RealReal's stock slumps after loss warning, job cuts

Shares of RealReal Inc. REAL, +1.44% slumped 2.4% in morning trading Tuesday, after the online luxury consignment site warned of a wider-than-expected net loss for the first quarter, but provided an upbeat outlook on gross merchandise volume (GMV). The company also said in response to the negative effects of the COVID-19 pandemic, it has cut its overall workforce by 10% and furloughed about 15% of its staff, as it has temporarily closed its stores and luxury consignment offices. The company said it was off to a "strong start" for the quarter until the spread of COVID-19 led to shelter-in-place and social distancing mandates. It now expects a first-quarter net loss of $39.9 million to $38.9 million, compared with the FactSet consensus for a loss of $30.4 million. Gross merchandise value is expected to be up about 15% from a year ago to $258 million; the average estimate of two analysts surveyed by FactSet was $224.5 million, with a range of $156.9 million and $292.0 million. The stock has shed 56.9% over the past three months, while the S&P 500 SPX, 0.42% has lost 14.0%.
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The Death of the Department Store: ‘Very Few Are Likely to Survive’

Shuttered flagships. Empty malls. Canceled orders. Risks of bankruptcy. The coronavirus has hit the behemoths of the retail world.

Neiman Marcus has stopped accepting new merchandise.Credit...Karsten Moran for The New York Times

Retailers have begun taking extreme measures to try to survive. Le Tote, a subscription clothing company that acquired Lord & Taylor last year from Hudson’s Bay, said in a memo on April 2 that the chain’s entire executive team, including the chief executive, would be let go immediately. It also suspended payments of goods to vendors for at least 90 days, citing “immense pressure on our liquidity position.”

Macy’s, which also owns Bloomingdale’s, extended payment for goods and services to 120 days from 60 days and, according to Reuters, has hired bankers from Lazard to explore new financing. Jeff Gennette, the chief executive, is forgoing any compensation for the duration of the crisis. The company was dropped from the S&P 500 last month based on its valuation.

J.C. Penney has hired Lazard, the law firm Kirkland & Ellis and the consultancy AlixPartners to explore restructuring options, according to two people familiar with the matter, and confirmed that it skipped an interest payment on its debt last week. It is expected to make a decision on what to do, including potentially filing for bankruptcy, within a few weeks, one of the people said.

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But none of them were in as immediate dire straits as Neiman Marcus, which has both an enormous debt burden — about $4.8 billion, thanks in part to a leveraged buyout in 2013 by the owners Ares Management and the Canada Pension Plan Investment Board — and a raft of expensive rents in the most high-profile shopping destinations, signed during boom times.

In late March, Neiman stopped accepting new merchandise and furloughed a large portion of its approximately 14,000 employees as the rumors of bankruptcy began to swirl. Its chief executive, Geoffroy van Raemdonck, announced that he was waiving his salary for April. The brand denied to vendors and its own employees at its sister brand Bergdorf Goodman that it was engaging advisers to explore a bankruptcy filing, but on April 14, S&P downgraded Neiman’s credit rating. Last week, the retailer did not make an interest payment that was due on April 15, angering bondholders and further fueling suspicions that a bankruptcy filing was imminent. A spokesperson for Neiman Marcus declined to comment.

Barneys offered steep discounts after declaring bankruptcy last year.Credit...Stephen Speranza for The New York Times

Even Nordstrom, widely considered the healthiest department store, said this month that it could be facing a “distressed” situation if its physical locations closed to customers for “an extended period of time.” Erik and Pete Nordstrom, chief executive and chief brand officer, are both receiving no base salary for at least six months. The chain has stunned some vendors with last-minute cancellations via email in recent days.

Across chains, prices for new merchandise sold via e-commerce have already been slashed by 40 percent in some cases. Order cancellations for the pre-fall season — which would normally have started delivering next month — have been increasing. Some brands said shipments have even been turned away upon delivery to warehouses, and extensions of payment terms are cascading through vendors, who are then forced to negotiate with their own manufacturers, marketing agencies, fulfillment centers and landlords.

“I’ve had a showroom for over 30 years, and we have always used the word ‘partnership,’ when talking about our relationship with the department stores,” said Betsee Isenberg of the showroom 10Eleven, which represents numerous brands such as Vince and ATM. “Through 9/11, through 2008, we worked hand in hand with our retailers. This is the first time the onus has been on the brands — many of which are losing millions and millions of dollars because of the canceled orders. It is just not fair that it is survival of the fittest.” In a new report, McKinsey refers to the situation as “wholesale Darwinism.”

The resort season has been canceled entirely, and fall orders have been put on hold, raising questions about what inventory will be left if and when shops reopen and consumers return to store.

The Neiman Marcus store at Hudson Yards in Manhattan. With stores closed, retailers have seen sales plummet.Credit...Mark Wickens for The New York Times

“Nobody knows what Q4 will be like, but you have to start putting the orders in now,” Sucharita Kodali, a retail analyst at Forrester, said of the holiday season, normally the most lucrative time of the year for the chains. “Some people don’t even have the money to put in Q4 orders, and may have to cancel Q4 orders anyway, and it’s a mess. There’s never been this much uncertainty.”

Robert Burke, the eponymous founder of a luxury consultancy, said he expected brands to move further away from a wholesale business, focusing on direct-to-consumer and a model with department stores where they control their own space and inventory.

