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How years of investor-friendly finance left retailers vulnerable to crisis

2nd Nov 2020 | Wholesale

Public and private companies have transferred billions of dollars to their investors over the years. Could that money have saved their business instead?

By the time Sears Holdings filed for bankruptcy in 2018, it had surely reached some sort of financial engineering singularity, if such a thing is possible.

Under Eddie Lampert's majority ownership and executive stewardship as CEO, a headache-inducing web of interrelated financial relationships had been created around and through the retailer. When all the asset sales, spinoffs and loans were finalized over the course of more than a decade, Lampert and his hedge fund were Sears' largest shareholder and lender, as well as a major landlord and supplier.

Through the 2000s and into the next decade, Sears also spent billions of dollars buying its own stock, which profited shareholders like Lampert. Some have pointed to Sears' massive buybacks as contributors to the company's ultimate downfall.

As the one-time retail giant went into terminal decline, Lampert earned the scorn of many industry observers. But Sears is only an extreme case of the financialization of retail. Had Lampert taken a somewhat more moderate approach, Sears would have found itself in good company.

Over the past decade, dozens of retail companies have been acquired by private equity firms, which finance those buyouts, and dividends for themselves and their investors, with debt left on the retailer's books. Publicly traded companies over the same period have spent many billions of dollars buying their own stock, a practice that benefits investors by reducing the total number of shares on the market and boosting earnings per share. That, too, is often financed with debt.

"Shareholders love repurchases. They love dividends," said Dennis Cantalupo, CEO of Pulse Ratings, a credit analysis firm focusing on the retail industry. "But from my perspective, it'd be very difficult to argue that any retailer in my world wouldn't be better served if, rather than pay dividends or buy back shares, they reinvested that money back into the business."

An exodus of dollars
Many of these practices would look different were retail living in an age of plenty, of stability. But it's not and hasn't been for some time. Technology is changing. Consumers are changing. Competition is changing.

Whether you call it "evolution" or "apocalypse," much of the industry has been struggling for years to grow sales, stabilize their customer base and stay out of bankruptcy court. And the number of those that have lost that fight and filed for bankruptcy has surged since 2016.

And this was all before a pandemic ruptured the industry, accelerating changes and deepening the financial troubles for many as stores were forced to close and consumers avoided physical shopping.

It's telling that many if not most publicly traded retailers halted their dividends and share buyback programs as they shut down their stores.

To let precious cash out the door during a major crisis and revenue collapse, with stores shut, would be unwise at best. But what about those same activities during a slow-burning crisis like the one apparel, department stores and much of mall-based retail have experienced over the past half-decade?

Select retailers' returns to shareholders
Dividends and buybacks from 2015-19 by some key industry players hurt financially by the COVID-19 crisis

Macy's, which has continually stalled in its efforts to reinvent itself, paid investors nearly half a billion dollars per year in dividends every year between 2015 and 2019.

Nordstrom, which has been among the hardest hit financially by the COVID-19 crisis, paid out even more to shareholders through a combination of dividends and share buybacks in that period — $4.8 billion all told.

Over the past half decade, Tailored Brands, Stage Stores, Stein Mart and Pier 1, which all filed for Chapter 11 this year, made a regular practice of paying out millions of dollars a year in buybacks and/or dividends, even in years when sales were falling.

Bankrupt retailers' past returns to shareholders
Dividends and buybacks from 2015-19 by retailers that filed for Ch. 11 in 2020

When Tailored Brands filed for bankruptcy in August, a restructuring officer for the men's apparel retailer bemoaned "the continuing decline in the brick-and-mortar retail industry" and the COVID-19 pandemic — both familiar refrains in retail bankruptcy filings this year.

Last year alone, this same company — whose sales fell 5.6% over the past two years — paid shareholders $28.1 million in dividends and bought $10 million of its own stock. In 2018, Tailored Brands paid another nearly $37 million in dividends.

By: Ben Unglesbee

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