Thursday, July 10, 2008

Another Retailer (Canary in Coal Mine) Down - Steve & Barry's

A few months ago we discussed the beginning bankruptcies - the first major retailer, Linen 'n Things, bit the bullet back then. [Apr 11: This Day in Bankruptcies - Another Airline and Our First Major Retailer] Now we have news of another major retailer, this one a major mall tenant - Steve & Barry's. This store has actually always amazed me - you walk in there and you can get a jacket for $9. I had no idea how they did it, but whatever they did, it was not working out. Sort of ironic since it was the type of store you would think would be thriving in the 'Pooring of America' scenario.
  • Fast-growing retailer Steve & Barry's LLC is expected to file for Chapter 11 bankruptcy protection as early as Wednesday, say people familiar with the matter, a collapse that stands to hurt everyone from Sarah Jessica Parker to the nation's struggling mall owners.
  • The Port Washington, N.Y., company hasn't been able to raise rescue financing in recent weeks, and is considering a plan that would sell off all of its assets. It also has been in last-minute discussions with Sears Holdings Corp., about a bailout or partial sale, say people familiar with the matter.
  • A filing would be painful to mall owners across the country, who ponied up hundreds of millions of dollars to attract Steve and Barry's into huge, empty spaces, often as large as 100,000 square feet. Many, and potentially all of those 275 stores could close, say people familiar with the matter. As of January, the company had between 16,000 and 17,000 employees; most of those jobs will be eliminated, people familiar with the matter say. Some vendors have already stopped shipping to the company in anticipation of a filing.
  • With fashionable clothes priced below $10, Steve & Barry's deep-discount model was built to thrive in a difficult economic environment. (that's the scary thing)
  • But a souring economy has made this a brutal period for retailers, who are pinched by slackening consumer spending and higher transportation costs. For Steve & Barry's, which ran its operations on the thinnest of margins, these factors made it all the more difficult to survive. (but energy inflation does not matter - if you strip out energy and food, everything is dandy - so please keep those interest rates low)
  • People close to the company's finances say most of the retailer's earnings came in the form of one-time so-called tenant improvement payments from landlords of $2 million to $7 million per store.
Look for many more retailers to come in the next 1-6 quarters. Once more, I stress, the consumer discretionary area will be (and is) the next (current) financials. If you are not catering to the very low end (where the middle class are fleeing too) or the very very upper end (in which case you feel no pain from silly things like $4 gas) - you are in trouble - as the American middle class is gutted by inflation and inability to get wage gains that reflect "true" inflation. It will take time to play out since (a) we stole money from our grandchildren so Americans can 'spend, spend, spend' (rebate checks) and (b) people are borrowing against credit cards to stay afloat. That ends eventually as the limits are reached and/or the credit card payments overwhelm the budget. Then the personal bankruptcies begin in large numbers - that's going to be a 2009/2010 issue. But it's setting up for a great post-cleansing 2011.

This is the spiral we've been talking about for a long time - the exact opposite of the "credit expansion, spend over your heads, charge it on my house ATM" service economy the US has morphed into the past 10-15 years. Each service job relies on other service jobs - once the first jobs begin to be wiped out - all the the jobs that rely on those people to spend on services, begin to erode. It's a chain reaction. Many service industry jobs will be lost - we overbuilt our stores because people were spending over their heads. Right Starbucks? [Jul 2: Starbucks Tells Walmart - "Here you Take Them!"] 12K Starbucks workers. 16-17K jobs here from Steve & Barry's. 75-125K Wall Street Jobs (just getting started). Auto workers here. Carpenters there. Airline workers to the right. Mortgage brokers to the left. 10-15K there. 3K here. 8K there. Eventually it adds up even if the government tell us a ton of jobs in "new businesses that are too young to show up in statistics" are popping up by the day. What a farce. You will see strip malls in many of the hardest hit states empty out (you would not believe what some parts of metro Detroit area - solid middle class neighborhoods - now look like in terms of strip malls - 5 out of 7 storefronts empty here, 4 out of 6 empty there - over and over and over. You drive around wondering who will be "missing" since the last time you drove past that spot). I've written throughout last summer and last fall that many of those small, one off (non chain), restaurants will simply disappear (killed by rising food costs on one side and killed by retrenching customers on the other side). Same for small service stores - the small businesses that make up 80% of American jobs - florists, dog groomers, nail technicians; all the non essentials. Where there were 3, there will be 1 left.

Unfortunately this is simply a very sad cleansing from a perfect storm of issues - I won't repeat them because we have talked about them ad nauseum since last summer. They are simply now coming home to roost all at once. Technically we might not even hit a "government measured" recession because their numbers are a complete fantasy - but read behind the scenes and when multiple sectors of our economy are in depression - autos, airlines, housing, finance, and retail.... you tell me how in an economy which is 70% based on spending we cannot even get -0.1% GDP (whereas Canada has gone negative? Please). The government statistics are now beyond folly. (why is consumer confidence at 28 year lows if the aggregate numbers show such strength we hear from our friends in D.C. with their gold plated benefits and six figure salaries - living in a parallel universe). Years upon years of trickle "down" economics are showing to be nothing more than trickle "on" economics - you know when the greatest proportion of GDP ever goes to corporate profits and the least percentage ever to employee wages = something eventually breaks. And "it" (employees) are now breaking - slowly but surely. Maybe the market is signaling they are seeing this, and why we are getting this relentless flood of selling.

Oh look there, another 2,500 jobs lost at Northwest Airlines; but that's ok - because it's an old school industry and we don't need those type of jobs. Send these folks over to Walmart along with the Starbucks folks, the auto workers, the hotel workers, the Las Vegas folks, the Steve & Barry workers... man we're going to have a Walmart every 50 feet at this pace to keep up with all these new workers that need a home. Walmart, federal government, and healthcare - the "growth" areas of the economy ex farmers and wildcatters. How about a national inititiative to at least put the construction guys back to work rebuilding our crumbling infrastructure with the NEXT stimulus? Nope that would make too much sense - let's just do more borrowing from China to hand to people to spend on luxuries such as ... food. And gas. The booming 2nd half 2008 recovery we were promised for the past 6-9 months has commenced. Aren't we all enjoying this?

Unfortunately the great cleansing has to happen. Housing prices need to fall to a level people only spend 30-35% of their salary on a roof over their head. [What Should Median Housing Prices be Today?] So they can pay for all the other things in life. Many of which increasing at 10-20% rates. The income pie for most is growing at best 3%ish. For many, as they lose jobs at higher pay, and take newer jobs at lower pay (when desperate you will take any pay)- their income pie is shrinking. That leaves even less money for "discretionary spending". So unfortunately the inflation is things we don't directly control (but need) could lead to the Fed's greatest worry - deflation. Deflation is what gets rich people worried - after all for that small sliver of society assets, not income, is what matter most. When assets deflate - then they will feel like many in the middle of America are now feeling. Poorer.... and feeling "trickled on".

[Stuff I've Been Negative on Since Last Fall]
[Do the Bottom 80% of Americans Stand a Chance]

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