where are they going? And this is a shift that we've seen for a while, it's not just pandemic, I'd probably argue that [laughs] people just simply aren't buying as many clothes during the pandemic than they were previously. But clearly this is a shift that has happened for a long time now. So what's your take on where spending has shifted?

Kline: So it's interesting, I was curious if we were spending a lot less money on clothes. And I'm talking about in 2019, prepandemic, when we didn't even know what the coronavirus was. And I looked at a year-by-year chart of clothing sales, and they all look roughly the same way. They're bigger in December, but they were compatible month-to-month. So even as we were making a shift -- and this was brick-and-mortar sales, so these sales didn't go to Amazon. And I started asking people in my life, where have these sales gone?

And the answer is, they've gone to athleisure. And some of those sales have gone to Target. You know, we've talked about how it used to be not acceptable to buy clothes at Target. You still might not buy your business outfit at Target, but you can absolutely buy your yoga pants or your workout gear or your casual sit-around-on-the-couch, but for some reason you're wearing athletic pants outfit. And that you can buy at Target.

Now, certainly you can also buy it at Lululemon, which is an outsized piece of sales, because their prices are very high. But we've seen a shift away from these mall boutiques, like Ann Taylor, like Gap, into some just other types of clothing, and it's just shifted the dollars around. Now, could Gap come back and capture it with Athleta? Maybe they could, but it's not this massive shift. We're not all keeping our clothes longer, we're just wearing different things. And that's caused a shakeout.

Flippen: It's funny you mentioned that, because as we mentioned at the start of the show, we are both now members of Planet Fitness. [laughs] And this morning, I got up, I went to Planet Fitness, I put on my athletic clothes, I came home, I took a shower, and I immediately put on my yoga pants. [laughs] And now I'm going to sit in front of my computer taping Industry Focus doing my normal day-to-day work, wearing my normal athleisure. And that was something that I was doing before the pandemic, right? So I definitely believe that retail sales have shifted.

And especially, as more companies figure out that they don't need to stick to traditional ways of doing things, whether that's doing full-time in-person work or whether that's requiring certain dress codes, there's maybe more flexibility that's coming, that continues to shift the way that we as consumers spend our money.

Kline: Emily, I'll even go back to what we're doing now. So back -- we hadn't been doing video for a while on the podcast, but previously, we used to shoot video. And there was no hard-and-fast rule, but generally you weren't supposed to wear a T-shirt unless it was a Motley Fool Podcast T-shirt. That went in and out, and it was one of our former hosts, my buddy Vin Shen, who occasionally was a little informal, and it got brought up. It was never really enforced. But I would say now, there's almost nothing you couldn't come on and wear as long as it was appropriate cover. Like, you know, Danny Vena can wear a Hawaiian shirt. I wore a Motley Fool T-shirt the other day to show off that I had a [laughs] Motley Fool T-shirt, because it came in the mail.

In general, let me ask you, you go to an office -- I weirdly didn't go to an office prepandemic and now [laughs] go to an office every day. But I'm alone in a room, so what I'm wearing isn't all that important. Emily, do you dress differently now that you're not going to the office?

Flippen: To an extent. Sometimes I will spend my whole day in PJs, whereas before I would definitely not come to the office in PJs, but there is a shift, I think, in the way that I'm going to be dressing coming back to work. I would occasionally, before this pandemic, wear a nice shirt or a nice pants into the office.

To your point, whenever we would tape Motley Fool Money, even though we were not doing video, for the most part, when I was a participant on the Motley Fool Money podcast show, I'd still dress up a little bit, because it was this more formal expectation of what Motley Fool Money -- which is our radio show, I hope people are aware of that, listeners are aware of that -- it was a more formal type show, so I'd want to represent that in what I was wearing. And sometimes I'd even do my hair, [laughs] for instance, right, to prepare for this show. And I think there's a very, very improbable chance in the future that that will happen. I think I have permanently changed my expectation for how I dress as a result of this pandemic. But we'll see.

