Friday, February 16, 2018

Bankruptcy Watch for Barnes & Noble

Barnes & Noble is well on its way to closing. I expect that it will go into bankruptcy within a year and that all stores will close.

I come to this unhappy conclusion after looking at the news from Barnes & Noble’s disastrous December and the subsequent layoffs.

I have to start with the layoffs, because it seems the layoffs were twice as extensive as we initially heard. For an inside perspective see The entirely unnecessary demise of Barnes & Noble at Brain Fuzzies, and I have been able to corroborate many of the important details from other reports and my own indirect contacts among (former) Barnes & Noble staff. The number of job cuts was not around 1,000, as it first appeared, but perhaps more than 2,000. Initial news reports said that head cashiers and digital leads were laid off in many stores. Instead, all full-time in-store staff were fired, and it appears the stores from now on will be operated by minimum-wage workers who work no more than 25 hours a week. Certainly the store will still be mostly staffed by book enthusiasts, but you will no longer find anyone in the store for whom books are a career. The few remaining workers probably won’t have time to talk to customers anyway, but if they do have time, they won’t have the in-depth knowledge that might help you find the book you are looking for. With the professional staff gone, buying a book at Barnes & Noble will be almost like buying one at Target: you find the book on the best-seller rack and take it to the cash register. Obviously, there will be more books in the store than 100 best-sellers, but with the job cuts, the retailer is conceding it has little hope of selling them.

If you are a loyal Barnes & Noble customer, you need only imagine your local store staffed by just three workers to realize that the store you loved is already gone.

So the job cuts are pretty drastic and the impact on the customer experience is devastating. It is also a concern that the retailer allowed such misleading press reports about the job cuts. A company can’t expect to keep public-facing changes a secret. Large companies attempt this kind of deception only when things are pretty desperate.

The job cuts are a desperate move in themselves. The cuts are, it seems to me, something the company would only do if there was substantial doubt that they could limp along until the next Christmas season. Barnes & Noble, you must understand, is a company that is profitable only in the month of November during the peak of Christmas shopping. For all other months of the year the company takes a loss. The company’s whole cash-flow strategy, then, has to be all about getting to November. They wouldn’t throw away their future the way they just did by firing their entire staff of book professionals if they thought they could get to November any other way. My hunch, though, is that with the cuts, they feel reasonably confident in making it to November.

Perhaps that depends on some optimistic assumptions, but beyond that, the problem is that just getting to November isn’t a strategy. With the qualified sales staff gone, November 2018 in-store sales can’t possibly resemble those of November 2017. When Home Depot tried a similar strategy many years ago, revenue went down by about a quarter and that retailer barely survived. Barnes & Noble was barely getting by as it was. Imagine its revenue going down by a quarter. Yet there is no avoiding it.

This can only mean bankruptcy for Barnes & Noble, either going into the 2018 Christmas shopping season or, more likely, immediately after. A retailer that faced a crisis when revenue fell 6 percent (comparing December 2017 to December 2016) won’t be able to keep the lights on when revenue falls by a larger amount.

Once in bankruptcy, Barnes & Noble is assured of the same outcome that Borders saw eight years earlier. A rule of thumb is that a retailer can expect to emerge from bankruptcy if its core problems are debt and rent. Barnes & Noble’s worries cut deeper than that. Its entire business model is flawed, often in glaring ways.

As a measure of the operational problems at Barnes & Noble, I must mention the recent high-profile “relaunch” of Barnes & Noble’s digital book publishing platform. Although I have published e-books myself, I have never released one on Barnes & Noble’s Nook platform because the old Nook publishing site made the process virtually impossible. Despite a rebranding, a site redesign, and some technical improvements, when I went to look at the new site it appeared that all the vexing technical hurdles remain. If you have a novel with no typography more advanced than italic text, you can convert the novel to a word processing document and you can publish it on the Nook platform. If a book is anything more complicated than that, you likely won’t be able to get it to display correctly on the Nook via Barnes & Noble’s publishing platform. You may try for several days, as I did, before ultimately giving up. This is so even though the Nook from the beginning has been capable of displaying advanced ebook typography and layout. It is the publishing platform, not the device, that presents the obstacle. To undertake a “relaunch” without addressing any of the real problems looks to me like the same kind of misdirection as the misleading reports about the layoffs. That is, Barnes & Noble is trying to deliver a growth story even as it slowly shuts down.

A company is never more intent on a growth story than when it is hoping to line up financing for its bankruptcy reorganization. Borders did vaguely similar things. But the prospects of a book retailer emerging from bankruptcy are a lot dimmer now than they were when Borders went into liquidation. If Borders could not keep any stores open in 2011, there is nothing to suggest that a bookseller will be able to borrow money in bankruptcy to keep stores open in 2018 or 2019. If the far-fetched scenario of bankruptcy reorganization is what Barnes & Noble’s planning is pointing toward, that means that the company does not see any preferable scenario that has any reasonable chance of occurring.

