Yves here. While IPO-related cheerleading is getting more stained than ever, also notice how lousy the mood is among retailers. This does not bode well for a consumption-driven economy.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
“Retail funk” is what Container Store CEO Kip Tindell blamed the comparable-store sales on: they’d declined 0.8% in the quarter. In the earnings announcement yesterday after the close, he was pointing the finger at his customers – strung-out Americans who have other priorities:
While consumers are buying homes and automobiles and even high ticket furniture, most segments of retail are, like us, seeing more challenging sales than we had hoped early in 2014 – so we’re not alone in this.
They’re indeed buying automobiles, supported by bubble-subprime lending with vertigo-inducing loan-to-value ratios of 150% and 7-year loan terms. But they’re NOT buying homes, not in large enough numbers, to the point where the Fed has commented on it. Tindell just hadn’t had a chance yet to read the news.
And they’re not buying enough at the Container Store. Total sales rose 8.6% to $173.4 million, but with new stores opening up all the time, sales at stores open for a year or longer declined. That’s bad for a supposedly fast-growing company that had just gone public.
The Container Store has been around since 1978, but in July 2007, at the peak of the prior credit bubble, private-equity firm Leonard Green acquired most of it. On November 5, with the IPO market once again doused in exuberance and hype, it was time to unload. The IPO price, set at $18 per share, then doubled behind closed doors. The first trade took place at $36 per share. That’s what everyone wants. Not 25% a year, risk free, as the stock market seems to promise. Any index fund can do that. But 100% in the wee hours before trading even starts, now that’s something! Only Wall Street benefitted.
It’s not unique in this IPO bubble. What a blast we’re having.
Yet, the company cranked out losses in 2012 and 2013, and it still doesn’t know how to make money; it announced another $3.6 million loss yesterday, after having lost $4.8 million in the prior quarter. Red ink as far as the eye can see. For a retailer, not some social media outfit that hasn’t figured out its business model yet!
After the behind-closed-doors 100% miracle, the stock soared to $47.07 in two months. But with the New Year, the hot air began hissing out of that bubble. Today, it closed at $24.86, down 47% from its peak six months ago. Reality has set in. And reality is that its customers are strung-out Americans with other priorities. So Tindell lashed out at them:
We thought our sluggish sales were all because of weather and calendar shifts that began last November and continued into the spring, but now we’ve come to realize it’s more than weather and calendar. Consistent with so many of our fellow retailers, we are experiencing a retail ‘funk.’
He feebly tried to make people feel better about having overpaid for the stock after it started trading and throughout the run-up before Wall Street took its money and ran. Hype meets reality.
Tindell had some corporate blah-blah-blah for these folks, packaged together with tidbits about a weak economy: “We are confident that customer enthusiasm for our brand, and employee morale are at all-time highs, yet we continue to experience slight traffic declines in this surprisingly tepid retail environment.”
“Tepid retail environment?” Wasn’t it tepid last November and December as well, when the IPO went airborne? Nope, it wasn’t tepid; it was terrible. But these details don’t stop the hype-mongers on Wall Street from pumping. Now, all that remains is hope:
We believe we’ll have a slight improvement in the second and third quarters. But we are very much looking forward to the fourth quarter as we comp against the worst weather we had in our history last year and believe we will see marked improvement in our sales trends.
Escape velocity? As always, only six months away. Just be patient! Note the word “believe.” He boiled it down to faith.
Alas, the decline in traffic is actually worse than the decline in same-store sales. Tindell was bragging about “average ticket growth.” The average customer spent 5.6% more per ticket, or 4.2% more at comparable stores. Despite that increased spending per customer – a sign of inflation – comparable-store sales dropped 0.8%. So comparable-store traffic dropped 5%?
Tindell admitted that much.
The company is struggling in a tough retail environment. It’s a difficult business. Consumers at the lower 80% of the income spectrum have seen their real wages decline – the lucky ones to have wages. They face soaring college expenses for their kids and soaring medical expenses for themselves. College grads are buckling under the weight of their student loans. There are many reasons why selling to the lower 80% is tough in this Fed-engineered economy where it’s only good at the top.