Kline: So let me tie this back to retail bankruptcy and why I think the COVID-19 reporting on this is a little bit wrong. These trends were happening. And I'm not saying there isn't a market for, say, LOFT to be selling some of its clothes, because obviously, you know, my wife, when she goes to work, if she has a meeting, she might be wearing a dressier outfit than on a regular day when she's just around the office. But in general, four days a week, with Fridays being like a jeans casual day, she's wearing business attire to the office. I would expect that loosens up after this, but it's not going to go away.

So there was some demand for what these companies sold, but they obviously missed the boat on how they pivoted. It's something we've seen talked about with JCPenney a lot. They've talked about women's apparel and they said, you know, we're getting it wrong, we're too dressy, we need to shift our line. And companies should have been doing that five or six years ago.

And that's the challenge with trends. It is hard to know when we're going to undergo a societal shift toward it being OK, to let's say, wear yoga pants to work. And our office has always been strange, in that, there are yoga classes. So sometimes you will see someone wearing their workout gear because they're about to go to a workout, and then you'll see them later and they'll be wearing nicer business gear or they might just be wearing different workout gear, because they changed after the workout.

I think, look, the retailers who get this right are going to be big winners. You know, if you look at a Lululemon and you talk about, are they going to be here in 15 years? You have to figure out, are they going to be able to pivot when maybe something else -- people who do yoga are still going to wear yoga pants, but there might be a time where tights and yoga pants are not sort of de facto clothing items. Those trends shift, and the companies that could follow them -- an example I'll give is, for a long time, Gap was really good at this. They saw when denim would shift in, they saw when it would shift out, and they always had basics, but they sort of knew the difference. That's a tricky ride. That makes any investment in a clothing retailer really challenging, because you can get it wrong. And if you get it wrong, you can be in trouble.

But Men's Wearhouse, oh! I don't know what they could do, because there's just not a need for their service if they're selling different types of clothes. If they're selling trendy T-shirts, I don't need a sales experience to do that. If I buy a suit, I want that, like, Macy's-level, Brooks Brothers-level experience at, like, half the price. Usually getting two suits for what it would cost you to get one suit at a Brooks Brothers.

Flippen: We have two other big retail stories that have happened, really, over the past day or two, that we should knock out here. And one of them is directly related to what we're talking about regarding athleisure, and that's Under Armour. We found out this week that their CFO and founder were named in an SEC probe of the company's accounting. We know that Under Armour has been investigated by the SEC over the past couple of years, but now it seems like the SEC likely believes that there are some violations of security laws that took place with this company's accounting.

So I'm kind of curious to pick your brain about what you make of this news and if you think Under Armour might be the next retail bankruptcy.

Kline: So Under Armour has been in trouble for a long time. They did something -- we've talked about this on many programs. They took a Lululemon-like brand that had real value, especially with athletes, and to keep sales numbers up, they discounted, they put it into sales channels. I mentioned this on a show this week. I bought Under Armour shirts on Woot, which is an off-price Amazon property. That should not be the case. It creates a value proposition that, hey, this shirt that you used to pay $45 for, yeah, you can get three of them for $20. That's not a great position to be in as a brand.

I own a lot of Under Armour, and I'm not their target high-performance athlete, but there's an Under Armour outlet at the outlet mall here, and sometimes they have really good prices. I'm not a great billboard for Under Armour. I'm not even sure they should have my size, if strategically what they want to be is a premium product.

That said, there's no putting that cat back in the bag without taking a lot of pain. If I was Under Armour, this potential financial malfeasance, that is definitely bad, but you can solve that by parting ways with those executives. And I think they need to do that anyway. I think Kevin Plank needs to be nowhere near this company.