There are other signs of financial desperation at Barnes & Noble. One recent development is a determined push to reduce inventory. The retailer is shipping books from store shelves to online buyers. It is a relatively quiet, if highly inefficient, way to get more stock out of the stores before it is too late.

So Barnes & Noble gives every indication of going into bankruptcy in a year or less, and the likely outcome is that all stores will close. The aftermath represents a problem for the book industry, as the Barnes & Noble chain represents about half of the remaining bookstores in the United States. My own county, population half a million people, will be left without a traditional bookstore, that is, one that sells popular new books. It will be harder to sell books, and book publishers will have to cut back accordingly. I have to imagine publishers are already drawing up lists of scheduled 2019 book releases that they may have to cancel. Worse, Barnes & Noble operates a significant fraction of college bookstores, it seems like about half but it is probably not as many as that, and I would imagine that those stores too could close in a bankruptcy liquidation. It will be up to each college to find a way to reopen its bookstore, and if the fall 2019 academic season depends on it, it is not too soon for colleges to start to think about what they will have to do.

Then there is the question about what will happen to the Nook e-readers. Nook unit sales have showed rapid decline in the last two years. The Nook devices are essentially orphaned now that Barnes & Noble has fired all its digital leads, the in-store staff who understood in detail how the Nook works. I don’t know the Nook platform well enough to hazard a guess as to which Nook models will continue to work in some fashion after Barnes & Noble goes dark and which will not work at all. I will just say that if a bankruptcy is announced, Nook users should immediately look into the question of how to save their important e-book purchases, because doing so might not be a simple process.

I cannot close without mentioning a story about Barnes & Noble’s local history. The first Barnes & Noble store in my area was on the site of the Valley Forge Music Fair, a concert venue that was harassed into closing by the local government for reasons that were never revealed to the public. It was a very popular place to see music, and as it was demolished, I wondered if the ill will surrounding the forced closing would adhere to the retail stores that took its place. Perhaps to guard against this possibility, the developer did not place a store on the site of the actual venue. Instead the new stores were in the places formerly occupied by the parking lot, with the new parking lot occupying the place where the stage and audience used to be.

Despite this precaution, the stores have not fared well. Linens-N-Things, the largest store, lasted only a few years, and the pet store that took over its spot does not seem to be doing much better. Now my guess is that Barnes & Noble, the second store, will also be closing. It is one of many stories that tell you that tearing down something old to build something new does not carry the promise that the new thing will succeed.

Wednesday, January 31, 2018

Hawaii Missile Alert Shows Lack of Civil Will

The false missile alert in Hawaii, we have learned, was the result of a rogue drill. The drill was meant to test the ability of civil defense officials to respond to an alert, but workers and a supervisor weren’t properly prepared for the drill, and the wording of the alert in the drill incorrectly contained a statement saying it was not a drill. Hawaii has temporarily suspended all such drills. Knowing that there was never any true information indicating a danger lightens the situation somewhat but is not as reassuring as it might be.

The problem of the rogue drill was compounded by at least five other problems. There are weaknesses in the user interface of the software used by state civil defense workers to send alerts. The state had no plan in place to retract an incorrect alert, and that was the main reason it took most of an hour to issue a retraction. The Pentagon and White House also obviously did not have a plan to react to this scenario. The governor was unable to respond quickly because he had lost his Twitter password.

The whole situation points to a lack of civil will. The officials charged with a response in this specific situation were not particularly interested in forging an effective response while the masses who did respond to the alert were prevented from getting any meaningful information on the events that were taking place. Secrecy and opacity worked against the government in this episode. An institution created for the purpose of a coherent collective response to a crisis instead became an obstacle that prevented any meaningful response.

There were plenty of people, more than a million paying close attention in Hawaii and beyond, who could have helped sort things out if they had not been kept completely in the dark. More than a dozen crises of 2017 showed how well Americans self-organize when the situation calls for it. In the false Hawaii missile alert, the government was the obstacle that prevented that from happening.

Tuesday, January 30, 2018

After Weak Sales, Future in Doubt at Toys ‘R’ Us

A source connected to Toys ‘R’ Us told a reporter at CNBC that holiday season sales at the bankrupt toy giant were so poor that its bankruptcy financing is being called into question.

We already knew that stock, traffic, and revenue were down during the holiday shopping season at Toys ‘R’ Us, but prices too were lower than planned as the retailer “discounted roughly 10 percent more of its products in holiday 2017 compared with the prior year.”