What’s chilling is the hype with which IPOs are launched during bubbles. We’ve been through this before. We’re going through it again. It’s a ingeniously designed wealth transfer machine. It transfers wealth from those who end up with these stocks in their conservative-sounding mutual or index funds to the players that made it happen. The technical term for this machine? “Healthy IPO market.”
Senior bankers are “privately warning” that the record bank lending binge “should not be seen as evidence of an economic recovery.” Instead, they’re fretting about the greatest credit bubble in history. Read…. Senior Bankers Warn: ‘It’s Crazy, It’s a Boom, It’s a Gold Rush’
13 comments
Comments are closed.
A few years ago, I kept on getting hounded by the sellers of guaranteed products based on indices. When I passed a comment stating that once again they had chosen an index already in the stratosphere instead of one with some kind of upside, the guy laughed: “Of course, if we chose an index without any momentum, nobody would want our product.”
Last week, while waiting at a red light on a brand new 5km commercial strip which used to be farm land 10 years ago, I noticed one lonely split level which just got purchased and will open up as a payday loan shop. It was hard to miss since the sign was larger than the house.
In my life experience, I have noticed one important variable that empowers individuals: self-control. Unfortunately, a large percentage of the population does not have it. And this deficiency seems to be caused by nature and nurture.
How do we create a system that monitors it instead of creating feedback loops that feed on the lack of it?
I think that’s a good point. I think self-control can work best in a system that shows fairness and where money is spent to give people a reasonable chance of success.
“The record during this time shows that the US has increasingly suffered from a profound fiscal irresponsibility in the sense that we have failed to spend what was necessary to achieve larger public purposes like full employment, decreasing inequality, widely distributed gains in standard of living that keep up with productivity , developing a first class educational system, developing alternatives to fossil energy to serve as the new basis of our economy, developing programs to meet the challenges of environmental sustainability and climate change, increasing family integration, and providing first class universal health care to all Americans as a right. So, for more than 35 years now, our politicians have poor mouthed about not being able to afford expanding our domestic social safety net and discretionary programs, while proceeding to spend lavishly on defense industries, and insisting that we can afford that, all while our country more and more develops the social and economic characteristics of a third world nation.”
Firestone, Joseph M. (2014-01-13). Fixing the Debt without Breaking America: Austerity, the Trillion Dollar Coin, and Ending Debt Ceiling, Sequester, and Budgetary Crises (Kindle Locations 2468-2471). EIS WebPress. Kindle Edition.
Because minting Trillion-dollar coins will encourage more responsible government spending, natch.
The Container Store is not typical retail, but it’s close enough for illustration. At least one-third of their sales rely on Elfa shelving, which they purchased outright a number of years ago. It’s a great product–although some of the items have been cheapened–but it is still primarily used for closet renovation. Two problems: 1) declining sales of new and existing homes means fewer closets being renovated, and 2) big box competitors have finally come up with equally good systems for less money. The housing collapse has had a much wider impact than just big ticket items.
‘In July 2007, at the peak of the prior credit bubble, private-equity firm Leonard Green acquired most of it. On November 5, with the IPO market once again doused in exuberance and hype, it was time to unload.’
Windows for unloading privately-acquired firms at rich IPO valuations are extremely cyclical, occurring at bull market peaks every 5 to 10 years. During bear markets, IPOs disappear.
Current PE deals are being done at record multiples of record corporate profits. How are these entities going to be IPO’d at a profit seven to ten years from now, when interest rates have risen and valuation multiples have fallen? Answer: many of them aren’t.
Limited partner bagholders, you have been warned.
A few days ago, the local TV news had a story about a long standing sporting goods store closing. After 70 years in business, the adult grand children of the founder have run into a problem that is insurmountable.
The sporting goods manufacturers have refused to supply them, because they only want to do business with big retailers.
Here was a store with loyal customers, employees, contributing to the local community, now dead, for the business crime of staying small.
How is that for reality?
Wall Street, will sell any piece of fluffed garbage, as long as they can financially rape someone. The Container Store fits the bill as fluffed garbage. Nobody needs the stuff they sell.