And you have to do something -- and I'll quote my brother, when my brother went to the football team in Washington a couple of years ago. He sat down with the owner and he said, "You are selling our suites in the secondary market for quick cash, you're selling seats in the stadium for quick cash at below market price. I can't go out and sell them to big corporations at full price until we create a scarcity, so we have to have empty seats."

My brother was right. And what Under Armour has to do is they have to pull in all their inventory, make it exclusive to their stores, retell the story of the brand and the moisture-wicking technology and all of the proprietary things they have. And just like my brother told the Washington football team -- which didn't follow his advice; he was only there for a few months -- you're going to have to take two to three years of pain to establish this as a premium product.

Now, could you put out a secondary line like Nike does? Like, there's cheap Nike sneakers, but you know those aren't the cool Nike sneakers. Under Armour could do that. But first, they need to get it so the right people are buying it. And if I buy it, I'm buying it at the right price for the promise of it being better.

Emily, I'm going to argue that Lululemon does not sell yoga pants that are appreciably better from the best alternatives. I don't know this, I don't wear a lot of yoga pants, but it looks like at Target, they have some very nice yoga pants for a third of the price, but it doesn't have the cachet, so Target is probably not taking a lot of Lulu sales, they might take the sales for, like, when you're not going to be going out and you want to wear something that's similar. That's where Under Armour has to go. They need a massive reset, and that's going to require some patient lenders and a CEO with a very clear strategy, and they clearly don't have that; they are managing for the moment not the long term.

Flippen: Yeah, I think a bankruptcy here might not be the way out for Under Armour, but they're definitely going to need some sort of big, [laughs] large change in management before we see any improvement here.

But moving on from a company that is obviously struggling today, how about to a retailer that's up nearly 25% as of recording? Do you know what company I'm talking about, Dan?

Kline: I should, because I have a list here, but I don't, so. [laughs]

Flippen: Well, it's up a whole 25%, AKA $0.06 [laughs] in share price, which might give you a little bit of a hint. But the company I'm talking about is, in fact, JCPenney. Because we found out today that Sycamore Partners, a private equity firm, is potentially leading a bid to acquire JCPenney for $1.75 billion and is theoretically proposing [laughs] a merger with Belk. Now, this is breaking news in the sense that this is just coming out today. So as to what this may look like, we don't have a lot of details, but what was your first impression when you read this?

Kline: So I sent you this story. So I absolutely should have remembered that that's what we're going to talk about. First of all, I had no idea Belk existed, [laughs] so you had to tell me what Belk did. And I've covered retail for six years, and they were not on my radar. So here's the exciting thing. There are three bidders for JCPenney. I would argue that one of the bidders is Simon Property and Brookfield Asset, they might quietly go away. They wanted JCPenney to not close. If they can get assurances that somebody else is going to keep those JCPenneys open, they may very well not be a player. But the Belk bid is the highest bid.

And if it happens, Sycamore Partners knows that investment is needed here. And we've been saying this all along. The interesting thing is, the JCPenney name might go away, that I found strange. That to me seems like the better name of the two. But that said, Jill Soltau has some really good ideas. Do I think she should be given unfettered billions to just implement them? No. Do I think she should be able to do things, like, test her in-store yoga studio to sell more athleisure and create more revenue? Yeah, I think they should have 25 different ideas being tested any given time and then run with the ones that work.

I think they could become a retail test lab, and that takes hundreds of millions, not billions. And then when you figure out what works, go with it, make it work. That might mean acquiring other brands or bringing -- I talked a lot about store within a store. You're not going to put a Warby Parker in a JCPenney if you think JCPenney might go away in three months. You might do it if you have Sycamore Partners behind it.

I thought this was really exciting. Should you buy JCPenney stock? Absolutely not. This company is bankrupt, you're going to get wiped out. Bondholders are not going to get fully paid back. Meaning, there will be no equity. So do not consider this an investable opportunity. But as a person who likes to go to the mall, it's nice to know that there might be something still at the mall.