Shares of J.C. Penney, which has temporarily shut its more than 800 stores, closed at 23 cents on the dollar last Wednesday after the retailer said it did not make a $12 million interest payment due that day. Brooke Buchanan, a representative, said it was a “strategic decision” in order to take advantage of a 30-day grace period before it was considered in default.

Normally bustling stores like Saks Fifth Avenue are now empty.Credit...Haruka Sakaguchi for The New York Times

Ms. Buchanan said J.C. Penney had “been engaged in discussions with its lenders since mid-2019 to evaluate options to strengthen its balance sheet, a process that has become even more important as our stores have also closed due to the pandemic.”

Cash flow for all department stores has dropped sharply. In a note on April 13, analysts at Cowen estimated four months of liquidity at Macy’s, six months at Kohl’s and seven months for J.C. Penney. Nordstrom, they predicted, could withstand store closings for 12 months.

“The nature of the mall is if you lose a big anchor like a Macy’s, you have co-tenancy issues and you have more pressure on the mall traffic, which was already a big issue,” said Oliver Chen, an analyst at Cowen. Co-tenancy clauses typically allow other tenants to demand rent reductions if certain key chains depart. Mr. Chen said that could accelerate the ongoing divide between top-tier malls and the second- or third-choice malls in certain areas.

According to a report this month from S&P Global Market Intelligence, department stores were more likely than any other consumer industry to default on their debt in the next year. It estimated the probability at 42 percent.

Nordstrom’s new store in Manhattan. Analysts predicted that it had enough cash to withstand 12 months of stores closures.Credit...Karsten Moran for The New York Times

In its April 2 memo, the management of Le Tote and Lord & Taylor said only “key employees” were being retained to preserve the business. A representative for Lord & Taylor and Le Tote declined to comment or disclose the number of employees who were furloughed and laid off.

“It appears to be a virtual certainty that Lord & Taylor will liquidate its business in the near future, either in or out of bankruptcy,” said James Van Horn, a partner at Barnes & Thornburg and a specialist in retail bankruptcy. “They were already one of the most challenged department stores prior to the coronavirus pandemic, and when the majority of the management team is leaving, the vast majority of employees are laid off and a minority of employees furloughed, there does not seem to be any other strategy but to liquidate the inventory.”

Mr. Van Horn said he expected that other chains might strategically employ Chapter 11 reorganizations to legally shed stores, lightening their rent burden.

“It will likely be a domino that falls,” he said. “Whether it is first or 10th, we don’t know.”

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The RealReal Will 'Dominate Digital Consignment Space'

Several digital native fashion retailers are worth taking a look at, according to DA Davidson.
Analyst John Morris initiated coverage of several fashion retailers Tuesday, including Revolve Group LLC RVLV 0.19% with a Neutral rating and $19 price target.
“As a digitally native brand, Revolve sits squarely at the intersection of sophisticated data-driven assortment planning and coveted fashion apparel,” the analyst said.

Inventory Overhang Remains A Concern

In the near term, Revolve is struggling with growing pains that are likely to last for several quarters as it "right-sizes" inventory and invests in future growth, Morris said.
Part of Revolve’s inventory overhang has been planned, as the company is building up for the launch of its superdown division and braces for international expansion, he said.
“Yet inventories have risen significantly faster than sales, most recently rising 31% in 3Q, ahead of 21% sales growth,” the analyst said.
A portion of the higher inventory levels have led to more discounting that weighs against gross margin upside, Morris said.
"We see these headwinds continuing for several more quarters."

The Real Deal

DA Davidson initiated coverage of The RealReal, Inc. REAL 5.2% with a Buy rating and $22 price target.
The RealReal is a brand destination with several first-mover competitive advantages in a market that is displaying accelerating growth, Morris said.
RealReal has a unique business model that makes it possible for the company to be a front-runner for trends like sustainability, uniqueness and individuality that are favored by the millennial and Gen Z demographics, he said.
"With a seamless supply chain, high customer retention, and substantial take rate, we expect REAL to dominate the digital consignment space,” the analyst said.
The RealReal’s authentication process has come into question of late, but this went unmentioned in the DA Davidson note.

Stitch Fix: Rising Ad Spend Tempers Sentiment  

Stitch Fix Inc SFIX 2.34% reported a first-quarter earnings and sales beat Monday, and several analysts highlighted the company’s new "direct buy" feature as a catalyst for future growth.
DA Davidson took a more guarded stance on Stitch Fix, initiating coverage with a Neutral rating and $27 price target.
Morris said he is cautious about Stitch Fix’s growth prospects, cost efficiency and a lack of visibility.
"We rate it Neutral because the company is showing a decelerating client growth rate despite significantly increasing marketing spend at a time when its core business is more challenged by competition and the complexities of growth which is likely to erode margins in the near term."
Stitch Fix is chasing new clients, and its advertising spend as a percentage of sales increased from 3% in 2016 to 8% in 2018 — yet its client growth rate is decelerating, the analyst said.
The e-commerce site is expecting  advertising spend as a percentage of sales to settle at around 9%-11% in FY2020, according to DA Davidson.
Increased competition could threaten the company’s market share, Morris said.
“According to our industry sources, Amazon.com, Inc. AMZN 2.72% and Nordstrom, Inc. JWN 2.05% lust for the customer data gathered from a subscription service: sizes, style preferences, direct feedback, etc.”
The new fashion subscription service entrants Rent the Runway and Urban Outfitters, Inc.'s URBN 0.22% Nuuly are other competitors clawing for market share, according to DA Davidson.  oa here