I like the Container Store, though not as much as Storeables, no longer in our region. Container, even more than Storeables, is a store for people with too much stuff. That’s where the closet systems come in. In order for it to work, people have to be buying a lot of stuff, and they need to want to spend money to store their stuff neatly. It’s two kinds of discretionary spending: first the stuff, then the stuff organization. In hard times, people are likely to buy less stuff and — if they have it — to figure they will just pile it somewhere or hold a garage sale.
This is a store that sells plastic boxes, baskets and wire shelving, all of which are available at other stores–Target, Lowes, Costco or IKEA– far less expensively and with comparable quality.
Bottom line from the CEO: We “heart” our consumers until they actually become CONSUMERS. Then they’re in a “funk.”
And to all of you “investors” who bet your retirement that we could inflate the price of plastic storage boxes, in assorted colors, forever, it’s called investing for the “long” term. Just ask Goldman Sachs. Sucker. No, I’m serious. Just ask Goldman Sachs. They have “analysts.”
Will be interesting to see if the estimated $25 billion Alibaba IPO, which is reportedly tentatively scheduled for early August, completes as hyped (8/8 is said to be a “Good Luck number” to the Chinese). It appears to me that this entity could impact the business models of a number of long-time online U.S. retailers and services, as well as “bricks and mortar” retailers and malls. Alibaba’s existing shareholders are an interesting group.
The current “retail funk” is the other side of the coin of The Corporate Illogic of Outsourcing and Offshoring post.
I wonder how much of the economy growth rate in general, & the “C” consumer spending component in particular, have been hurt by the “Fiscal Cliff” reduction in Fed Gov spending in Jan 2013.
The flat or reduced median hourly wage, & median worker hours worked (so many unemployed or 40-hr wanting workers forced in to <40 hr underemployed) also reduces C.
The coercive oligopolistic overpriced crappy health care insurance, or adding to emergency fund savings to pay for an expected Individual Mandate Penalty Fee, is a new mandatory coercive cost in 2014, which would also tend to reduce the portion of C that is "discretionary consumer spending".
Does this company CEO Tindell understand these basic Macroecon 101 concepts? Tindell could blame his company performance on these factors, even if the actuality is that the company's future sucks independent of macro factors.
Do many US CEOs not understand Macroecon 101? CEOs while bragging about their "elite skills/greatness", simultaneously belittle US & their particularly company's workers, some who are actually highly skilled, including PhDs in STEM fields, multiple patents, proven ability to exceed sales targets, , etc
Why is there no lobby of industries related to consumer discretionary spending, companies like Container Store or Apple, to fight against policies that reduce consumer discretionary spending & support policies that increase consumer discretionary spending?
Shouldn’t these companies be supporting Medicare For All (or at least elimination of any ACA individual mandate), a Job Guarantee with a $15 minimum wage, Federal loans at or below the 10 yr T-Bond rate to stimulate signficant addition (new construction or buying out existing private apartments) cooperative non-profit apartment housing (a “publically financed” “option” for housing), free (ala 1970s CA from what I’ve read) or cheaper tuition for university education at public land grant universities & community colleges, etc?
Is it that these discretionary consumer spending companies’ CEOs not understand Macroecon 101?
Or is it that these discretionary consumer spending companies’ CEOs preferred goal is class warfare against the majority of workers (lower 80%, 99% 99.9% of income – pick a percentage), that the preference is to dominate & maintain the majority of USians feeling anxious, scared to assert their rights, scared to protest economic conditions at an Occupy-type protest, & starving for the insufficient jobs available; moreso than their claimed #1 priority of actually increasing their company’s profits?
Yves/other commenters, any opinion here? I am genuinely confused
The correct answer begins with your words “Or is it,” and contains the words “class warfare.” I’m surprised you had to ask. “Supply side” is still a popular myth, at least among the Conservatives.
Paul Krugman (“Him!”) had a great post yesterday showing that the people being horribly hurt by low interest rates were in the 1%. That’s why they keep screaming about the rampant inflation that will overtake us any decade now. They want interest rates raised. I went to the bank (Capital One) to buy a savings bond for my newborn great nephew. The teller laughed at me. Banks, she said, don’t sell them any more. They don’t pay anything worth mentioning.
Yves, the baby leopards, or whatever they are, “Donate” and “Subscribe,” are so cute!
Confusion to our enemies.