Deeper in the story is the hint that the two largest toy manufacturers, Mattel and Hasbro, might not support an exit from bankruptcy for Toys ‘R’ Us. These two manufacturers supply most of the products sold in Toys ‘R’ Us despite having a smaller market share in every other distribution channel, so they would lose a significant amount of market presence if Toys ‘R’ Us were to close. Analysts had previously assumed these two manufacturers would support Toys ‘R’ Us no matter what happened, but with the whole toy industry in decline, toy manufacturers are not financially strong enough to prop up a perpetually struggling retailer. The planned liquidation of 20 percent of Toys ‘R’ Us U.S. stores and dozens more at the U.K. subsidiary already put unusual financial pressure on the toy manufacturers.

Targeting Health Care Paperwork

The headline that shook the health insurance sector this morning: “Amazon, Berkshire Hathaway, and JPMorgan Chase to partner on US employee health care.”

While details are few, this is the largest new initiative in U.S. health care in several years. The three employers have 1 million employees, so the new company could, at launch, control 1 percent of the U.S. health care market. The paperwork burden will be the initial focus:

"The healthcare system is complex, and we enter into this challenge open-eyed about the degree of difficulty," said Amazon CEO Jeff Bezos. "Hard as it might be, reducing healthcare's burden on the economy while improving outcomes for employees and their families would be worth the effort."

"Our people want transparency, knowledge and control when it comes to managing their healthcare," said JPMorgan Chase CEO Jamie Dimon. "The three of our companies have extraordinary resources, and our goal is to create solutions that benefit our U.S. employees, their families and, potentially, all Americans."

The new company's goal at first will be to target technology solutions to simplify the health-care system.

Any technology-focused effort could surely find a way to streamline the administrative burden of health care. In its current form, health care data flow is a hodgepodge of papers, fax machines, web portals, spreadsheets, data warehouses, and password-protected files attached to email messages. The office buildings where health coverage decisions are made are larger than hospitals. Data leaks are so common that most Americans have had parts of their health history exposed. Insurers so routinely decline coverage for needed medical treatments that health care costs are the leading cause of bankruptcy among those with or without health coverage, and the potential inability to get medical treatment is one of the all-pervasive anxieties in American life. The bar is set so low, any company determined to take a fresh look at the problem could easily do better.

Though the initial focus on paperwork points to the greatest potential for efficiencies that could put new pressure on health care companies, the sector is equally worried about another detail: the new joint venture will not be expected to make a profit. This is why CVS and several other health care stocks are down 6 percent this morning. It is hard for a profit-making company to compete with one that is just trying to solve a problem.

Wednesday, January 24, 2018

Toys ‘R’ Us Closes 20% of Stores

While we wait for a restructuring plan from Toys ‘R’ Us, the clock is ticking, and the bankrupt retailer had to make some quick decisions about store closings. The store closing plan (PDF) filed last night in bankruptcy court and pending court approval, would close about 180 Toys ‘R’ Us and Babies ‘R’ Us locations, about 20 percent of stores. The store closing list (PDF pages 72-74, 82) includes many locations where the two stores are located together. In total, 79 Toys ‘R’ Us stores, 126 Babies ‘R’ Us stores, and one outlet store will close.

The affected stores are expected to completely liquidate between early February and early April. I have seen photos from December of nearly bare shelves in Toys ‘R’ Us stores, so there will not be as much stock to liquidate as you would normally expect to see in a store closing. It will not be a surprise if workers move the remaining toys to a small area at the front of the store to make it easier for shoppers to find the merchandise.

Deciding what stores to close is not the same as writing a restructuring plan, and only the legal deadlines provide assurance that such a plan is on the way. The store closing plan and the simultaneous letter to loyal customers point to the principles in play as the company tries to forge a plan, but these early documents provide little insight into the practical steps that must follow. Toys ‘R’ Us went into bankruptcy without a plan and then suffered a disastrous December in stores. It is suffering not just from a high debt load and its own missteps, but also from larger trends unfavorable to toys, children’s books, and movie tie-ins. These headwinds make it unlikely that a toy retailer can increase revenue no matter how well-managed it is.

There is little margin for error, then, as Toys ‘R’ Us writes its plan, yet everything we have seen so far has the air of procrastination and resistance – errors that would tend to leave a struggling company too large and too fragile to survive after its restructuring. It is hard for me to imagine how Toys ‘R’ Us can rebuild its customer experience as it says it must while operating for the next five years or longer at a loss.

But those details will follow. For now, closing 20 percent of stores is a step forward that, as the company put it in its letter to customers, gives it a better chance of carrying on.

Toys ‘R’ Us stores closing
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Babies ‘R’ Us stores closing
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Toys ‘R’ Us outlet store closing
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