Flippen: Yeah, this struck me as really strange. And I think everybody should maybe take it with a grain of salt. Sycamore was also apparently interested in acquiring L Brands' subsidiary Victoria's Secret, and they backed out of that deal. So nothing is written in stone here, definitely, to your point, Dan, don't go out buying JCPenney assuming [laughs] this deal is going to go through and assuming that Sycamore's interest, as a private equity firm, is suddenly going to make you a lot of money as an equity investor. The reality is, that's typically not how it works when an PE firm comes into a company, especially, in my opinion, a company that they want to merge with Belk.

And almost, I didn't think I'd say this at the onset, but it almost feels like it devalues JCPenney [laughs] by merging it with Belk, which has, to your point, you didn't even know still existed. It really has not made a name for itself. It has an expensive retail footprint, mostly in stand-alone stores. Maybe there is some leveraging they can do here with the store count. But, to me, this just seems like trying to combine two bad things to make a good thing, and I'm not sure if that's how that works. [laughs]

Kline: Yeah. And they're also not exactly related. So maybe if you cherry-pick the best piece of each, but that's expensive as well. Look, Sycamore Partners has money, and that's what JCPenney needs. Forgetting the brand equity of either brand, "JCPenney" just sounds nice, and "Belk" sounds terrible. And I apologize. I'm sure it's after the Belk family and I just insulted all their ancestors. I apologize. But JCPenney, sort of, sounds like a store, it has an old-timey ring to it, maybe you can have a Belk section inside your JCPenney.

But I actually think this is an encouraging idea that there's a lot of money out there to invest in retail. And we've talked about a lot of bankruptcies. And, Emily, I made a big list here of bankruptcies. The important thing to remember is most of these are Chapter 11 bankruptcies. These are stores that maybe they have too many stores -- in a lot of cases, they had leveraged buyout debt -- and just they didn't have the money to invest, that they're going to get a second chance. I mean, do we need 8,000 G&Cs? I don't think we do. Do we need 2,500? We might.

And I think you're going to see -- let's call it a retail reset. And of course, yep, we lost Pier 1, we lost Modell's. That's very sad to someone who lived in New York, it was going to Moe's was actually, you know, part of the culture in New York, the sports world. But that said, most of these retailers are going to live to fight another day.

Flippen: And, Dan, I'm hopeful that we won't have to do [laughs] another retail bankruptcy show, but I, at this point, would be very surprised if we got away with it. Obviously, it's never good for these companies, it's never good for their employees, and it's especially never good for the investors in these companies when they are facing issues like this. But I am hopeful that we'll have some turnaround in the economy sooner rather than later, but most of the companies that we talked about today were on their way out before the pandemic began, and it simply accelerated that.

Kline: Let me go out on a depressing limb here, Emily. We're going to do this at least one more time. And I think, unfortunately, we're going to do this on an emergency basis for a company we haven't talked much about. I think, unless there is a quick bounceback, there is a retailer out there -- and I'm not going to speculate which one, because that will be irresponsible -- there is a retailer out there that is on the medium list, not the high list, that's going to file for bankruptcy. Look, upper-end clothes retailers that were doing OK before this may not make it, we've already seen Neiman Marcus go Chapter 11 and close some stores and exit some properties.

I wish I could be more optimistic, but I do think there's going to be, whether it's a podcast or someplace else, there's going to be one where we wake up and we go, oh my, God! and we just have to communicate to the Fool-iverse about it.

Flippen: Well, hopefully our next two podcasts, potentially over Planet Fitness and definitely over your trip to Las Vegas, will be more uplifting, [laughs] before we get back into retail bankruptcies. But until then, Dan, thank you so much for joining, as always.

Kline: Thanks for having me.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions, you can always shoot us an email at IndustryFocus@Fool.com, or tweet at 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 Tim Sparks for his work behind the screen today. For Dan Kline, I'm Emily Flippen. Thanks for listening, and Fool on!