Global turnaround stories in the making

Last week Friday, we focused on the global turnaround success stories of Best Buy, Walmart, and Target.

It is important to focus on these stories as there is still come public debate about whether there is any value in the business rescue/turnaround process. Given the challenges that the SAA business rescue faced, and the challenges facing the Transnet business turnaround, can anybody blame the public for their cynicism?

There is a lot of restructuring taking place in the US market as companies find that informal restructuring is an attractive alternative to the business rescue process. Below are some of the turnarounds to keep an eye on this year as they seek to profitability.

Kohl’s
Kohl’s may be the true poster child for the modern retail turnaround, in that it shows just how tenuous even a string of good quarters can be in the current environment.

After a year and a half of negative comp sales in 2016 and early 2017, Kohl’s put together three quarters of positive comps and estimate-beating performances last year. To drive customers to stores, Kohl’s experimented with and then expanded a partnership with Amazon, hosting the e-commerce giant’s products and accepting returns. It struck numerous deals with brands, including emerging brands. It tweaked its loyalty program.

This year has been rocky, though. In March the retailer cut its guidance after Q1 sales declined. Comps and top-line sales declined in Q2, as well, though Kohl’s beat expectations partly thanks to a strong back-to-school showing.

While one of the strongest in its sector, Kohl’s is still a department store and faces many of the same existential issues, including a market that is bifurcating between shoppers who seek value and convenience on the one hand, and those seeking luxury and aspirational lifestyles on the other.

“They’re doing a lot of the right things, but their problem is that they’re kind of too narrow. They don’t have the breadth of a Target,” Kaser said of Kohl’s. “So they miss a little bit of that convenience. And certainly nobody aspires to the lifestyle that Kohl’s offers. It’s really just OK stuff at pretty good prices.”

Bed Bath & Beyond
Bed Bath & Beyond’s sales and profits have fallen recently as TJX Cos., Target, Williams Sonoma, Amazon and online specialists, among others, have siphoned off the retailer’s customers. Its foot traffic has dipped the past two years, largely because of store closures, according to analytics firm Placer.ai. Sales declines recently prompted dozens of more store closures. Meanwhile, the retailer has become a target for activist investors.

One silver lining for the home retailer: It just poached Target’s chief merchant, who was one of the architects of the mass merchant’s turnaround. Also, Bed Bath & Beyond’s balance sheet is fairly healthy, and pays out more than $80 million dividends to shareholders — money that could be capital used toward a turnaround in a pinch.

Ultimately, the retailer’s biggest challenge may be it’s broader proposition as its market fragments and changes. “There’s really not much there you can’t get somewhere else more easily,” Kaser said. “Maybe people go to Bed Bath & Beyond as a destination, but I don’t know how big that the population is.”

The retailer does have an audience with a larger income relative to some competitors, and customers spend more time there than they do in Home Goods, for example, according to Placer.ai data. Those two trends could be areas of opportunity for Bed Bath & Beyond, according to the analytics firm.

J.C. Penney
Penney, not unlike a lot of department store and apparel retailers, has been in turnaround mode for years. When the company issued a public statement reassuring investors and other stakeholders that it specifically was not working on a Chapter 11 filing, it was as clear as ever just how high the stakes are for CEO Jill Soltau and her team.

The company is working to control inventory overages and bring its merchandising and layouts up to date with reimagined stores. These are all good, necessary things. But working against the retailer is its balance sheet. Penney pays more than $300 million a year on interest and carries more than $3.5 billion in long-term debt. Soltau has acknowledged the “urgency” hanging over her team’s work. Improvements in profits, and eventually in the top-line, would be a major win for the company and the sector as a whole. But if money is time the clock is ticking. “Their balance sheet is leveraged, so they have that strike against them, and their cash flow just turned positive,” Cantalupo said. “So they don’t have all that much money to reinvest back into the business.”